Financial Statement Analysis

Liquidity

Current = current assets ÷ current liabilities. Quick = (cash + securities + receivables) ÷ current liabilities.

Activity

• Receivables turnover = credit sales ÷ average receivables; days sales outstanding (DSO) = 365 ÷ turnover.
• Inventory turnover = cost of goods sold ÷ average inventory; days inventory outstanding (DIO) = 365 ÷ turnover.
• Cash conversion cycle = DSO + DIO − days payables outstanding (DPO).

Solvency and profitability

• Debt to equity; times interest earned = earnings before interest and taxes (EBIT) ÷ interest.
• Return on assets (ROA) = net income ÷ average assets. Return on equity (ROE) = net income ÷ average equity.

DuPont

ROE = net margin × asset turnover × equity multiplier.

Transactions

Ratio > 1: equal decreases to numerator and denominator raise it; ratio < 1: lower it.

Variances

Price = (actual price − standard price) × actual quantity. Quantity = (actual quantity − standard quantity) × standard price.

Economics

Leading indicators move first; gross domestic product (GDP) = consumption + investment + government + net exports; elastic demand (> 1): price up → revenue down.

Exam traps

• The quick ratio leaves out inventory and prepaid expenses.
• A favorable price variance alongside an unfavorable quantity variance may mean cheaper, lower-quality materials.
• Rising ROE can come from more leverage rather than better operations — break it down with DuPont.