Financial Statement Analysis

Describe basic financial statement analytical methods. Use financial statement analysis to assess the solvency of a business. Use financial statement analysis to assess the profitability of a business. Describe the contents of corporate annual reports.

Three such methods are as follows: 1.Basic Analytical Methods Users analyze a company’s financial statements using a variety of analytical methods. Horizontal analysis 2. Vertical analysis 3. Common-sized statements .

.Horizontal Analysis The percentage analysis of increases and decreases in related items using comparative financial statements is called horizontal analysis.

.

000 = 3.2% .Horizontal Analysis: Difference Base year (2009) $17.000 $533.

Comparative Schedule of Current Assets— Horizontal Analysis .

Comparative Income Statement—Horizontal Analysis .

Vertical Analysis A percentage analysis used to show the relationship of each component to the total within a single statement is called vertical analysis. .

Vertical Analysis of Balance Sheet In a vertical analysis of the balance sheet. Each liability and stockholders’ equity item is stated as a percent of the total liabilities and stockholders’ equity. each asset item is stated as a percent of the total assets. .

139.Vertical Analysis: Current assets Total assets $550.000 = 48.500 .3% $1.

498.8% .000 = 12. each item is stated as a percent of net sales. Vertical Analysis: Selling expenses $191.000 Net sales $1.Vertical Analysis of the Income Statement In a vertical analysis of the income statement.

Meet its financial obligations (debts). called profitability. 2.Solvency Analysis All users of financial statements are interested in the ability of a company to do the following: 1. . called solvency. Earn income.

Working Capital The excess of current assets of a business over its current liabilities is called working capital.000 $290.000 –210.000 Current assets Current liabilities Working capital .000 $340. The working capital is often used in evaluating a company’s ability to pay current liabilities. Working Capital = Current Assets – Current Liabilities 2010 $550.000 2009 $533.000 –243.

6 2.000 $243.2 2.000 2. Current Ratio = Current Assets Current Liabilities 2010 Current assets Current liabilities Currentratio Current ratio $550.000 .000 $243.000 $210.Current Ratio The current ratio.000 $210.2 $533.000 2.6 2009 $533. sometimes called the working capital ratio or bankers’ ratio measures a company’s ability to pay its current liabilities.000 $550.

3 2009 $ 64.000 $280. 2010 Quick assets: Cash Temporary Investments Accounts receivable (net) a.500 75.000 1.Quick Ratio A ratio that measures the “instant” debt-paying ability of a company is called the quick ratio or acid-test ratio.000 1. Current liabilities Quick ratio (a ÷ b) $ 90.700 $243. Total quick assets b.700 60.500 $210.000 $244.0 .000 115.000 120.

7 9.498.000 $ 260.000 115.500 $ 235.000 $ 120.000 $ 130.000 $ 117.200.000 a. Collecting accounts receivable as quickly as possible improves a company’s solvency.000 $ 140.500 $1. Accounts Receivable Turnover = Net Sales Average Accounts Receivable 2010 2009 $1. Net sales Accounts receivable (net): Beginning of year End of year Total b.000 120.2 .Accounts Receivable Turnover The relationship between sales and accounts receivable may be stated as the accounts receivable turnover. Average (Total ÷ 2) Accounts receivable turnover (a ÷ b) 12.

Number of Days’ Sales in Receivables The number of days’ sales in receivables is an estimate of the length of time (in days) the accounts receivable have been outstanding. Average Accounts Receivable Average Daily Sales Number of Days’ Sales in = Receivables Net Sales 365 .

000 $ 4. Average accounts receivable (Total accounts receivable ÷ 2) 2009 $ 117.6 39.498.500 $1.200.000 $ 3. Average daily sales (Sales ÷ 365) Number of days’ sales in receivables (a ÷ b) 28.000 $1.2010 a.288 Net sales b.5 .104 $ 130.

Inventory Turnover The relationship between the volume of goods (merchandise) sold and inventory may be stated as the inventory turnover.000 $ 273.000 $ 547.000 $ 297.000 2.000 $ 283. The purpose of this ratio is to assess the efficiency of the firm in managing its inventory.8 2009 $ 820. Cost of Goods Sold Inventory Turnover = Average Inventory 2010 a.000 264.8 . Cost of goods sold Inventories: Beginning of year End of year Total b.000 $ 594.000 283.500 3.000 $ 311. Average (Total ÷ 2) Inventory turnover (a ÷ b) $1.043.

7 132.Number of Days’ Sales in Inventory The number of days’ sales in inventory is a rough measure of the length of time it takes to purchase. Average Inventory Number of Days’ = Sales in Inventory Average Daily Cost of Goods Sold Cost of Goods Sold 365 2010 $ 273. sell.500 $1.858 2009 $ 297.000 $2.2 .043. Average daily cost of goods sold (COGS ÷ 365 days) Number of days’ sales in inventory (a ÷ b) 95. and replace the inventory.247 a.000 $2.000 $ 820. Average inventory (Total ÷ 2) Cost of goods sold b.

Fixed assets (net) b. Long-term liabilities Ratio of fixed assets to long-term liabilities (a ÷ b) 2009 $470. It also indicates the ability of the business to borrow additional funds on a long-term basis.000 $444. Ratio of Fixed Assets to Long= Term Liabilities Fixed Assets (net) Long-Term Liabilities 2010 a.4 .000 4.Ratio of Fixed Assets to Long-Term Liabilities The ratio of fixed assets to long-term liabilities is a solvency measure that indicates the margin of safety of the noteholders or bondholders.500 $100.000 $200.4 2.

Ratio of Fixed Assets to Long-Term Liabilities The ratio of fixed assets to long-term liabilities is a solvency measure that indicates the margin of safety of the noteholders or bondholders. It also indicates the ability of the business to borrow additional funds on a long-term basis.000 2009 $470.4 2. Ratio of Fixed Assets to Long= Term Liabilities Fixed Assets (net) Long-Term Liabilities 2010 a.000 $200.4 .500 $100.000 4. Fixed assets (net) b. Long-term liabilities Ratio of fixed assets to long-term liabilities (a ÷ b) $444.