After studying Chapter 13, 
                  After studying Chapter 13, 
                  you should be able to:
                  you should be able to:
          Understand the purpose of basic financial statements and their 
           contents. 
          Explain why financial statement analysis is important to the firm and 
           to outside suppliers of capital. 
          Define, calculate, and categorize (according to liquidity, financial 
           leverage, coverage, activity, and profitability) the major financial 
           ratios and understand what they can tell us about the firm. 
          Define, calculate, and discuss a firm’s operating cycle and cash cycle.
          Use ratios to analyze a firm's health and then recommend reasonable 
           alternative courses of action to improve the health of the firm. 
          Analyze a firm’s return on investment (i.e., “earning power”) and 
           return on equity using a DuPont approach. 
          Understand the limitations of financial ratio analysis. 
          Use trend analysis, common-size analysis, and index analysis to gain 
           additional insights into a firm's performance.
6-2
        Financial 
        Financial 
        Financial 
         Financial 
        Statement Analysis
        Statement Analysis
        Statement Analysis
         Statement Analysis
    FFininaanncciaial l SSttaatteememenntsts
    AA Po Possssibiblele  FFrraamemewwoorrkk fo forr  AnAnaalylyssisis
    BaBallaannccee  ShSheeeett Ra Ratiotioss
    InInccoomeme St Staatteememennt at anndd In Inccoomeme  
    StaStatetememennt/t/BaBallaannccee  ShSheeeett Ra Ratiotioss
    TTrreenndd  AnAnaallyyssisis
    CoCommommonn--SSiizzee a anndd  InInddeexx  AnAnaalylyssisis
6-3
        Examples of External Uses 
        Examples of External Uses 
        Examples of External Uses 
         Examples of External Uses 
        of Statement Analysis
        of Statement Analysis
        of Statement Analysis
         of Statement Analysis
    TTrade Crrade Crededitorsitors  -- F-- Focus oocus on thn thee  
     TTrade Crrade Crededitorsitors
     lliqiquiduidity of ity of the firm.the firm.
    BonBondhdholdoldeersrs  -- F-- Focus oocus on thn thee        
     BonBondhdholdoldeersrs
     llongong-te-termrm  cacash sh floflow ow of the fif the firrm.m.
    ShShaarerehhololderderss --  -- FocuFocuss o on n the the 
     ShShaarerehhololderderss
     profprofitaitabbilility and ity and lolongng--tteermrm  heaheallth th of of 
     ththee  ffiirmrm..
6-4
        Examples of Internal Uses 
        Examples of Internal Uses 
        Examples of Internal Uses 
         Examples of Internal Uses 
        of Statement Analysis
        of Statement Analysis
        of Statement Analysis
         of Statement Analysis
   PPllanan  -- -- FFooccuuss o onn ass assesessinsingg t thhe e cucurrrrenentt  
    PPllanan
    fifinnanancicial pal poosisitiotionn an andd e evavaluluaatintingg  
    ppootetenntitial firal firmm  ooppppoorrtutunniitieties.s.
   CoConnttrrooll  -- F-- Fooccuus s oonn r retueturrnn o onn  ininvvestestmmenent t 
    CoConnttrrooll
    foforr v vararioiouus s asassetssets a anndd  asasset eset effifficiecienncycy..
   UnUnddeerrsstantandd --  -- FFooccuuss o onn  uunndderersstantanddiningg  
    UnUnddeerrsstantandd
    hhooww  susuppppliliererss o off  ffuunndds s ananaalyzlyzee th the fie firrmm..
6-5
                        Primary Types of 
                        Primary Types of 
                        Primary Types of 
                         Primary Types of 
                        Financial Statements
                        Financial Statements
                        Financial Statements
                         Financial Statements
      BBaalalanncece S Shheeeett
      BBaalalanncece S Shheeeett
                AA  susummmmary ary ofof  a a ffiirm’rm’s s ffiinannancicialal  pposiosittiionon  onon  
                  a a ggiiven ven ddatate e tthathat  shoshowws s ttoottalal  assetassetss  ==  ttototalal  
                  lliiababiilliittiies es ++  owownners’ers’  eqequiuittyy..
      InIncocomme e SStatatemtemenentt
      InIncocomme e SStatatemtemenentt
                AA  susummmmary ary ofof  a a ffiirm’rm’s s revenrevenues ues anand d 
                  expexpenses enses oover ver a a specispeciffiied ed pperieriodod,,  enendidinng g 
                  wwiitthh  nenett  iincncomome e or or llooss ss ffoorr  tthehe  pperieriodod..
6-6