Pertemuan 2 Dan 3 MK

Principles of Managerial Finance
Fifteenth Edition, Global Edition
Chapter 3
Financial Statements and
Ratio Analysis
Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

Learning Goals (1 of 2)
LG 1 Review the contents of the stockholders’ report and the
procedures for consolidating international financial
statements.
LG 2 Understand who uses financial ratios and how.
LG 3 Use ratios to analyze a firm’s liquidity and activity.
LG 4 Discuss the relationship between debt and financial
leverage, as well as the ratios used to analyze a firm’s
debt.

Learning Goals (2 of 2)
LG 5 Use ratios to analyze a firm’s profitability and its market
value.
LG 6 Use a summary of financial ratios and the DuPont
system of analysis to perform a complete ratio
analysis.

3.1 The Stockholders’ Report (1 of 8)
• General Accepted Accounting Principals (GAAP)
– Authorized by the Financial Accounting Standards Board
(FASB)
• Sarbanes-Oxley Act of 2002
– Established the Public Company Accounting Oversight
Board (PCAOB)
• The Letter to Stockholders
– The first element of the annual stockholders’ report and the
primary communication from management

• The Four Key Financial Statements
– Income Statement
 Provides a financial summary of the firm’s operating results
during a specified period
 Dividends Per Share
– The dollar amount of cash distributed during the period on
behalf of each outstanding share of common stock

Table 3.1 Bartlett Company Income
Statements ($000) (1 of 2)
For the years ended December 31
blank 2019 2018

Sales revenue $ 3,074 $ 2,567
Less: Cost of goods sold 2,088 1,711
Gross profits $ 986 $ 856
Less: Operating expenses blank blank
Selling expense $ 100 $ 108
General and administrative expenses 194 187
Other operating expenses 35 35
Depreciation expense 239 223
Total operating expense $ 568 $ 553
Operating profits $ 418 $ 303

Table 3.1 Bartlett Company Income
Statements ($000) (2 of 2)
For the years ended December 31
blank 2019 2018

Less: Interest expense 93 91
Net profits before taxes $ 325 $ 212
Less: Taxes 94 64
Net profits after taxes $ 231 $ 148
Less: Preferred stock dividends 10 10
Earnings available for common stockholders $ 221 $ 138
Earnings per share (EPS)a $ 2.90 $ 1.81
Dividend per share (DPS)b $ 1.29 $ 0.75
a
Calculated by dividing the earnings available for common stockholders by the number of shares of common stock
outstanding: 76,262 in 2019 and 76,244 in 2018. Earnings per share in 2019: $221,000 ÷ 76,262 = $2.90; in 2018:
$138,000 ÷ 76,244 = $1.81.
b
Calculated by dividing the dollar amount of dividends paid to common stockholders by the number of shares of common
stock outstanding. Dividends per share in 2019: $98,000 ÷ 76,262 = $1.29; in 2018: $57,183 ÷ 76,244 = $0.75.
Hubungannya dengan Dividend Payout Ratio

Income 1. Sales or Revenue
2. Cost of Goods Sold
Statement
Gross Profit
3. Selling Expenses
Intermediate
4. Administrative or General Expenses
Components
5. Other Income and Expense
Companies generally Income from Operations
present some or all of 6. Financing costs
these sections and totals Income before Income Tax
within the income
7. Income Tax
statement.
Income from Continuing Operations
8. Discontinued Operations
Net Income
9. Non-Controlling Interest
10. Earnings Per Share
4-8
Format of the
Income 1
Statement 2
Includes all of the

major items in
previous list, except
4
for discontinued
operations.
ILLUSTRATION 4.2 9
Income Statement 10
4-9
Condensed
Income
Statement
More representative of
the type found in
practice.
ILLUSTRATION 4.3
Condensed Income
Statement
Company prepares
supplementary
schedules to
support the totals. ILLUSTRATION 4.4
Sample Supporting
Schedule
4-10
– Balance Sheet (IFRS St of Fin St)
 Summary statement of the firm’s financial position at a given
point in time
 Current Assets
– Short-term assets, expected to be converted into cash
within 1 year
 Current Liabilities
– Short-term liabilities, expected to be paid within 1 year
 Long-Term Debt
– Debt for which payment is not due in the current year

– Balance Sheet
 Paid-in-Capital in Excess of Par
– The amount of proceeds in excess of the par value
received from the original sale of common stock
 Statement of Stockholders’ Equity
– Shows all equity account transactions that occurred during
a given year

Table 3.2 Bartlett Company Balance
Sheets ($000) (1 of 2)
December 31
Assets 2019 2018

Cash $ 363 $ 288
Marketable securities 68 51
Accounts receivable 503 365
Inventories 289 300
Total current assets $ 1,223 $ 1,004
Land and buildings $ 2,072 $ 1,903
Machinery and equipment 1,866 1,693
Furniture and fixtures 358 316
Vehicles 275 314

Other (includes financial leases) 98 96
Total gross fixed assets (at cost) $ 4,669 $ 4,322
Less: Accumulated depreciation 2,295 2,056
Net fixed assets $ 2,374 $ 2,266
Total assets $ 3,597 $ 3,270

Table 3.2 Bartlett Company Balance
Sheets ($000) (2 of 2)
December 31
Assets 2019 2018

Liabilities and Stockholders’ Equity Blank blank
Accounts payable $ 382 $ 270
Notes payable 79 99
Accruals 159 114
Total current liabilities $ 620 $ 483
Long-term debt (includes financial leases) 1,023 967
Total liabilities $ 1,643 $ 1,450
Preferred stock: cumulative 5%, $100 par, 2,000 shares authorized and issued $ 200 $ 200
Common stock: $2.50 par, 100,000 shares authorized, shares issued and outstanding in 2019: 191 191
76,262; in 2018: 76,244
Paid-in capital in excess of par on common stock 428 417

Retained earnings 1,135 1,012
Total stockholders’ equity $ 1,954 $ 1,820
Total liabilities and stockholders’ equity $ 3,597 $ 3,270

Statement of
Financial
Position
(IFRS)
Report Form
lists the
sections one
above the
other.
ILLUSTRATION 5.17
Classified Report-Form
Statement of Financial
Position

LO 2
Classification
ILLUSTRATION 5.1
Subclassifications Statement of Financial
Position Classification
A survey of 175 companies showed that companies appear to

favor reporting current assets first on the statement of financial
position.

LO 1
Classification
Equity Section
1. Share Capital. The par or stated value of shares issued. It includes
ordinary shares (sometimes referred to as common shares) and
preference shares (sometimes referred to as preferred shares).
2. Share Premium. The excess of amounts paid-in over the par or
stated value.
3. Retained Earnings. The company’s undistributed earnings.
4. Accumulated Other Comprehensive Income. The aggregate
amount of the other comprehensive income items.
5. Treasury Shares. Generally, the amount of ordinary shares
repurchased.
6. Non-Controlling Interest (Minority Interest). A portion of the equity
of subsidiaries not owned by the reporting company.

LO 1
– Statement of Retained Earnings
 Reconciles the net income earned during a given year, and
any cash dividends paid, with the change in retained earnings
between the start and the end of that year

Table 3.3 Bartlett Company Statement of
Retained Earnings ($000) for the Year
Ended December 31, 2019
Retained earnings balance (January 1, 2019) $1,012
Plus: Net profits after taxes (for 2019) 231
Less: Cash dividends (paid during 2019) blank
Preferred stock 10
Common stock 98
Total dividends paid $ 108
Retained earnings balance (December 31, 2019) $1,135

– Statement of Cash Flows
 Provides a summary of the firm’s operating, investment, and
financing cash flows and reconciles them with changes in its
cash and marketable securities during the period

Cash Flows ($000) for the Year Ended
December 31, 2019 (1 of 2)
Cash Flow from Operating Activities Blank
Net profits after taxes $ 231

Depreciation 239
Increase in accounts receivable –138a
Decrease in inventories 11
Increase in accounts payable 112
Increase in accruals 45
Cash provided by operating activities $ 500
Cash Flow from Investment Activities blank
Increase in gross fixed assets –347
Change in equity investments in other firms 0
Cash provided by investment activities –$ 347
Cash Flows ($000) for the Year Ended
December 31, 2019 (2 of 2)
Cash Flow from Financing Activities Blank
Decrease in notes payable −20
Increase in long-term debts 56
Changes in stockholders’ equity b 11
Dividends paid − 108
Cash provided by financing activities −$ 61
Net increase in cash and marketable securities $ 92
a
As is customary, parentheses are used to denote a negative number, which in this case is a cash outflow.
b
Retained earnings are excluded here because their change is actually reflected in the combination of the “net profits
after taxes” and “dividends paid” entries.

• Notes to the Financial Statements
– Explanatory notes keyed to relevant accounts in the
statements; they provide detailed information on the
accounting policies, procedures, calculations, and
transactions underlying entries in the financial statements

• Consolidating International Financial Statements
– Financial Accounting Standards Board (FASB) Standard
No. 52
 Mandates that U.S.–based companies translate their foreign-
currency-denominated assets and liabilities into U.S. dollars,
for consolidation with the parent company’s financial
statements
– Current Rate (Translation) Method
 Technique used by U.S.–based companies to translate their
foreign-currency-denominated assets and liabilities into U.S.
dollars, for consolidation with the parent company’s financial
statements, using the year-end (current) exchange rate

3.2 Using Financial Ratios (1 of 5)
• Interested Parties
– Shareholders
– Creditors
– Management

• Types of Ratio Comparisons

– Cross-Sectional Analysis
 Comparison of different firms’ financial ratios at the same point
in time; involves comparing the firm’s ratios with those of other
firms in its industry or with industry averages
– Benchmarking
 A type of cross-sectional analysis in which the firm’s ratio
values are compared with those of a key competitor or with a
group of competitors that it wishes to emulate

Table 3.5 Financial Ratios for Select Firms
and Their Industry Average Values (1 of 2)
blank Average
collection Total Net Return on Return on Price to
Current Quick Inventory period asset Debt profit total common earnings
ratio ratio turnover (days) turnover ratio margin assets equity ratio
Apple 1.4 1.3 61.6 49.6 0.7 0.6 21.2% 14.2% 35.6% 16.9
Hewlett- 1.0 0.7 8.8 31.1 1.7 0.7 5.2 8.6 16.4 10.7
Packard
Computers 1.5 0.6 21.0 57.0 0.8 0.4 15.6 11.9 32.3 16.0
Home Depot 1.3 0.4 4.3 5.3 1.6 0.5 4.0 6.5 13.7 22.7
Lowe’s 1.3 0.2 3.7 0.0 1.4 0.4 3.7 5.4 9.3 20.6
Building 2.8 0.8 3.7 5.3 1.6 0.3 4.0 6.5 13.7 26.2
materials
Kroger 0.8 0.2 11.5 5.8 3.2 0.8 1.9 6.0 30.0 13.6

Table 3.5 Financial Ratios for Select Firms
and Their Industry Average Values (2 of 2)
blank Average
collection Total Net Return on Return on Price to
Current Quick Inventory period asset Debt profit total common earnings
ratio ratio turnover (days) turnover ratio margin assets equity ratio
Whole Foods 1.5 1.1 19.9 5.6 2.5 0.5 3.2 8.0 15.7 18.0
Market
Grocery 1.3 0.7 11.1 7.5 2.4 0.6 2.1 3.1 9.8 20.8
stores
Target 0.9 0.3 5.9 3.9 1.8 0.7 3.8 7.1 24.4 10.7
Walmart 0.9 0.3 9.0 3.7 2.4 0.6 3.5 8.4 20.3 16.3
Merchandis 1.7 0.6 4.1 3.7 2.3 0.5 1.5 4.9 10.8 37.1
e stores
The data used to calculate these ratios are drawn from the Compustat North American database.

• Types of Ratio Comparisons

– Time-Series Analysis
 Evaluation of the firm’s financial performance over time using
financial ratio analysis
– Combined Analysis
 Combines cross-sectional and time-series analyses

Figure 3.1 Combined Analysis

• Cautions About Using Ratio Analysis

– Ratios that reveal large deviations from the norm merely
indicate the possibility of a problem
– A single ratio does not generally provide sufficient
information from which to judge the overall performance of
the firm
– The ratios being compared should be calculated using
financial statements dated at the same point in time during
the year

• Cautions About Using Ratio Analysis

– It is preferable to use audited financial statements
– The financial data being compared should have been
developed in the same way
– Results can be distorted by inflation

Table 3.6 Whole Foods Market Inc.
Balance Sheets for 2016 and 2015
($ millions)
Assets 2016 2015 Liabilities and Equity 2016 2015
Cash $ 852 $ 519 Accounts payable $307 $295
Accounts receivable 242 218 Other current liabilities 1,034 957
Inventory 517 500 Total current liabilities $1,341 $1,252
Other current assets 364 307 Long-term debt 1,776 720
Total current assets $1,975 $1,544 Total liabilities $3,117 $1,972
Property, plant, and 3,442 3,163 Common stock 907 1,780
equipment (net)
Other long-term assets 924 1,034 Retained earnings 2,317 1,989
Total fixed assets $4,366 $4,197 Total equity $3,224 $3,769
Total assets $6,341 $5,741 Total liabilities plus equity $6,341 $5,741
Note: The company had 318.3 million and 348.9 million shares outstanding in 2016 and 2015,
respectively.

Table 3.7 Whole Foods Market Inc. Income
Statements for 2016 and 2015 ($ millions)
blank 2016 2015
Sales $ 15,724 $ 15,389
Less: Cost of goods sold 10,313 9,973
Gross profit $ 5,411 $ 5,416
Less: Selling, general, and administrative expenses 4,477 4,472
Other operating expenses 77 83
Operating profit (EBIT) $ 857 $ 861
Less: Interest expense 41 0
Plus: Other income 11 17
Pre-tax income $ 827 $ 878
Less: Taxes 320 342
Net income $ 507 $ 536
Dividends paid $ 177 $ 186

3.3 Liquidity Ratios (1 of 2)
• Liquidity
– A firm’s ability to satisfy its short-term obligations as they
come due
• Current Ratio = Current Assets ÷ Current Liabilities
– A measure of liquidity calculated by dividing the firm’s
current assets by its current liabilities

3.3 Liquidity Ratios (2 of 2)
• Quick (Acid-Test) Ratio = (Current Assets – Current
Liabilities) ÷ Current Liabilities
– A measure of liquidity calculated by dividing the firm’s
current assets less inventory by its current liabilities

3.4 Activity Ratios (1 of 3)
• Activity Ratios
– Measure the speed with which various accounts are
converted into sales or cash, or inflows or outflows
• Inventory Turnover = Cost of Goods Sold ÷ Inventory
– Measures the activity, or liquidity, of a firm’s inventory
 Average Age of Inventory = Inventory Turnover ÷ 365
– Average number of days’ sales in inventory

• Average Collection Period = Accounts Receivable ÷ Average
Sales Per Day
or
Accounts Receivable ÷ (Annual Sales ÷ 365)
– The average amount of time needed to collect accounts
receivable

• Average Payment Period = Accounts Payable ÷ Average
Purchases Per Day
or
Accounts Payable ÷ (Annual Purchases ÷ 365)
– The average amount of time needed to pay accounts
payable
• Total Asset Turnover = Sales ÷ Total Assets
– Indicates the efficiency with which the firm uses its assets to
generate sales

3.5 Debt Ratios (1 of 3)
• Financial Leverage
– The magnification of risk and return through the use of fixed-
cost financing, such as debt and preferred stock
• Degree of Indebtedness
– Ratios that measure the amount of debt relative to other
significant balance sheet amounts

Example 3.5 (1 of 2)
Patty Akers is incorporating her new business. After much
analysis, she determines that an initial investment of
$50,000—>$20,000 in current assets and $30,000 in fixed
assets—>is necessary.
These funds can be obtained in one of two ways. The first is
the no-debt plan, under which she would invest the full
$50,000 without borrowing.
The other alternative, the debt plan, involves investing
$25,000 and borrowing the balance of $25,000 at 6% annual
interest.

Example 3.5 (2 of 2)
Patty expects
$30,000 in sales,
$18,000 in operating expenses, and a 21% tax rate.
Projected balance sheets and income statements associated with the

two plans appear below in Table 3.8.
The no-debt plan results in after-tax profits of $9,480, which represent a

19% rate of return on Patty’s $50,000 investment.
The debt plan results in $8,295 of after-tax profits, which represent a

33.2% rate of return on Patty’s investment of $25,000. The debt plan
provides Patty with a higher rate of return, but also has a greater risk
because the annual $1,500 of interest must be paid whether Patty’s
business is profitable or not.

Table 3.8 Financial Statements Associated
with Patty’s Alternatives

• Debt Ratio = Total Liabilities ÷ Total Assets
– Measures the proportion of total assets financed by the
firm’s creditors
• Debt-to-Equity Ratio = Total Liabilities ÷ Common Stock
Equity
– Measures the relative proportion of total liabilities and
common stock equity used to finance the firm’s total assets
• Times Interest Earned Ratio = Earnings Before Interest
and Taxes ÷ Interest
– Measures the firm’s ability to make contractual interest
payments; sometimes called the interest coverage ratio

• Fixed Payment Coverage Ratio =
Earnings Before Interest and Taxes  Lease Payments

  1 
Interest  Lease Payments  (Principal Payments  Prefereed Stock Dividends)   
  1 T 
– Measures the firm’s ability to meet all fixed-payment

obligations

3.6 Profitability Ratios (1 of 5)
• Common-Size Income Statements
– An income statement in which each item is expressed as a
percentage of sales

Table 3.9 Whole Foods Common-Size
Income Statements
blank 2016 2015 Evaluationa 2015–2016
Sales revenue 100.0% 100.0% Blank
Less: Cost of goods sold 65.6 64.8 Worse
(1) Gross profit margin 34.4% 35.2% Worse
Less: Operating expenses blank Blank Blank
Less: Selling, general, and administrative 28.5% 29.1% Better
expenses
Other operating expenses 0.5 0.5 Same
(2) Operating profit margin 5.4% 5.6% Worse
Less: Interest expense 0.3 0.0 Blank
Plus: Other income 0.1% 0.1% blank
Pre-tax income 5.2% 5.7% Worse
Less: Taxes 2.0 2.2 Better
(3) Net profit margin 3.2% 3.5% Worse
a
Subjective assessments based on data provided.
• Gross Profit Margin = (Sales – Cost of Goods Sold) ÷ Sales
= Gross Profits ÷ Sales
– Measures the percentage of each sales dollar remaining after
the firm has paid for its goods
• Operating Profit Margin = Operating Profit ÷ Sales
– Measures the percentage of each sales dollar remaining after
all costs and expenses other than interest, taxes, and
preferred stock dividends are deducted; the “pure profits”
earned on each sales dollar

• Net Profit Margin = Earnings Available for Common
Stockholders ÷ Sales
– Measures the percentage of each sales dollar remaining
after all costs and expenses, including interest, taxes, and
preferred stock dividends, have been deducted

Earnings Available for Common Stockholders
• Earnings Per Share (EPS) = Number of Shares of Common Stock Outstanding
– Represents the number of dollars earned during the period on

behalf of each outstanding share of common stock
• Return on Total Assets (ROA) = Total Assets
– Measures the overall effectiveness of management in generating

profits with its available assets; also called the return on
investment (ROI)

• Return on Equity = Number of Shares of Common Stock Outstanding
– Measures the return earned on the common stockholders’

investment in the firm

3.7 Market Ratios (1 of 2)
• Price/Earnings Ratio = Market Price Per Share of Common
Stock ÷ Earnings Per Share
– Measures the amount that investors are willing to pay for
each dollar of a firm’s earnings
• Market/Book Ratio
– Book Value Per Share of Common Stock 

Total Common Stock Equity
Number of Shares of Common Stock Outstanding

3.7 Market Ratios (2 of 2)
Market Price Per Share of Common Stock
• Market/Book (M/B) Ratio = Book Value Per Share of Common Stock
– Provides an assessment of how investors view the firm’s

performance

3.8 A Complete Ratio Analysis (1 of 5)
• Summary of Whole Foods’ Financial Condition
– Liquidity
 Overall liquidity of the firm increased significantly in 2016
– Activity
 Whole Foods is managing its current assets and liabilities
reasonably well
 Total asset turnover slowed significantly in 2016
– Debt
 Whole Foods’ indebtedness increased sharply in 2016, though
the company still uses less debt than does the average
grocery company

• Summary of Whole Foods’ Financial Condition
– Profitability
 Whole Foods was more profitable than the average grocery
firm in 2016 by all measures
– Market
 Both the P/E and M/B ratios fell in 2016, suggesting that
investors have a little less confidence in the firm in 2016,
although both ratios are above the industry average

Table 3.10 Summary of Whole Foods’
Ratios (2015–2016, Including 2016 Industry
Averages) (1 of 2)

Table 3.10 Summary of Whole Foods’
Ratios (2015–2016, Including 2016 Industry
Averages) (2 of 2)

• DuPont System of Analysis
– System used to dissect the firm’s financial statements and to
assess its financial condition
– Dupont Formula
 Multiplies the firm’s net profit margin by its total asset turnover
to calculate the firm’s return on total assets (ROA)
Earnings Available for Common Stockholders Sales

ROA  
Sales Total Assets

Total Assets

Figure 3.4 DuPont System of Analysis

– Modified Dupont Formula
 Relates the firm’s return on total assets (ROA) to its return on
equity (ROE) using the financial leverage multiplier (FLM)
– Financial Leverage Multiplier = Total Assets ÷ Common
Stock Equity
• The ratio of the firm’s total assets to its common stock
equity
Earnings Available for Common Stockholders Total Assets

ROE  
Total Assets Common Stock Equity

Common Stock Equity

– Applying the DuPont System
 The advantage of the DuPont system is that it allows the firm
to break its return on equity into a profit-on-sales component
(net profit margin), an efficiency-of-asset use component (total
asset turnover), and a use-of-financial-leverage component
(financial leverage multiplier)
 Analysts can decompose the total return to owners into these
important components

Example 3.6
In Table 3.10 we saw that Whole Foods’ 2016 ROE was
15.7%, above the 13.8% industry average. What are the
drivers of this difference? Start at the far right of Figure 3.4
and move left. Whole Foods’ ROA was 8.0%, well above the
industry average of 3.1%. Whole Foods’ FLM was just under
2.0, whereas the industry average was 2.5.4 Therefore,
Whole Foods’ shareholders enjoyed a higher-than-average
ROE because the firm’s underlying profitability, its ROA, was
much higher than that of the typical grocery chain.
Continuing to move left in Figure 3.4, we see that the ROA
figure resulted from Whole Foods’ above-average net profit
margin of 3.2% and its asset turnover of 2.48, which just
barely rose above the industry average.
4
We estimate the industry average FLM by dividing the industry average debt-to-equity ratio of 1.5 in Table 3.10 by the
industry average debt ratio of 0.6.

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Principles of Managerial Finance

Fifteenth Edition, Global Edition

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

blank 2019 2018

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blank 2019 2018

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Includes all of the

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Assets 2019 2018

Vehicles 275 314

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Assets 2019 2018

Paid-in capital in excess of par on common stock 428 417

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A survey of 175 companies showed that companies appear to

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Net profits after taxes $ 231

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• Types of Ratio Comparisons

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• Types of Ratio Comparisons

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• Cautions About Using Ratio Analysis

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• Cautions About Using Ratio Analysis

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Projected balance sheets and income statements associated with the

The no-debt plan results in after-tax profits of $9,480, which represent a

The debt plan results in $8,295 of after-tax profits, which represent a

Copyright © 2019 Pearson Education, Ltd. All Rights Reserved.

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Earnings Before Interest and Taxes  Lease Payments