Professional Documents
Culture Documents
• REPORT FORM
• ACCOUNT FORM
A B TOTAL
Partners’ Equity, Beg xx xx xx
Add: Partner’s Share in Profit xx xx xx
Total xx xx xx
Less: Withdrawal (xx) (xx) (xx)
Partners’ Equity, Beg xx xx xx
• TYPES OF ACTIVITIES
• OPERATING ACTIVITIES
• INVESTING ACTIVITIES
• FINANCING ACTIVITIES
• CASH FLOW CLASSIFICATION
• INFLOW
• OUTFLOW
• METHODS OF PRESENTING
• DIRECT
• INDIRECT
• COMMON-SIZE ANALYSIS
• RATIO ANALYSIS
• LIQUIDITY RATIOS
• LEVERAGE RATIOS
• PROFITABILITY RATIOS
1 COMMON-SIZE ANALYSIS
• COMMON-SIZE ANALYSIS EXPRESSES LINE ITEMS OR ACCOUNTS IN THE
FINANCIAL STATEMENTS AS PERCENTAGES.
• THE TWO MAJOR FORMS OF COMMON-SIZE ANALYSIS ARE HORIZONTAL
ANALYSIS AND VERTICAL ANALYSIS.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1 HORIZONTAL ANALYSIS
• ALSO CALLED TREND ANALYSIS, HORIZONTAL ANALYSIS
EXPRESSES A LINE ITEM AS A PERCENTAGE OF SOME
PRIOR-PERIOD AMOUNT.
• THIS APPROACH ALLOWS THE TREND OVER TIME TO BE
ASSESSED.
• IN HORIZONTAL ANALYSIS, LINE ITEMS ARE EXPRESSED AS
A PERCENTAGE OF A BASE PERIOD AMOUNT.
• THE BASE PERIOD CAN BE THE IMMEDIATELY PRECEDING
PERIOD, OR IT CAN BE A PERIOD FURTHER IN THE PAST.
HORIZONTAL ANALYSIS
1 VERTICAL ANALYSIS
• WHILE HORIZONTAL ANALYSIS INVOLVES RELATIONSHIPS AMONG
ITEMS OVER TIME, VERTICAL ANALYSIS IS CONCERNED WITH
RELATIONSHIPS AMONG ITEMS WITHIN A PARTICULAR TIME PERIOD.
• VERTICAL ANALYSIS EXPRESSES THE LINE ITEM AS A PERCENTAGE
OF SOME OTHER LINE ITEM FOR THE SAME PERIOD.
• WITH THIS APPROACH, WITHIN-PERIOD RELATIONSHIPS CAN BE
ASSESSED.
• LINE ITEMS ON INCOME STATEMENTS OFTEN ARE EXPRESSED AS
PERCENTAGES OF NET SALES. ITEMS ON THE BALANCE SHEET OFTEN
ARE EXPRESSED AS A PERCENTAGE OF TOTAL ASSETS.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
VERTICAL ANALYSIS
2 RATIO ANALYSIS
• RATIO ANALYSIS IS THE SECOND MAJOR
TECHNIQUE FOR FINANCIAL STATEMENT ANALYSIS.
• RATIOS ARE FRACTIONS OR PERCENTAGES
COMPUTED BY DIVIDING ONE ACCOUNT OR LINE-
ITEM AMOUNT BY ANOTHER.
• FOR EXAMPLE, OPERATING INCOME DIVIDED BY
SALES PRODUCES A RATIO THAT MEASURES THE
PROFIT MARGIN ON SALES.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2 STANDARDS FOR COMPARISON
• RATIOS BY THEMSELVES TELL LITTLE ABOUT THE FINANCIAL WELL-BEING OF
A COMPANY.
• FOR MEANINGFUL ANALYSIS, THE RATIOS SHOULD BE COMPARED WITH A
STANDARD.
• ONLY THROUGH COMPARISON CAN SOMEONE USING A FINANCIAL
STATEMENT ASSESS THE FINANCIAL HEALTH OF A COMPANY.
• TWO STANDARDS COMMONLY USED ARE THE PAST HISTORY OF THE
COMPANY AND INDUSTRIAL AVERAGES.
2 CLASSIFICATION OF RATIOS
• RATIOS GENERALLY ARE CLASSIFIED INTO ONE OF THREE
CATEGORIES: LIQUIDITY, BORROWING CAPACITY OR LEVERAGE,
AND PROFITABILITY.
• LIQUIDITY RATIOS MEASURE THE ABILITY OF A COMPANY TO MEET ITS
CURRENT OBLIGATIONS.
• LEVERAGE RATIOS MEASURE THE ABILITY OF A COMPANY TO MEET ITS
LONG- AND SHORT-TERM OBLIGATIONS. THESE RATIOS PROVIDE A
MEASURE OF THE DEGREE OF PROTECTION PROVIDED TO A COMPANY’S
CREDITORS.
• PROFITABILITY RATIOS MEASURE THE EARNING ABILITY OF A COMPANY.
THESE RATIOS ALLOW INVESTORS, CREDITORS, AND MANAGERS TO
EVALUATE THE EXTENT TO WHICH INVESTED FUNDS ARE BEING USED
EFFICIENTLY.
LIQUIDITY RATIOS
CLASSIFICATION OF RATIOS
3 CURRENT RATIO
• THIS RATIO TELLS AN ANALYST HOW MANY TIMES THE AVERAGE INVENTORY TURNS
OVER, OR IS SOLD, DURING THE YEAR.
• A LOW TURNOVER RATIO MAY SIGNAL THE PRESENCE OF TOO MUCH INVENTORY OR
SLUGGISH SALES.
• THE NUMBER OF DAYS INVENTORY IS HELD BEFORE BEING SOLD CAN BE COMPUTED
AS:
365 ÷ INVENTORY TURNOVER RATIO = TURNOVER IN DAYS
LEVERAGE RATIOS
CLASSIFICATION OF RATIOS
4 TIMES-INTEREST-EARNED RATIO
• SINCE TOTAL LIABILITIES ARE COMPARED WITH TOTAL ASSETS, THE RATIO
MEASURES THE DEGREE OF PROTECTION AFFORDED TO CREDITORS IN CASE
OF INSOLVENCY.
• CREDITORS OFTEN IMPOSE RESTRICTIONS ON THE PERCENTAGE OF LIABILITIES
ALLOWED.
• IF THIS PERCENTAGE IS EXCEEDED, THE COMPANY IS IN DEFAULT, AND
FORECLOSURE CAN TAKE PLACE.
4 DEBT-TO-EQUITY RATIO
• ANOTHER RATIO USEFUL IN ASSESSING THE LEVERAGE USED BY A
COMPANY IS THE DEBT-TO-EQUITY RATIO.
• THIS RATIO COMPARES THE AMOUNT OF DEBT THAT IS FINANCED
BY STOCKHOLDERS AND IS CALCULATED AS FOLLOWS:
• BY ADDING BACK THE AFTER-TAX COST OF INTEREST, THIS MEASURE REFLECTS ONLY HOW
THE ASSETS WERE EMPLOYED.
• IT DOES NOT CONSIDER THE MANNER IN WHICH THEY WERE FINANCED (INTEREST EXPENSE
IS A COST OF OBTAINING THE ASSETS, NOT A COST OF USING THEM).
RETURN ON COMMON STOCKHOLDERS’
5 EQUITY
• RETURN ON TOTAL ASSETS IS MEASURED WITHOUT REGARD TO THE
SOURCE OF INVESTED FUNDS.
• FOR COMMON STOCKHOLDERS, HOWEVER, THE RETURN THAT THEY
RECEIVE ON THEIR INVESTMENT IS OF PARAMOUNT IMPORTANCE.
• OF SPECIAL INTEREST TO COMMON STOCKHOLDERS IS HOW THEY ARE
BEING TREATED RELATIVE TO OTHER SUPPLIERS OF CAPITAL FUNDS.
• THE RETURN ON STOCKHOLDERS’ EQUITY PROVIDES A MEASURE THAT
CAN BE USED TO COMPARE AGAINST OTHER RETURN MEASURES (E.G.,
PREFERRED DIVIDEND RATES AND BOND RATES) AND IS COMPUTED AS
FOLLOWS:
FINANCIAL STATEMENT ANALYSIS. ILLUSTRATION
FINANCIAL STATEMENT ANALYSIS. ILLUSTRATION