IMBA財(cái)政會(huì)計(jì)培訓(xùn)資料英文版課件

Thisweek’sindividualHWPage197ofIn-classexercisesONLY1Thisweek’sindividualHW1TheQualitiesofaGoodAnalystReport

FormatProfessionallayoutsSmoothlydividedintosectionsSectionslogicallystructuredandconnectedClearlyworded2TheQualitiesofaGoodAnalysTheQualitiesofaGoodAnalystReport

Contents1. Summaryofanalysis2. Introductionofcoveredcompany 2.1Industryanalysis 2.2.Companyanalysis3. Qualityofearningsanalysis4. Profitabilityanalysis5. Growthanalysis6. Earningsforecasts7. Riskanalysis8. Valuation9. Recommendation3TheQualitiesofaGoodAnalysTheQualitiesofaGoodAnalystReportComments:Beaware,youmakealiving(aniceapt.,adecentwedding,agoodeducationforyourchild,acomfortableretirementplan…)fromsellingyouranalystreportstoinvestors.YoudonothavetoSTRICTLYfollowtheaforementionedformat.Usetheformatthatyoubelievesellsyouranalysiswell.Becreative!!!Beprofessional!!!BeEthical!!!4TheQualitiesofaGoodAnalysImportantdatesDecember3,NOCLASS,preparationforreportandpresentationDecember17,reportDUE,turninahardcopyinclass,andemailmeanelectroniccopy.ElectroniccopiestobeplacedonclasswebsiteDecember24,presentation.Startsat8:30,20minutesforeachgroup.Beforepresentation,IrandomlychooseONEpresenterfromthegroup.Feelfreetocometodiscussyourprojectwithme!5ImportantdatesDecember3,NOGradingGuidelineTheformatandcontentsofthereportTheformatandcontentsofthepresentationThepresenter’s精神面貌ThewaytohandlequestionsEnglishislesseranissueIacceptchallengestograding,butreservetherightstomakethefinaljudgment!6GradingGuidelineTheformatanObligation7Obligation7LiabilityRecognitionAnobligationisaliabilityif:1.Itinvolvesaprobablefuturesacrificeofresourcesandtheamountofthesacrificecanbereasonablypreciselymeasured.2.Thereislittleornodiscretiontoavoidthetransfer3.ThetransactionoreventthatgivesrisetotheobligationhasalreadyoccurredAmutualpromise(orexecutorycontract)isnotaliabilitybecauseofitem3above.Thisis,signingacontactisnotatransaction.Anexampleofamutualpromiseisthecustomerpromisestopayandthefirmpromisestodelivergoodsatadate.Ifthispromiseisintheformofalegalcontract,itmaygivebothpartiesrightsbuttherightsarenotyetconsideredassetsandtheobligationsarenotyetconsideredliabilities,becausethetransactionspecifiedinthepromiseshasnotyetoccurred.8LiabilityRecognitionAnobligaClassificationsofAccountingLiabilitiesbyDegreeofCertaintyonrepaymentdatesandrepaymentamountsReadexamples1-9on450ofStickneyandWeil9ClassificationsofAccountingAccountingItems:RecognizedversusDisclosedAccountingitemswhoseeconomicimpactonthefirmcanbemeasuredwithreasonableprecision,arerecognizedintheI/SorB/S,suchastheliabilitiestotheleftofthedividinglineinthepreviousslide.AccountingitemswhoseeconomicimpactonthefirmcanNOTbemeasuredwithreasonableprecision,aresometimesdisclosedinannualreports,suchascontingencyliabilitiestotherightofthedividingline.10AccountingItems:RecognizedvContingencies:PotentialLiabilitiesContingentliabilitiesarepotentialliabilitiesrelatedtopastevents.Themoreprobablethepotentialtobecomealegalobligation,thegreatertherationaleforrecognizingitasaliability.Probabilityofapotentialliabilityisverydifficulttomeasure.Ingeneral,anobligationshouldberecognizedasaliabilityifitisprobablethatthefirmwillhavemakefuturesacrificesofresources.Ofcourse,thewordprobableisalsodifficulttomeasure.Contingenciesarenormallydisclosedinfootnotes.But,FASBandIASCrequiretherecognitionofalossandacontingentliability,when,givenpastevents,Itisprobablethatanassethasbeenimpairedoraliabilityincurred,andTheamountofthelosscanbereasonablyestimated.11Contingencies:PotentialLiabiLiabilityValuationIngeneral,liabilitiesarepresentedonthebalancesheetatthepresentvalueofpaymentsneededtofulfilltheobligation.Presentvaluereferstodiscountingthenominalpaymentsbyaninterestrateappropriateforthefirm.Discountingisamathematicalcomputationwherebyfutureflowsarereducedtoreflecttheconceptthatmoneyhastimevalue.(SeeAppendixAatthebackofthetext.)Currentliabilitiesarenotgenerallydiscountedbecauseoftheshortperiodoftimeuntiltheyaretoberesolved.Theshortperiodoftimewouldcausetheamountofanydiscounttobesmallenoughtobeconsideredimmaterial.12LiabilityValuationIngeneral,LiabilityClassificationLiabilitiesareseparatedintocurrentandnoncurrentbasedonthelengthoftimethatwillelapsebeforetheobligationmustbefulfilled.Currentliabilitiesareobligationsthatmustbefulfilledwithinthecurrentoperatingcyclewhichisalmostalwaysoneyear.Noncurrentliabilitiesareobligationsthatneednotbefulfilledwithinthecurrentoperatingcycle.Obligationscallingforperiodicpaymentssuchasamortgagemaybenoncurrentbuthaveacurrentportion;thatis,thepaymentsduewithintheoperatingcyclearecurrentbuttheremainingpaymentsarenoncurrent.13LiabilityClassificationLiabilCurrentLiabilitiesa.Accountspayableb.Short-termnotesandinterestpayablec.Wages,salariesandotherpayrollitemsd.Incometaxespayablee.Deferredperformanceliabilities:advancesfromcustomersf.Deferredperformanceliabilities:productwarranties14CurrentLiabilitiesa.AccountsAccountsPayabletoCreditorsBusinessfirmsoftenbuyandselltoeachotheroncredit.Amountsowedtootherbusinessesforservicesorgoodsarecalledtradeaccountspayable.Typicallytheseareshort-termliabilities.Typically,apaymentgraceperiodisallowedbeforetheseobligationsmustbefulfilled(orpaid).Agraceperiodmaybe30daysormore.Becausesuchagraceperiodrepresentsinterest-freeborrowing,theprudentfirmtakesadvantagebypayingexactlyontimebutnotbefore.Rarely,afirmismoreaggressiveandalwayspayslate,butalatechargemaybeassessedandsuchafirmwilldevelopareputationwhichmayaffectthetermstheycannegotiate.15AccountsPayabletoCreditorsBShort-TermNotesandInterestPayableAnotepayableisaformofshorttermborrowing.Thenoteaccruesinterestexpenseandinterestpayableatastatedrateovertime.Thetotalamountofthenoteandtheinterestaremostlydueasonepaymentuponmaturityofthenote.16Short-TermNotesandInterestWages,SalariesandOtherPayrollItemsEmployerspayworkersdirectlyincashandintheformofbenefits--thisgivesrisetopayrollexpenseForexample,vacationtimemaybeearnedovertime.Thefirmpaystaxesonthisbenefitasitisearnedandaliabilitytotheworkerisrecorded.Whenvacationistaken,theliabilityisreduced.Employersalsopaysometaxesthatrelatetotheworkers--thesearetaxexpenses.17Wages,SalariesandOtherPayrIncomeTaxesPayableU.S.andmostcountriestaxbusinessincome.Corporationsaretaxeddirectly.Partnershipsandsoleproprietorshipsarenottaxedbuttheincomeisassignedtothepartnersorproprietorwhomustthenpaythetax.Incometaxesareassumedtoaccrue;thatis,theincometaxliabilityincreasesasthefirmearnsincome.TaxrulesalsocallforperiodicpaymentstotheIRS.Sothatbusinessincometaxesareestimatedandpaidthroughouttheyear.Theannualfilingdeadline(March15)isareportingdeadlineandnotapaymentdeadline;paymentinmanycasesisrequiredearlier.Inaddition,GAAPallowsfordifferencesbetweenincometaxexpense(anaccrualconcept)andincometaxliability(theamountowedtoIRS).Thisiscoveredinalaterchapterunderdeferredtaxaccounting.18IncomeTaxesPayableU.S.andmDeferredPerformanceLiabilities:AdvancesfromCustomersAmutualpromise(thecustomerpromisestopayandthefirmpromisestodeliver)isnotrecorded.However,ifthecustomerpaysinadvance,thenthereisanobligationthatarisesandthefirmrecordsthisasanincreaseinanasset(cash)andanincreaseinaliability(advancesfromcustomers,unearnedrevenues).Theobligationisforthefirmtoeitherfulfillitspromisetodelivergoodsorserviceswithinthespecificationsofthecontractorreturnthecash.Anexampleisamagazinesubscriptionwhichistypicallypaidinadvance.Thesubscriptionisanobligationtoproduceanddeliverthemagazine.Whenamagazineisdelivered,theobligationcanbereduced(debited)andrevenuecanberecognized(credited)becauseitisthenearned.19DeferredPerformanceLiabilitiDeferredPerformanceLiabilities:

ProductWarrantiesAwarrantyisapromisetorepairorreplacethegoodbutislimitedbytime.Whengoodswithawarrantyaresold:revenue,thewarrantyexpense,andthewarrantyliabilityarerecognized.Theamountoftheliabilitymustbeestimated.Whenaclaimismade,thewarrantyliabilityisreduced(debited)andwhatisgiventofulfilltheclaim(cashornewgoodsorpartsandlabor)arecredited.Anyunusedportionofthewarrantyexpiresattheendofthewarrantyperiodreducingtheliabilityandcreatingagain.20DeferredPerformanceLiabilitiLong-TermLiabilitiesa.Bondsb.Mortgages21Long-TermLiabilitiesa.Bonds2ProceduresforRecordingLong-TermLiabilitiesWhereasshorttermliabilitiesmaybepaidatmaturity,long-termliabilitiesaremorecommonlypaidininstallments.Also,thegeneralruleisthatlong-termliabilitiesarerecordedatthepresentvalueofthepayments.Theaccountantdistinguishesbetweenpaymentoftheliability(theprinciple)andpaymentofinterest(anexpenseoffinancing).Commonly,theprinciple,theperiodicpaymentsandtheinterestratesareexplicitlystatedinthedebtcontract.Ifnot,thendiscountedcashflowmethodsmaybeusedtoseparateouttheinterestpayment.Therateofinterestthatequatedthepresentvalueofagivensetofperiodicpaymentswiththeprincipleiscalledtheinternalrateofreturnordiscountrate).Ifyouareconfusedwiththisslide,pleaseskipandreturnafterFinishingthischapter.22ProceduresforRecordingLong-Long-termLiabilities:

InterestImputationSomecontractsdonotexplicitlystateinterestpayments,insteadthepurchasepricemayincludecarryingcharges.Thereisnoeconomicconceptofaninterest-freeloan.Theinterestmaynotbeexpressed,butitisthere.TheIRSagreesandwillrequirethetaxpayertocalculateinterestpaymentsevenifthecontractdoesnotspecificallystatearateofinterest(calledimplicitorimputedinterest).GAAPagreesandrequiresthatlongtermliabilitiesberecordedattheirpresentvalueandthatrepaymentsbeseparatedintointerestexpenseandreductionoftheliability.Whereinterestratesarenotstated,theycanbecomputedusingpresentvaluemethodsandusingtheknowpaymentswithAnestimateofmarketvalue(whichbecomesthePV),orAnestimateoftheinterestrateforsimilardebt.Ifyouareconfusedwiththisslide,pleaseskipandreturnafterFinishingthischapter.23Long-termLiabilities:

InteresBondsBondsaredebtinstrumentssoldtotheinvestingpublic.Somebondscarrynocollateral（擔(dān)保）andarecalleddebenturebonds.Bondsbackedbycollateralarecalledcollateraltrustbonds.Bondsthatcanbeconvertedtocommonsharesoftheissuingcompanyarecalledconvertiblebonds.Bondsarerecordedasalong-termliability.24BondsBondsaredebtinstrumentHowtodefineabond?1.Apieceofpaper2.Facevalue(orparvalue):forexample$1,0003.Anominal（名義上的）interestrate:forexample10%(therateisannualrateifnotstatedotherwise.Semiannualrateishalfofitat5%).4.Duration:numberofyearsbeforetheprincipleisdue,forexample,5years5.Frequencyofnominalinterestpaymentinayear:annuallypaysonceayear;semiannuallypaystwiceayear(soafive-yearbondwouldhavetensemiannualperiods)25Howtodefineabond?1.ApiecHowtodefineabond?Thedefinitionofabondisthepatternofitscashpaymentstothebondholders,nothingelse(STOP:Thisisthefirstimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)Thebondinthepreviousslideisdefinedas:Thisbondisdefinedbyten$50paymentsofnominalinterestseveryhalfayear(semiannually);andapaymentofparvalue$1,000attheendofthefifthyear.$50$50$50$50$50$50$50$50$50$50$1,00026Howtodefineabond?ThedefinHowmuchwillthisbondsellfor?Likeanyinvestmentvehicles,thepriceofabondisthenetpresentvalueofitsfuturecashpayments(NPV)Thebondpriceandtheparvalueofthebondaretotallytwodifferentthings,theydonothavetobethesame.Thepreviousbondcanbesoldmorethanorlessthantheparvalue$1,000.(STOP:Thisisthesecondimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)IassumeyouhavelearntNPVcalculations,andTheuseofpresentvaluetables.27HowmuchwillthisbondsellfHowmuchwillthisbondsellfor?TherateofreturnthatweusetodiscountthecashflowstogetNPVofthebondiscalleddiscountrate（折現(xiàn)率）.Discountrateisdecided,atthetimeofthebondsale,bytheriskassociatedwiththebond.Ifitismore(less)likelyforthebondsellertodefaultinthefuture,thediscountratewillhigher(lower).Microsoft’sbonddiscountratemaybe4.8%,whileasmallfoodchain’sbonddiscountratehastobe10.7%.Discountratehasnothingtodowiththebond’snominalinterestrate;nominalinterestrateonlydeterminesthecashpayments($50eachinthiscase).(STOP:Thisisthethirdimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)28HowmuchwillthisbondsellfHowmuchwillthisbondsellfor?-soldatparLetusassumethepreviousbond’sdiscountrateis10%(this10%hasnothingtodowiththe10%nominalinterestrate).Thenthebondpriceis=50/(1+5%)+50/(1+5%)2+50/(1+5%)3+50/(1+5%)4+……50/(1+5%)10+1000/(1+5%)10=$1,000Whyweuse5%discountratenotthe10%?Becausethe$50nominalinterestpaymentisforhalfayear.Weuse10periodsbecausefiveyearsmakeuptenhalf-a-years.Whenbondpriceisequaltobondfacevalue,wesayitissoldatpar.Youshouldnotrelyonanycalculatorortablestocomputethebondpriceintheaboveequation.Whennominalinterestrate(5%)isthesameasdiscountrate(5%),thebondissoldatparvalue.(STOP:Thisisthefourthimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)29HowmuchwillthisbondsellfHowmuchwillthisbondsellfor?-soldatpremiumLetusassumethepreviousbond’sdiscountrateis8%(thatis,itislessriskierthaninthepreviousslidetolendtothecompanysoalowerdiscountrateisused).Thenthebondpriceis=50/(1+4%)+50/(1+4%)2+50/(1+4%)3+50/(1+4%)4+……50/(1+4%)10+1000/(1+4%)10

=$50*8.11081+$1,000*0.675562=$1,0811StickneyandWeilpage855,4%atn=102StickneyandWeilpage853,4%atn=10Premium=$1,081–1,000=$81Whenbondpriceismorethanbondparvalue,wesayitissoldatpremium.30HowmuchwillthisbondsellfHowmuchwillthisbondsellfor?-soldatdiscountLetusassumethepreviousbond’sdiscountrateis12%(thatis,itismoreriskierthanintheprevioustwoslidetolendtothecompanysoahigherdiscountrateisused).Thenthebondpriceis=50/(1+6%)+50/(1+6%)2+50/(1+6%)3+50/(1+6%)4+……50/(1+6%)10+1000/(1+6%)10

=$50*7.36009**+$1,000*0.55839***=$926**StickneyandWeilpage855,6%atn=10***StickneyandWeilpage853,6%atn=10Discount=$1,000–926=$74Whenbondpriceislessthanbondparvalue,wesayitissoldatdiscount.31HowmuchwillthisbondsellfHowmuchwillthisbondsellfor?-summarySoldatpremiumSoldatparSoldatdiscountNominalInterestrate10%10%10%Discountrate8%10%12%BondPrice(cashreceivedbythebondseller)$1,081$1,000$826Understandpricedifference-technicalInthebondpriceequation,comparetosoldatpar,thenumeratoristhesame,butdenominatorissmaller,thentheresultgetslargerInthebondpriceequation,comparetosoldatpar,thenumeratoristhesame,butdenominatorislarger,thentheresultgetssmallerUnderstandpricedifference-intuitiveWhenthemarketdemands8%(discountrate,rateofreturn)fromthebondseller,thebondsellerpayscashat10%everyyear.Sothisbondisworthmorethantheparvalue.Whenthemarketdemands10%(discountrate,rateofreturn)fromthebondseller,thebondsellerpayscashat10%everyyear.Sothisbondisworthitsparvalue.Whenthemarketdemands12%(discountrate,rateofreturn)fromthebondseller,thebondsellerpayscashat10%everyyear.Sothisbondisworthlessthantheparvalue.32HowmuchwillthisbondsellfBond’srealinterestrateandinterestexpenseThebond’srealinterestrateisNOTthenominalinterestrate;itisthediscountrate.Nominalinterestrateisonlyusedtodeterminethepatternoffuturecashpayments.Interestexpenseistherealinterestratetimesthebalanceofthebondpayable(principle)accountatthebeginningoftheperiod..(STOP:Thisisthefifthimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)Whenthebondissoldatpar,interestexpenseisthethesameascashpayment(the$50).Whenthebondissoldatpremium,interestexpenseislessthancashpayment.Thedifferenceisareturn(decrease)ofprinciple(bondpayable).Whenthebondissoldatdiscount,interestexpenseismorethancashpayment,thedifferenceincreasestheprinciple(bondpayable)tothefacevalue.Inanycase,attheendofthefifthyear,afterthelastpaymentof$50,bondpayableaccountshouldhaveabalanceof$1,000(parvalue),thentheborrowerpaysthecreditor$1,000cash.33Bond’srealinterestrateandBondaccounting–anexample$100,000parvalue12%nominalinterestrateFiveyeardurationCashpaymentsmadesemiannuallyDiscountrate14%Bondpricethen=$92,976.Thisistheamountofcashthebondsellerreceivesfromthebondsales.Hethen: Dr.Cash92,976 Cr.BondPayable92,976Note:atthistime,thebondsellerowes$92,976(principleofthebond),notthe$100,000parvalue.(STOP:Thisisthesixthimportantconceptinbondaccounting,youmustunderstandbeforeyougoon)34Bondaccounting–anexample$1Bondaccounting–anexampleOnJune30ofyear1,thebondsellerpayscash$100,000*0.06=$6,000.ThisisNOTinterestexpense.Interestexpenseforthefirsthalfofyear1=discountrate7%*bondpayable$92,976=$6,508.

Dr.Interestexpense6,508 Cr.Cash6,000Cr.Bondpayable508Nowbondpayableaccountbalance=$92,976+508=$93,48435Bondaccounting–anexample35Bondaccounting–anexampleOnDecember31ofyear1,thebondsellerpayscash$100,000*0.06=$6,000.ThisisNOTinterestexpense.Interestexpenseforthesecondhalfofyear1=discountrate7%*bondpayable$93,484=$6,544. Dr.Interestexpense6,544 Cr.Cash6,000Cr.Bondpayable544Nowbondpayableaccountbalance=$92,976+508+544=$94,028Soonsoforth,onDecember31ofyear5,afterpaycashof$6,000forthe10thtime,bondpayableaccounthasabalanceof$100,000.Thenpaycashof$100,000toreturntheparvalue. Dr.BondPayable100,000 Cr.Cash100,000Thebondisgonenow!!!36Bondaccounting–anexampleOnThisexhibit9.4(p.504)showsthecalculationofinterestexpenseandincreaseinbondpayableoverthefiveyeardurationperiod.Itiscalledanamortizationschedulebecauseitlookslikethatthetotaldiscount,$7,024,hasbeenamortizedoverthesetenperiods)37Thisexhibit9.4(p.504)showBondaccounting–anexampleAccountingforbondsoldatparisstraightforward.Everytimebondsellerpayscash Dr.Interestexpense Cr.CashAccountingforbondsoldatpremiumissimilartoaccountingforbondsoldatdiscount(exhibit9.5,p.506).Everytimethebondsellerpayscash Dr.Interestexpense Dr.Bondpayable Cr.CashRemember,thistimebondpayable’sbeginningbalanceismorethantheparvalue$100,000.Sothedebitentrytobondpayableaccountreducesitto$100,000attheendofthefifthyear.38Bondaccounting–anexampleAcBondretirementbeforematurityThebalanceofbondpayableaccountisthebookvalueofthebond.Afterthebondissold,itsbookvaluewillseldomequalthemarketvalueofthebond,inthesamewhatthatthebookvalueofabuildingwillseldomequalthemarketvalueofthebuilding.Whymarketvalueofbondchanges?Rememberthecashflowsinthebondpriceequationdonotchange,thentheonlythingthatchangesbondmarketvalueisthediscountrate.Thediscountratechangeswith1)thecompany’sabilitytopayoffdebts,2)thecountry’srisk-freerate,and3)inflationrate.39BondretirementbeforematuritBondretirementbeforematurityAfterthebondissold,sometimes,thesellerbuysthebondbackfromthebondholderatmarketvalue.Ifmarketvalueissmallerthanthebookvalue,thesellerrealizesgains;iflarger,thesellerrealizeslosses.(rememberthisisliabilitiesnotassets)Toavoidcompaniesusingbondretirementtomanagetheirearnings,GAAPrequiresthegains/lossesfrombondretirementtobeshowninI/Sasextraordinaryitems,whichisincludedinnetincome,butnotexcludedfromincomefromcontinuingoperation.40BondretirementbeforematuritMortgagesandNotesMortgagesfollowthegeneralruleforlong-termliabilities.Amortgagecontracttypicallyallowssomerecoursetothelenderintheeventofdefault;thismightbealienonpropertyorcollateral.Whentheloanismade,thefirmreceivescashandaliabilityiscreated,mortgagepayable.Theliabilityisrecordedatthepresentvalueoftheperiodicpayments.Asperiodicpaymentsaremade:cashisreturned,theliabilityisreducedandinterestexpenseisrecognizedusingdiscountedcashflowmethods.TheconventionpresentlyintheU.S.formortgagescallsforequalpaymentsoverthelifeoftheloan.Sincetheliabilitydecreasesoverthelifeoftheloan,theinterestexpensealsodecreasesandagreateramountofcashgoestoreducingtheprinciple.41MortgagesandNotesMortgagesfMortgagesConsidera5yearmortgagefor$125,000toberepaidin10installmentsof$17,000persemesterwith12percentinterestcompoundedsemiannually.Therepaymentscheduleisgivenbelow.Noticethateventhoughthecashpaymentsareequal;thebalanceowedandtheinterestexpensedecreaseovertime.Thelastpaymentisalittlelessthan$17,000duetoroundingeffects.=(2)*0.06=(4)-(3)=(2)-(5)42MortgagesConsidera5yearmorUnifyingPrinciplesof

AccountingforLong-TermLiabilitiesLong-termliabilitiesobligatetheborrowingfirmtopayspecifiedamountsatdefinitetimesmorethanoneyearinthefuture.Alllong-termliabilitiesappearonthebalancesheetatthepresentvalueoftheremainingfuturepayments.Process:1.Recordtheliabilityatthecashorcash-equivalentvaluereceived.Thisamountisthepresentvalueoftheliability.2.Atanysubsequenttimewhenthefirmmakesacashpaymentoranadjustingentryforinterest,itcomputesinterestasthebookvalueoftheliabilitymultipliesbytheinterestrate(notnecessarilythefacerateofinterest).43UnifyingPrinciplesof

AccounAnalysisofRiskFactorsthataffectriskofafirmEconomy-widefactorssuchasinflationIndustry-widefactorssuchascompetitionFirm-specificfactorssuchaspotentialforalaborstrikeQuestionsorissuesa.Canthefirmpayshort-termobligationslikeworkers'wages?Thatis,whataremeasuresofshorttermrisk?b.Canthefirmpaylong-termobligationslikedebt?Thatis,whatarelong-termmeasuresofrisk?44AnalysisofRiskFactorsthataMeasuresofShort-TermRiskMeasuresofshort-termliquidityriskCurrentratiocurrentratio=(currentassets)/(currentliabilities)Measureofabilityofthefirmtopayshort-termliabilitiesontimeQuickratio(currenthighlyliquidassets)/(currentliabilities)CurrenthighlyliquidassetsareassetsthatarequicklyandeasilyconvertedintocashThisincludesbankaccountsbutnotinventories45MeasuresofShort-TermRiskMeaMeasuresofShort-TermRisk(Cont.)Cashflowfromoperationstocurrentliabilitiesratio(cashflowfromoperations)/(currentliabilities)Measurestheabilityofthefirmtopaycurrentliabilitieswithoutborrowingoradditionalinvestments.WorkingcapitalturnoverratiosWorkingcapitalisabroaddefinitionofcashthatincludescashandotherassetsthatarehighlyliquidsuchasmarketablesecurities.Ratiosthatuseworkingcapitalshowtheshort-termliquidityofthefirmincludingnear-cashassets.46MeasuresofShort-TermRisk(CMeasuresofLong-TermRiskDebt-to-equityratio(totalliabilities)/(totalequities)totalequities=totalliab.+shareholders’equityPercentageoftotalfinancingprovidedbydebtorsorcreditors.Afirmissaidtobehighlyleveragedwhenthisratioislarge.CashfromoperationstototalliabilitiesratioMeasurestheabilityofthefirmtopayallliabilitiesfromcashwithoutnewdebtoradditionalinvestment.47MeasuresofLong-TermRiskDebtMeasuresofLong-TermRisk(Cont.)Interestcoverageratio=

(interestbeforeinterestandincometax) (interestexpense)NumberoftimesinterestiscoveredbyincomeIndicatestherelativeprotectionthatoperatingprofitabilityprovidestodebtorsSomeanalystsusecashflowsinsteadofincome48MeasuresofLong-TermRisk(CoLimitationsofRatioAnalysis1.Ratiosbasedonfinancialdatasharethesameproblemsoffinancialdata(suchastimeliness).2.Changesinmanyratioscorrelatewithotherratiossoadirectinterpretationofachangeinaratioisnotalwaysapparent.3.Comparingratiosovertimeiscomplicatedbythefactthateconomicconditionsmaychangealso.4.Comparingratiosbetweentwofirmsiscomplicatedbythefactthatthefirmsmayhavedifferenteconomicenvironments