Professional Documents
Culture Documents
CHAPTER 17
ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
17-2
Other sources
(1) Newspapers (e.g., Wall Street Journal )
(2) Periodicals (e.g. Forbes, Fortune)
(3) Financial information organizations such
as: Moody’s, Standard & Poor’s, Dun &
Bradstreet, Inc., and Robert Morris
Associates
(4) Other business publications
17-7
Methods of
Financial Statement Analysis
Horizontal Analysis
Vertical Analysis
Common-Size Statements
Trend Percentages
Ratio Analysis
17-8
Horizontal Analysis
Vertical Analysis
For a single financial
statement, each item
is expressed as a
percentage of a
significant total,
e.g., all income
statement items are
expressed as a
percentage of sales
17-10
Common-Size Statements
Financial statements that show
only percentages and no
absolute dollar amounts
17-11
Trend Percentages
Show changes over time in
given financial statement items
(can help evaluate financial
information of several years)
17-12
Ratio Analysis
Expression of logical relationships
between items in a financial
statement of a single period
(e.g., percentage relationship
between revenue and net income)
17-13
Incre
2019 2018 Am
Assets
Current assets:
Cash $ 12,000 $ 23,500
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets 155,000 164,700
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment 160,000 125,000
Total assets $ 315,000 $ 289,700
17-15
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 2019 and 2018
Increase (Decrease)
2019 2018 Amount %
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 67,000 $ 44,000 $ 23,000 52.3
Notes payable 3,000 6,000 (3,000) (50.0)
Total current liabilities 70,000 50,000 20,000 40.0
Long-term liabilities:
Bonds payable, 8% 75,000 80,000 (5,000) (6.3)
Total liabilities 145,000 130,000 15,000 11.5
Stockholders' equity:
Preferred stock 20,000 20,000 - 0.0
Common stock 60,000 60,000 - 0.0
Additional paid-in capital 10,000 10,000 - 0.0
Total paid-in capital 90,000 90,000 - 0.0
Retained earnings 80,000 69,700 10,300 14.8
Total stockholders' equity 170,000 159,700 10,300 6.4
Total liabilities and stockholders' equity $ 315,000 $ 289,700 $ 25,300 8.7
17-23
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 2019 and 2018
Increase (Decrease)
2019 2018 Amount %
Net sales $ 520,000 $ 480,000 $ 40,000 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 128,600 126,000 2,600 2.1
Net operating income 31,400 39,000 (7,600) (19.5)
Interest expense 6,400 7,000 (600) (8.6)
Net income before taxes 25,000 32,000 (7,000) (21.9)
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income $ 17,500 $ 22,400 $ (4,900) (21.9)
17-25
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Increase (Decrease)
2019 2018 Amount %
Net sales $ 520,000 $ 480,000 $ 40,000 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 128,600 126,000 2,600 2.1
Net operating Sales
incomeincreased31,400
by 8.3% while
39,000net (7,600) (19.5)
Interest expense income decreased6,400 by 21.9%.
7,000 (600) (8.6)
Net income before taxes 25,000 32,000 (7,000) (21.9)
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income $ 17,500 $ 22,400 $ (4,900) (21.9)
17-26
140
Trend line
130 for Sales
% of 100 Base
120
110
100
90
Sales
Years
Expenses
17-35
Ratios
Ratios can be expressed in three
different ways:
1. Ratio (e.g., current ratio of 2:1)
2. % (e.g., profit margin of 2%)
3. P (e.g., EPS of P2.25)
CAUTION!
“Using ratios and percentages without
considering the underlying causes may
be hazardous to your health!”
lead to incorrect conclusions.”
17-36
Categories of Ratios
Liquidity Ratios
Indicate a company’s short-term
debt-paying ability
Equity (Long-Term Solvency) Ratios
Show relationship between debt and
equity financing in a company
Profitability Tests
Relate income to other variables
Market Tests
Help assess relative merits of stocks in
the marketplace
17-37
NORTON CORPORATION
Income Statements
For the Years Ended December 31, 2019 and 2018
2019 2018
Net sales $ 494,000 $ 450,000
Cost of goods sold 140,000 127,000
Gross margin 354,000 323,000
Operating expenses 270,000 249,000
Net operating income 84,000 74,000
Interest expense 7,300 8,000
Net income before taxes 76,700 66,000
Less income taxes (30%) 23,010 19,800
Net income $ 53,690 $ 46,200
17-45
Working Capital*
The excess of current assets over
current liabilities.
12/31/2019
Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000
* While this is not a ratio, it does give an
indication of a company’s liquidity.
17-48
Current P65,000
= = 1.55 : 1
Ratio P42,000
in Accounts Receivable
#4
Days’ Sales
365 Days
in Accounts =
Accounts Receivable Turnover
Receivables
Days’ Sales
365 Days
in Accounts = = 13.67 days
26.70 Times
Receivables
in Accounts Receivable
#4
Days’ Sales
365 Days
in Accounts =
Accounts Receivable Turnover
Receivables
Days’ Sales
365 Days
in Accounts = = 13.67 days
26.70 Times
Receivables
Inventory Turnover
#5
Inventory Cost of Goods Sold
=
Turnover Average Inventory
Inventory P140,000
= = 12.73 times
Turnover (P10,000 + P12,000) ÷ 2
Inventory Turnover
#5
Inventory Cost of Goods Sold
=
Turnover Average Inventory
Inventory P140,000
= = 12.73 times
Turnover (P10,000 + P12,000) ÷ 2
Would 5 be a
desirable number of times
for inventory to turnover?
17-57
Equity, or Long–Term
Solvency Ratios
This is part of the information to
calculate the equity, or long-term
solvency ratios of Norton Corporation.
NORTON CORPORATION
2019
Net operating income $ 84,000
Net sales 494,000
Interest expense 7,300
Total stockholders' equity 234,390
17-58
Common shares outstanding
Beginning of year 17,000
End of year 27,400
Net income $ 53,690
Stockholders' equity
Beginning of year 180,000
Here is the
End of year 234,390
rest of the
information Dividends per share 2
we will Dec. 31 market price/share 20
use. Interest expense 7,300
Total assets
Beginning of year 300,000
End of year 346,390
17-59
Equity Ratio
#6
Equity Stockholders’ Equity
=
Ratio Total Assets
Equity P234,390
= = 67.7%
Ratio P346,390
Return on
P53,690
Stockholders’ = = 25.9%
(P180,000 + P234,390) ÷ 2
Equity
Important measure of the
income-producing ability
of a company.
17-63
Earnings P53,690
= = P2.42
per Share (17,000 + 27,400) ÷ 2
Alternate #3
17-67
Price-Earnings Ratio
A/K/A P/E Multiple
#10
Important Considerations
Need for comparable data
Data is provided by Dun &
Bradstreet, Standard & Poor’s etc.
Must compare by industry
Is EPS comparable?
Impact of inflation
17-70
Question
The current ratio is a measure of
liquidity that is computed by dividing
total assets by total liabilities.
a. True
b. False
17-71
Question
The current ratio is a measure of
liquidity that is computed by dividing
total assets by total liabilities.
a. True
b. False The current ratio is a measure of
liquidity, but is computed by
dividing current assets by
current liabilities
17-72
Question
Quick assets are defined as Cash,
Marketable Securities and net
receivables.
a. True
b. False
17-73
Question
Quick assets are defined as Cash,
Marketable Securities and net
receivables.
a. True
b. False
17-74