Professional Documents
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2
Exhibit 10, pg 72, Vol 3, CFA Program Curriculum 2012
Basic EPS
Basic EPS = Net income Preferred dividends
Weighted average number of shares outstanding
Diluted EPS
Diluted EPS =
[ Net income -
Preferred
dividends ] +
Convertible
preferred +
dividends
[
Convertible
debt (1 - t)
interest
]
Shares from Shares from
Weighted Shares
conversion of conversion of
average + + + issuable from
convertible convertible
shares stock options
preferred shares debt
Comprehensive Income
Net income + Other comprehensive income = Comprehensive income
CFO
Inflows Outflows
Cash collected from customers. Cash paid to employees.
Interest and dividends received. Cash paid to suppliers.
Proceeds from sale of securities held for trading. Cash paid for other expenses.
Cash used to purchase trading
securities.
Interest paid.
Taxes paid.
CFI
Inflows Outflows
Sale proceeds from fixed assets. Purchase of fixed assets.
Sale proceeds from long-term investments. Cash used to acquire LT investment
securities.
CFF
Inflows Outflows
Proceeds from debt issuance. Repayment of LT debt.
Proceeds from issuance of equity instruments. Payments made to repurchase stock.
Dividends payments.
Bank overdrafts Included as a part of cash equivalents. Not considered a part of cash equivalents
and included in CFF.
Presentation Format
CFO Direct or indirect method. The former is Direct or indirect method. The former is
(No difference in CFI and preferred. preferred. However, if the direct method
CFF presentation) is used, a reconciliation of net income
and CFO must be included.
Disclosures
Taxes paid should be presented separately If taxes and interest paid are not explicitly
on the cash flow statement. stated on the cash flow statement, details
can be provided in footnotes.
Inventory Turnover
Cost of goods sold
Inventory turnover =
Average inventory
Receivables Turnover
Revenue
Receivables turnover =
Average receivables
Payables Turnover
Purchases
Payables turnover =
Average trade payables
Current Ratio
Current assets
Current ratio =
Current liabilities
Quick Ratio
Cash + Short-term marketable investments + Receivables
Quick ratio =
Current liabilities
Cash Ratio
Cash + Short-term marketable investments
Cash ratio =
Current liabilities
Debt-to-Assets Ratio
Total debt
Debt-to-assets ratio =
Total assets
Debt-to-Capital Ratio
Total debt
Debt-to-capital ratio =
Total debt + Shareholders equity
Debt-to-Equity Ratio
Total debt
Debt-to-equity ratio =
Shareholders equity
Pretax Margin
EBT (earnings before tax, but after interest)
Pretax margin =
Revenue
Return on Assets
Net income
ROA =
Average total assets
Net income + Interest expense (1 Tax rate)
Adjusted ROA =
Average total assets
Operating income or EBIT
Operating ROA =
Average total assets
Return on Equity
Net income
Return on equity =
Average total equity
ROA Leverage
3-Way Dupont Decomposition
Net income Revenue Average total assets
ROE =
Revenue Average total assets Average shareholders equity
EBITDA
EBITDA per share =
Average number of shares outstanding
LIFO versus FIFO (with rising prices and stable inventory levels.)
LIFO FIFO
COGS Higher Lower
Income before taxes Lower Higher
Income taxes Lower Higher
Net income Lower Higher
Cash flow Higher Lower
EI Lower Higher
Working capital Lower Higher
Effect on Effect on
Type of Ratio Numerator Denominator Effect on Ratio
Profitability ratios. Income is lower Sales are the same Lower under LIFO.
NP and GP margins under LIFO because under both.
COGS is higher
Debt to equity Same debt levels Lower equity under Higher under LIFO
LIFO
Current ratio Current assets are Current liabilities Lower under LIFO
lower under LIFO are the same.
because EI is lower.
Quick ratio Assets are higher as Current liabilities Higher under LIFO
a result of lower are the same
taxes paid
Total asset turnover Sales are the same Lower total assets Higher under LIFO
under LIFO
When the cost is expensed Net income decreases by the entire after-tax
amount of the cost.
No related asset is recorded on the balance
sheet and therefore, no depreciation or
amortization expense is charged in future
periods.
Operating cash flow decreases.
Expensed costs have no financial statement
impact in future years.
Capitalizing Expensing
Net income (first year) Higher Lower
Net income (future years) Lower Higher
Total assets Higher Lower
Shareholders equity Higher Lower
Cash flow from operations Higher Lower
Cash flow from investing Lower Higher
Income variability Lower Higher
Debt to equity Lower Higher
Accelerated Depriciation
2
DDB depreciation in Year X = Book value at the beginning of Year X
Depreciable life
Deferred tax asset Recognized if it is probable that Deferred tax assets are
recognition. sufficient taxable profit will be recognized in full and then
available in the future. reduced by a valuation
allowance if it is likely that
they will not be realized.
DEFERRED TAX PRESENTATION
Offsetting of deferred Offsetting allowed only if the Same as in IFRS.
tax assets and liabilities. entity has right to legally enforce
it and the balance is related to a
tax levied by the same authority.
Leverage Ratios
Debt-to-capital ratio Measures the percentage Total debt Total debt + Total
of a companys total capital shareholders equity
(debt + equity) financed by
debt.
Financial leverage ratio Measures the amount of Average total assets Average shareholders
total assets supported by equity
one money unit of equity.
Coverage Ratios
Fixed charge coverage ratio Measures the number of EBIT + Lease Interest payments +
times a companys earnings payments Lease payments
(before interest, taxes and
lease payments) can cover
the companys interest and
lease payments.
EIFIFO = EILIFO + LR
where
LR = LIFO Reserve
Net income after tax under FIFO will be greater than LIFO net income after tax by:
Change in LIFO Reserve (1 - Tax rate)
Gross investment in fixed assets Accumulated depreciation Net investment in fixed assets
= +
Annual depreciation expense Annual depreciation expense Annual depreciation expense
Unrealized and
Balance Sheet Realized Gains and Income (Interest &
Classification Value Losses Dividends)
Held-to-maturity Amortized cost Unrealized: Not Recognized on
(Par value +/- reported income statement.
unamortized Realized:
premium/ discount). Recognized on
income statement.
Permits inventory
IFRS Lower of cost or net FIFO.
realizable value. Weighted Average write downs,
Cost. and also reversals of
write downs.
Long-Term Investments
Percent Ownership Extent of Control Accounting Treatment
Long-Term Contracts