How to Understand Your Financial Statements

   
    Financial Statements are important tools to recognize the performance of a company. Income statement, Balance Sheet and Cash Flow Statement are three official financial statements that are common to see. They not only present accounts balance and your profit or loss but also reflect some deeper information such as the profitability of a company. However, deep information does not show up itself. In order to make a further analysis of a business, you need to do some calculation and comparison to get some ratios. 

1.Current Ratio=Current assets\Current liability

    Current ratio is used to measure the liquidity of a company. It reflects the short-term debt-paying liability by comparing the value of current assets and current liabilities. 

    For example, the current ratio for Tim Hortons INC. In 2014 is 1.155 to 1, which means Tim Hortons has $1.16 of current assets for every dollar of current liabilities. While the current ratio in 2013 is 0.98. So the liquidity of Tim Hortons was increased in 2014, which means the company's financial condition was getting better. 

2.Inventory Turnover=Cost of goods sold/Average Inventory  

    Inventory Turnover is another useful ratio to measure the liquidity of a business. It shows the numbers of times you sold out your inventory. Also, you can use this ratio to calculate the days' sales in inventory, which reflects how long it takes to sell your inventory. 

For example, the inventory turnover of Tim Hortons Inc. is 9.01, which means this company sold out their inventory nine times in 2014. The days' sales in inventory ratio is 40.50, which means their inventory can be sold within 41 days after purchase. These two numbers imply that the inventory liquidity of Tim Hortons is in good condition.

3.Interest Coverage=(Profit+Income tax expense+Interest expense)/Interest expense

    Interest Coverage is used to identify the solvency of a company by showing whether you have enough money to pay the interest expenses for your long-term liability. Furthermore, investors can learn whether your company will live long in the future or go bankrupt from this ratio. 

    For example, the interest coverage of Tim Hortons Inc. in 2014 is 9.62, which means the profit before interest and taxes of this company can afford 9 times of their interest expenses. This reflects that the company is able to handle their long-term liabilities and to support its further development in the future.

4.Return on Assets=Profit/Average total assets 

    Return on Assets is a ratio to define the profitability of a company. It means how much profit can $1 of assets make in one year. Generally, the higher this ratio is, the more profitable this company is. 
    For example, the return on assets of Tim Hortons in 2014 is 9.09%. So each dollar of assets in Tim Hortons made $0.09 during the year of 2014. So we can see that the profitability of this company was good. 
_________________________________________
1. All Financial Statements are retrieved from: http://www.timhortons.com/us/en/pdf/THI_Q2_2014_10-Q.pdf

Comments

  1. CynthiaJune 2, 2017 at 6:31 AM

    The blog has talk about the function of the financial statement, like it can calculate the different ratio so that we can analyze the financial situation of the company. Besides, Judy introduce the function and how to analyze it specifically. That does really help me and teach me how to run a business better.

    ReplyDelete
  2. UnknownJune 3, 2017 at 11:52 PM

    This blog has a full demonstrations of financial statement by few different data and formula. What is more, the thing is most impressed on me is that the ratio is more important than the only few number in financial statement. Carry on.

    ReplyDelete

Post a Comment

Popular posts from this blog

Three Activities in Cash Flow Statement

Image
        Cash Flow Statement is a formal financial statement that shows the performance of a company. It tells investors and creditors whether the company is worth to invest. A cash flow statement can be divided into three parts, which are operating activities, investing activities and financing statement. These three parts provide different kinds of cash information and also reflect the performance of business from various aspects.  1.Operating Activities     Operating Activities are transactions related to providing services and selling products. This the most frequent activity in a business. This part turns the accrual net income on income statement into a cash basis.      The cash from operating activities is always be compared with the profit. If the cash is greater than profit, the profitability of this company is in a good condition. On the other hand, if the cash from operating activities is less than the profit, it means...
Read more

Partnership vs. Corporation

Image
      It is not surprising that many people want to start their own business these days. The first problem they meet is which type of company they should register. Some people prefer to start with a partnership, while other people like a corporation better. However, no matter which type you choose, it should be the most appropriate one for your business. So it is necessary to learn the differences partnership and corporation before you make your final decision. 1.  Income Taxes A partnership is not taxed as a separate entity. Actually, since the profit of the business is shared by each partnership as their personal income, the tax for business is already calculated in partners’ personal income taxes. On the other hand, a corporation must pay income taxes as a separate entity every month. Moreover, shareholders don’t need to pay personal income taxes for their capitals in business unless they receive dividends. Generally, the tax rate for compan...
Read more

Careers Related to Accounting

Image
Accounting deals with different kinds of transactions and financial statements, which makes it become a fundamental part of the business. However, the whole accounting field might be very different from many people’s imagination. Accounting does not only means mechanically recording entries and numbers; instead, it requires various analytical skills to judge the financial condition of a company. Therefore, plenty of careers are developed and play an irreplaceable role in the business world. Here are some popular careers for accounting people : • Bookkeeper Bookkeeping is considered to be the most basic and simple job in the accounting field, but it still requires enough carefulness to make sure the accuracy. It includes works like posting day-to-day general journals and general ledgers. In other words, bookkeeper’s job ends at trial balance part of the accounting cycle, and provide reliable data for accountants to do further analysis. Generally, a bookkeeper should hav...
Read more