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Financial Statement

Analysis: The Big Picture

Chapter
14-1

Study
Study Objectives
Objectives
1.

Discuss the need for comparative analysis.

2.

Identify the tools of financial statement analysis.

3.

Explain and apply horizontal analysis.

4.

Describe and apply vertical analysis.

5.

Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.

Chapter
14-2

Financial Statements
Balance Sheet
Income Statement

Financial
Statements

Statement of
Retained Earnings
Statement of
Cash Flows

Chapter
14-3

3

Notes to
Financial Statements

assets = liabilities + stockholders’ equity Chapter 14-4 .Balance Sheet  A firm’s balance sheet presents a “snapshot” view of the company’s financial position at a specific point in time.

Balance Sheet for Global Petroleum Corporation Chapter 14-5 .

earnings. Income = revenue  expenses Measures of Income Chapter 14-6 • Gross profit • Operating profit • Other income • Earnings before interest and taxes • Pretax income • Net income / net profit after taxes . or margin.Income Statement  Income is also called profit.

Income Statement for Global Petroleum Corporation Chapter 14-7 .

Statement of Retained Earnings  The statement of retained earnings reconciles  the net income earned during a given year.  with the change in retained earnings between the start and end of that year. Chapter 14-8 . and any cash dividends paid.

Statement of Retained Earnings for Global Petroleum Corporation Chapter 14-9 .

• Explanatory notes • that provide detailed information on the accounting policies. investment. and financing cash flows • with changes in its cash and marketable securities • during the year. . calculations. and transactions • underlying entries in the financial statements.Financial Statements Statement of Cash Flows Notes to Financial Statements Chapter 14-10 • Reconciles • the firm’s operating.

Statement of Cash Flows for Global Petroleum Corporation Chapter 14-11 11 .

company may have to borrow or issue equity securities to pay bills.company able to generate sufficient cash to pay its bills.Usefulness of the Statement of Cash Flows Without cash. Cash flow from Operations: High amount . Low amount . a company will not survive. Chapter 14-12 .

Basics Basics of of Financial Financial Statement Statement Analysis Analysis Analyzing financial statements involves: Characteristics Tools of Analysis Liquidity Intracompany Horizontal Profitability Industry averages Vertical Solvency Chapter 14-13 Comparison Bases Intercompany Ratio .

assets. or equity.Analyzing Financial Performance Using Ratio Analysis Liquidity Ratios Activity Ratios • Measure the speed at which a firm converts various accounts into sales or cash. Chapter 14-14 14 • Measure a firm’s ability to satisfy its short-term obligations as they come due. Market Ratios • Relate a firm’s market value to certain accounting values. . Profitability Ratios • Relate a firm’s earnings to its sales. Debt Ratios • Measure the proportion of total assets financed by a firm’s creditors.

Using Financial Ratios Benchmark 1 Benchmark 2 Chapter 14-15 15 • Analysts compare the current year’s financial ratios with previous years’ ratios • to identify trends that help them evaluate the firm’s prospects. • Analysts compare the ratios of one company with those of other firms in the same industry. .

Horizontal analysis is commonly applied to the balance sheet. is a technique for evaluating a series of financial statement data over a period of time. Chapter 14-16 . Its purpose is to determine the increase or decrease that has taken place. income statement. also called trend analysis. and statement of retained earnings.Horizontal Horizontal Analysis Analysis Horizontal analysis.

000 40.000 $ 200.000 $ 210.000 Instructions: Prepare a horizontal analysis of the balance sheet data for Ramsey Corporation using 2008 as a base.000 12.000 2008 $ 80. Chapter 14-17 .000 16. Current assets PP&E Intangibles Total assets 2009 $ 76.000 99.000 25.200 $ 200.000 Current liabilities Long-term liabilties Stockholders' equity Total liabilities & equity $ 40.000 $ 48.Horizontal Horizontal Analysis Analysis Exercise: The comparative condensed balance sheets of Ramsey Corporation are presented below.000 $ 210.800 143.000 150.000 90.

000 $ 210.000) -4.Horizontal Horizontal Analysis Analysis Exercise: The comparative condensed balance sheets of Ramsey Corporation are presented below.000) -37.5% $ (10. . Chapter 14-18 LO 3 Explain and apply horizontal analysis.000 $ 210.000 99.000 90.000 10. Current assets PP&E Intangibles Total assets 2009 $ 76.0% (15.8% Instructions: Prepare a horizontal analysis of the balance sheet data for Ramsey Corporation using 2008 as a base.000) -15.0% 9.000 Increase Percentage (Decrease) Change $ (4.200) (7.000) 4.800 143.7% 35.000) -5.000 40.000 $ 48.000 2008 $ 80.200 $ 200.000 16.000 150.200 $ (10.000 $ 200.000 25.000 Current liabilities Long-term liabilties Stockholders' equity Total liabilities & equity $ 40.000 12.0% -4.0% -4.8% $ (7.

Vertical Vertical Analysis Analysis Vertical analysis. we might say that selling expenses are 16% of net sales. is a technique that expresses each financial statement item as a percent of a base amount. Chapter 14-19 . Vertical analysis is commonly applied to the balance sheet and the income statement. On an income statement. also called common-size analysis.

Net sales Cost of goods sold Gross profit Operating expense Net income 2009 Amount $ 600.000 483.000 117.000 $ 36.Vertical Vertical Analysis Analysis Exercise: The comparative condensed income statements of Hendi Corporation are shown below.200 $ 59.000 80.000 44.000 57.000 Instructions: Prepare a vertical analysis of the income statement data for Hendi Corporation in columnar form for both years.000 420. Chapter 14-20 .800 2008 Amount $ 500.

0% 2008 Amount Percent $ 500.000 84.5% 57.0% 420.000 8.0% 44. Chapter 14-21 .5% $ 59.000 100.200 9.8% $ 36.000 7.800 10.2% Instructions: Prepare a vertical analysis of the income statement data for Hendi Corporation in columnar form for both years.0% 483.000 16.Vertical Vertical Analysis Analysis Exercise: The comparative condensed income statements of Hendi Corporation are shown below.000 19.0% 80. Net sales Cost of goods sold Gross profit Operating expense Net income 2009 Amount Percent $ 600.5% 117.000 100.000 80.

Market Ratios • Relate a firm’s market value to certain accounting values. assets. Profitability Ratios • Relate a firm’s earnings to its sales. or equity. Debt Ratios • Measure the proportion of total assets financed by a firm’s creditors. Chapter 14-22 22 • Measure a firm’s ability to satisfy its short-term obligations as they come due. .Analyzing Financial Performance Using Ratio Analysis Liquidity Ratios Activity Ratios • Measure the speed at which a firm converts various accounts into sales or cash.

Chapter 14-23 .Ratio Ratio Analysis Analysis A single ratio by itself is not very meaningful. The discussion of ratios will include the following types of comparisons.

Liquidity Ratios Measures the firm’s ability to meet its short-term obligations measures immediate liquidity Chapter 14-24 24 .

on average.Activity Ratios Receivable turnover = credit sales_______ average Acc. Chapter 14-25 25 . Average collection period = accounts receivable average sales per day Measures the average amount of time that elapses from a sale on credit until the payment becomes useable funds for a firm Measures the average length of time it takes the firm to pay its suppliers. Receivables It measures the number of times. the company collects receivables during the period.

Activity Ratios Measures how quickly a firm sells its goods Average age of inventory = 365 days/inventory turnover A measure of the efficiency with which a firm uses its fixed assets Chapter 14-26 26 a measure of the efficiency with which a firm uses all its assets to generate sales .

Debt Ratios a measure of the proportion of total assets financed by a firm’s creditors A measure of the proportional of total assets financed by a firm’s equity Chapter 14-27 27 .

Debt Ratios A measure of the firm’s financial leverage Chapter 14-28 28 A measure of the firm’s ability to make contractual interest payments .

A measure of profitability that represents the percentage of each sales peso remaining after deducting all costs and expenses other than interest and taxes Chapter 14-29 29 .Profitability Ratios A measure of profitability that represents the percentage of each sales peso remaining after a firm has paid for its goods.

of peso earned on behalf of each outstanding share of common stock.Profitability Ratios Measures the no. Chapter 14-30 30 .

Profitability Ratios A measure of the overall effectiveness of management in generating returns to common stockholders with its available assets Chapter 14-31 31 A measure that captures the return earned on the common stockholders’ investments in a firm .

Profitability Ratios DuPont System of Analysis Chapter 14-32 32 .

Market Ratios A measure of a firm’s long.term growth prospects that represents the amount investor’s are willing to pay for each peso of a firm’s earnings Chapter 14-33 33 .

Market Ratios A measure used to assess a firm’s future performance by relating its market value per share to its book value per share Chapter 14-34 34 .