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Financial Analysis
Suppose you are comparing two firms within an industry. One is large and the other is small. Will relative or absolute numbers be of more value in each case? What kinds of statistics can help evaluate relative size?
Gibson, Charles H. (2012-05-10). Financial Reporting and Analysis (Page 217). Cengage Textbook. Kindle Edition.
When comparing two firms that are unequal in size, the relative financial ratios are more appropriate for any type of comparison. The advantage of using ratios is that they represent a metric that can be easily compared with industry standards or other specific companies of different sizes. The financial statement represents a snap shot of a company's performance over a given time period and the financial information that these reports provide can allow the analysis of a wide range of different ratios. These ratios can provide insights to factors such as the company's ability to repay short- and long-term liabilities, information about the debt structure, and information about the capital structure that the company is operating with along with various profitability metrics.
Chapter 6
Problem 6-11
Q 6-11 List the two computations that are used to determine the liquidity of inventory.
Gibson, Charles H. (2012-05-10). Financial Reporting and Analysis (Page 249). Cengage Textbook. Kindle Edition.
The operating cycle for a company is the time period between the acquisition of goods and the final cash realization resulting from sales and subsequent collections.
Inventory Turnover
Inventory turnover indicates the liquidity of the inventory. This computation is similar to the accounts receivable turnover computation.
The inventory turnover formula follows:
Inventory Turnover = Cost...
An approximation of the operating cycle can be determined from the receivables liquidity figures and the inventory liquidity figures. Compute the operating cycle as follows:
Operating Cycle = Accounts Receivable Turnover in Days + Inventory Turnover in Days
Problem 6-15
If a company has substantial cash sales and credit sales, is there any meaning to the receivable liquidity computations that are based on gross sales?
Yes. Any computations that use gross sales as a metric can give an insight to the company's total sales volume and general performance. However, other liquidity metrics such as the operating cycle which considers credit collection times can give a more accurate account of the company's current asset and liabilities position.
Financial analysis report template
Liquidity of short-term assets
Walmart
Jan 31, 2015
Jan 31, 2014
Jan 31, 2013
Jan 31, 2012
Jan 31, 2011
Selected Financial Data (USD $ in millions)
Current assets
63,278
61,185
59,940
54,975
51,893
Current liabilities
65,272
69,345
71,818
62,300
58,484
Ratio
Current ratio
0.97
0.88
0.83
0.88
0.89
Costco
Aug 31, 2014
Sep 1, 2013
Sep 2, 2012
Aug 28, 2011
Aug…
(2009). Google's Big IPO, Five Years Later. [Article]. Wall Street Journal - Eastern Edition, 254(40), C3. Davis, H.Z., & Peles, Y.C. (1993). Measuring Equilibrating Forces of Financial Ratios. The Accounting Review, 68(4), 725-747. Google Inc. (2012). 2011 Annual Report. Mountain View, CA: Google Inc. Kirby, J. (2009). How Google really does it. (Cover story). [Article]. Canadian Business, 82(18), 54-58. Lee, M.-j. (2010). Measuring the Usage Effects of Tying a Messenger to Windows: A
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