Analyzing Financial Statements

Chapter 13
Analyzing and Interpreting Financial

Statements
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

13-2
Conceptual Learning Objectives
C1: Explain the purpose of analysis

C2: Identify the building blocks of
analysis
C3: Describe standards for comparisons
in analysis
C4: Identify the tools of analysis

13-3
Analytical Learning Objectives
A1: Summarize and report results of

analysis
A2: Appendix 17A: Explain the form and
assess the content of a complete
income statement

13-4
Procedural Learning Objectives
P1: Explain and apply methods of

horizontal analysis
P2: Describe and apply methods of
vertical analysis
P3: Define and apply ratio analysis

13-5
C1
Basics of Analysis
Application
of analytical
tools
Involves
Reduces
transforming
uncertainty
data

13-6
C1
Purpose of Analysis
Financial statement analysis helps users

make better decisions.
Internal Users External Users

Managers Shareholders
Officers Lenders
Internal Auditors Customers
13-7
C2
Building Blocks of Analysis
Ability to meet
short-term Ability to
obligations and Liquidity generate future
to efficiently
generate
and Solvency revenues and
meet long-term
revenues Efficiency obligations
Ability to provide Ability to

financial rewards Market generate
Profitability
sufficient to
attract and retain
Prospects positive
market
financing expectations
13-8
C2
Information for Analysis
Income Statement Notes

Balance Sheet
Statement of
Stockholders’ Equity
Statement of Cash
Flows

13-9
C3
Standards for Comparison
To help me interpret our

financial statements, I
use several standards of
comparison.
 Intracompany
 Competitor
 Industry
 Guidelines
13-10
C4
Tools of Analysis
Horizontal Analysis
Comparing a company’s financial condition
and performance across time.
Time

13-11
C4
Tools of Analysis V
e
r
t
Comparing a company’s i
financial condition and c
a
performance to a base amount l
A
n
a
l
y
s
i
s
13-12
C4
Tools of Analysis
Measurement of key
relations between
financial statement items

13-13
C4
Horizontal Analysis
Now, let’s
look at
some ways
to use
horizontal
Time analysis.

13-14
C4
Horizontal Analysis
CLOVER CORPORATION
Comparative (Partial) Balance Sheet
December 31, 2007
Dollar Percent
2007 2006 Change Change
Assets
Current assets:
Cash and equivalents $ 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

13-15
P1
Comparative Statements
Calculate Change in Dollar Amount

Dollar Analysis Period Base Period
Change = Amount – Amount
Since we are measuring the amount of

the change between 2006 and 2007, the
dollar amounts for 2006 become the
“base” period amounts.

13-16
P1
Comparative Statements
Calculate Change as a Percent

Percent Dollar Change
Change
=
Base Period Amount × 100

13-17
P1
CLOVER CORPORATION
Comparative (partial) Balance Sheet
December 31, 2007
Dollar Percent
2007 2006 Change Change*
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 $ (11,500) (48.9)
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200 1,800
$12,000 – $23,500 = $(11,500)
Land ($11,500
40,000÷ $23,500)
40,000× 100 -= 48.9% 0.0
Total assets $ 315,000 $ 289,700
* Percent rounded to first decimal point.
13-18
P1
CLOVER CORPORATION
Comparative (Partial) Balance Sheet
December 31, 2007
Dollar Percent
2007 2006 Change Change*
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 $ (11,500) (48.9)
Accounts receivable, net 60,000 40,000 20,000 50.0
Inventory 80,000 100,000 (20,000) (20.0)
Prepaid expenses 3,000 1,200 1,800 150.0
Total current assets $ 155,000 $ 164,700 $ (9,700) (5.9)
Land 40,000 40,000 - 0.0
Buildings and equipment, net 120,000 85,000 35,000 41.2
Total property and equipment $ 160,000 $ 125,000 $ 35,000 28.0
Total assets $ 315,000 $ 289,700 $ 25,300 8.7
* Percent rounded to first decimal point.
Best Buy
Comparative Income Statements 13-19
For the Years Ended February 26, 2005, and February 28, 2004
Percent
(in millions, except per share amounts) 2004 2005 Dollar change Change
Revenues $24,548 $27,433 $2,885 11.75%

Cost of Goods Sold 18,677 20,938 2,261 12.11%
Gross Profit 5,871 6,495 624 10.63%
Selling, General and Administrative Expenses 4,567 5,053 486 10.64%
Operating Income 1,304 1,442 138 10.58%
Net Interest Income (Expense) -8 1 9 -112.50%
Earnings from Continuing Operations before Income Tax Expense 1,296 1,443 147 11.35%
Earnings from Continuing Operations 496 509 13 2.62%
Earnings from Continuing Operations 800 934 134 16.75%
Loss from Discontinued (note 2), Net of $17 Tax -29 0 29 -100.00%
Gain or (Loss) on disposal of Discontinued Operations (note 2) -66 50 116 -175.76%
Net Earnings 705 984 279 39.57%
Basic Earnings (Loss) Per Share
Continuing Operations $2.47 $2.87 0.40 16.19%
Discontinued Operations -$0.09 0 0.09 -100.00%
Gain or (Loss) on disposal of Discontinued Operations -$0.20 $0.15 0.35 -175.00%
Basic Earnings Per Share $2.18 $3.02 $0.84 38.53%
Diluted Earnings (Loss) Per Share

Continuing Operations 2.41 $2.79 $0.38 15.77%
Discontinued Operations -0.09 0 0.09 -100.00%
Gain (Loss) on Disposal of Discontinued Operations -0.20 0.15 0.35 -175.00%
Diluted Earnings Per Share $2.13 $2.94 $0.81 38.03%
Basic Weighted Average Common Shares Outstanding (in millions) 323.3 325.9 2.60 0.80%
1
Diluted Weighted Average Common Shares Outstanding (in millions) 333.9 336.6 2.70 0.81%
1
The calculation of diluted earnings per share assumes the conversion of our convertible debentures
due in 2022 into 5.8 million shares of common stock and adds back related after-tax interest expense
of $6.5 for all periods presented.
13-20
P1
Trend Analysis
Now, let’s
look at trend
analysis!

13-21
P1
Trend Analysis
Trend analysis is used to reveal patterns in data

covering successive periods.
Trend Analysis Period Amount

Percent
=
Base Period Amount
× 100
13-22
P1
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31,
Item 2005 2004 2003 2002 2001
Revenues $ 400,000 $ 355,000 $ 320,000 $ 290,000 $ 275,000
Cost of sales 285,000 250,000 225,000 198,000 190,000
Gross profit 115,000 105,000 95,000 92,000 85,000
2001 is the base period so its

amounts will equal 100%.

13-23
P1
Trend Analysis
Berry Products
Income Information
Item 2005 2004 2003 2002 2001
Revenues $ 400,000 $ 355,000 $ 320,000 $ 290,000 $ 275,000
Cost of sales 285,000 250,000 225,000 198,000 190,000
Gross profit 115,000 105,000 95,000 92,000 85,000
Item 2005 2004 2003 2002 2001

Revenues 105% 100%
Cost of sales 104% 100%
Gross profit 108% 100%
(290,000 ¸ 275,000) ´ 100% = 105%

(198,000 ¸ 190,000) ´ 100% = 104%
(92,000 ¸ 85,000) ´
McGraw-Hill/Irwin 100% = 108% © The McGraw-Hill Companies, Inc., 2008
13-24
P1
Trend Analysis
Berry Products
Income Information
Item 2005 2004 2003 2002 2001
Revenues $ 400,000 $ 355,000 $ 320,000 $ 290,000 $ 275,000
Cost of sales 285,000 250,000 225,000 198,000 190,000
Gross profit 115,000 105,000 95,000 92,000 85,000
Item 2005 2004 2003 2002 2001

Revenues 145% 129% 116% 105% 100%
Cost of sales 150% 132% 118% 104% 100%
Gross profit 135% 124% 112% 108% 100%
How would this trend analysis

look on a line graph?
13-25
P1
Trend Analysis
We can use the trend
percentages to construct a
160 graph so we can see the
150 trend over time.
140
Percentage
130
120 Revenues
Cost of Sales
110 Gross Profit
100
2001 2002 2003 2004 2005
Year
13-26
P2
V Common-Size Statements
e
r
t
i Now, let’s look at some vertical
c analysis tools!
a
l
A
n
a
l
y
s
i
s
13-27
P2
Common-Size Statements
Calculate Common-size Percent

Common-size Analysis Amount
Percent
= Base Amount × 100
Financial Statement Base Amount

Balance Sheet Total Assets
Income Statement Revenues
CLOVER CORPORATION 13-28
P2 Comparative (Partial) Balance Sheet
December 31, 2007
Common-size
Percents*
2007 2006 2007 2006
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1%
Inventory 80,000 100,000
($12,000 ÷ $315,000)
Total current assets $ 155,000 ×$100 = 3.8%
164,700
Land ($23,500 ÷ $289,700)
40,000 40,000 × 10012.7% = 8.1%
Total assets $ 315,000 $ 289,700
* Percent rounded to first decimal point. © The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
13-29
CLOVER CORPORATION
P2 Comparative (Partial) Balance Sheet
December 31, 2007
Common-size
Percents*
2007 2006 2007 2006
Assets
Current assets:
Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1%
Accounts receivable, net 60,000 40,000 19.0% 13.8%
Inventory 80,000 100,000 25.4% 34.5%
Prepaid expenses 3,000 1,200 1.0% 0.4%
Total current assets $ 155,000 $ 164,700 49.2% 56.9%
Land 40,000 40,000 12.7% 13.8%
Buildings and equipment, net 120,000 85,000 38.1% 29.3%
Total property and equipment $ 160,000 $ 125,000 50.8% 43.1%
Total assets $ 315,000 $ 289,700 100.0% 100.0%
*McGraw-Hill/Irwin
Percent rounded to first decimal point. © The McGraw-Hill Companies, Inc., 2008
CLOVER CORPORATION 13-30
Comparative (Partial) Balance Sheets
P2
December 31, 2007
Common-size
Percents*
2007 2006 2007 2006
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 67,000 $ 44,000 21.3% 15.2%
Notes payable 3,000 6,000 1.0% 2.1%
Total current liabilities $ 70,000 $ 50,000 22.2% 17.3%
Long-term liabilities:
Bonds payable, 8% 75,000 80,000 23.8% 27.6%
Total liabilities $ 145,000 $ 130,000 46.0% 44.9%
Shareholders' equity:
Preferred stock 20,000 20,000 6.3% 6.9%
Common stock 60,000 60,000 19.0% 20.7%
Additional paid-in capital 10,000 10,000 3.2% 3.5%
Total paid-in capital $ 90,000 $ 90,000 28.6% 31.1%
Retained earnings 80,000 69,700 25.4% 24.1%
Total shareholders' equity $ 170,000 $ 159,700 54.0% 55.1%
Total liabilities and shareholders' equity $ 315,000 $ 289,700 100.0% 100.0%
* Percent rounded
McGraw-Hill/Irwin to first decimal point. © The McGraw-Hill Companies, Inc., 2008
13-31
CLOVER CORPORATION
P2
Comparative Income Statements
For the Years Ended December 31, 2007
Common-size
Percents*
2007 2006 2007 2006
Revenues $ 520,000 $ 480,000 100.0% 100.0%
Costs and expenses:
Cost of sales 360,000 315,000 69.2% 65.6%
Selling and admin. 128,600 126,000 24.7% 26.3%
Interest expense 6,400 7,000 1.2% 1.5%
Income before taxes $ 25,000 $ 32,000 4.8% 6.7%
Income taxes (30%) 7,500 9,600 1.4% 2.0%
Net income $ 17,500 $ 22,400 3.4% 4.7%
Net income per share $ 0.79 $ 1.01
Avg. # common shares 22,200 22,200
* Rounded to first decimal point.
13-32
P2
Common-Size Graphics
This is a graphical analysis of Clover

Corporation’s common-size income
statement for 2007.
2007
Other gains
Revenues
Income taxes 0.2% Net100.0%
earnings
Cost of goods sold
1.4% 69.2
3.6%
Selling and administrative
Net interest 24.7
Net1.20%
interest 1.2
Income taxes 1.4 Cost of goods
Other
Selling gains
and 0.2 sold
Net earnings
administrative 3.6 69.0%
24.6%
McGraw-Hill/Irwin
Net income per share © The McGraw-Hill Companies, Inc., 2008
13-33
P3
Ratio Analysis
Liquidity
and Solvency
Efficiency
Profitability Market
Prospects
Let’s use the following financial
statements for Norton Corporation for
McGraw-Hill/Irwinour ratio analysis. © The McGraw-Hill Companies, Inc., 2008
NORTON CORPORATION 13-34
P3 Balance Sheet
December 31, 2007
2007 2006
Assets
Current assets:
Cash $ 30,000 $ 20,000
Inventory 12,000 10,000
Land 165,000 123,000
Total assets $ 346,390 $ 300,000
NORTON CORPORATION 13-35
P3 Balance Sheet
December 31, 2007
2007 2006
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 39,000 $ 40,000
Notes payable, short-term 3,000 2,000
Total current liabilities $ 42,000 $ 42,000
Long-term liabilities:
Notes payable, long-term 70,000 78,000
Total liabilities $ 112,000 $ 120,000
Shareholders' equity:
Common stock, $1 par value 27,400 17,000
Additional paid-in capital 158,100 113,000
Total paid-in capital $ 185,500 $ 130,000
Retained earnings 48,890 50,000
Total shareholders' equity $ 234,390 $ 180,000
Total liabilities and shareholders' equity

McGraw-Hill/Irwin
$ ©346,390
The McGraw-Hill $ 300,000
Companies, Inc., 2008
13-36
NORTON CORPORATION
P3
Income Statement
For the Years Ended December 31
2007 2006
Revenues $ 494,000 $ 450,000
Cost of sales 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
13-37
P3
Liquidity and Efficiency
Current Inventory
Ratio Turnover
Acid-test Days’ Sales

Ratio Uncollected
Accounts
Days’ Sales
Receivable
in Inventory
Turnover
Total Asset
Turnover
13-38
P3
Liquidity and Efficiency
NORTON CORPORATION
2007
Use this information Cash $ 30,000

Accounts receivable, net
to calculate the Beginning of year 17,000
liquidity and End of year 20,000
efficiency ratios Inventory
Beginning of year 10,000
for Norton
End of year 12,000
Corporation. Total current assets 65,000
Total current liabilities 42,000
Total assets
End of year 346,390
Revenues 494,000
McGraw-Hill/Irwin Cost of sales 140,000
© The McGraw-Hill Companies, Inc., 2008
13-39
P3
Working Capital
Working capital represents current assets

financed from long-term capital sources that
do not require near-term repayment.
Dec. 31, 2007

Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000
13-40
P3
Current Ratio
Current Current Assets

=
Ratio Current Liabilities
Current $65,000
= = 1.55 : 1
Ratio $42,000
This ratio measures the

short-term debt-paying
ability of the company.

13-41
P3
Acid-Test Ratio
Acid-Test = Quick Assets
Ratio Current Liabilities
Quick assets are Cash, Short-Term Investments,
and Current Receivables.
Acid-Test = $50,000 = 1.19 : 1

Ratio $42,000
This ratio is like the current
ratio but excludes current assets
such as inventories and prepaid
expenses that may be difficult to
quickly convert into cash.
13-42
P3
Accounts Receivable Turnover
Accounts Sales on Account

Receivable = Average Accounts Receivable
Turnover
Accounts $494,000
Receivable = ($17,000 + $20,000) ÷ 2 = 26.7 times
Turnover
This ratio measures how many

times a company converts its
receivables into cash each year.
13-43
P3
Inventory Turnover
Inventory Cost of Goods Sold

=
Turnover Average Inventory
Inventory $140,000
= = 12.73 times
Turnover ($10,000 + $12,000) ÷ 2
This ratio measures the number

of times merchandise is sold and
and replaced during the year.

13-44
P3
Days’ Sales Uncollected
Days’ Sales Ending Accounts Receivable

= Net Sales ´ 365
Uncollected
Days’ Sales $20,000

= ´ 365 = 14.8 days
Uncollected $494,000
This ratio measures the liquidity

of receivables.

13-45
P3
Days’ Sales in Inventory
Days’ Sales Ending Inventory

= ´ 365
in Inventory Cost of Goods Sold
Days’ Sales $12,000

= ´ 365 = 31.29 days
in Inventory $140,000
This ratio measures the liquidity

of inventory.

13-46
P3
Total Asset Turnover
Total Asset Net Sales

=
Turnover Average Total Assets
Total Asset $494,000

= = 1.53 times
Turnover ($300,000 + $346,390) ÷ 2
This ratio measures the

efficiency of assets in producing
sales.

13-47
P3
Solvency
Debt
Ratio
Equity
Ratio
Pledged Assets
to Secured
Liabilities
Times
Interest
Earned
13-48
P3
Solvency
Use this information to calculate the solvency

ratios for Norton Corporation.
NORTON CORPORATION
2007
Net income before interest
expense and income taxes $ 84,000
Interest expense 7,300
Total shareholders' equity 234,390
Total liabilities 112,000
Total assets 346,390
13-49
P3
Debt Ratio
Debt Total Liabilities

=
Ratio Total Assets
Debt $112,000
= = 32.3%
Ratio $346,390
This ratio measures what portion of a

company’s assets are contributed by
creditors.

13-50
P3
Equity Ratio
Equity Total Equity

=
Ratio Total Assets
Equity $234,390
= = 67.7%
Ratio $346,390
This ratio measures what portion of a

company’s assets are contributed by
owners.

13-51
P3
Debt-to-Equity Ratio
Debt-to-
Equity- Total Liabilities
=
Ratio Total Equity
This ratio measures the solvency of

companies.

13-52
P3
Times Interest Earned
Net Income before Interest Expense

Times and Income Taxes
Interest =
Earned Interest Expense
Times $84,000
Interest = = 11.51
Earned $7,300
This is the most common measure of the

ability of a firm’s operations to provide
protection to the long-term creditor.
13-53
P3
Profitability
Profit Basic
Margin Earnings per
Share
Gross Book Value

Margin per Common
Share
Return on Return on
Total Assets Common
Stockholders’
Equity
13-54
P3
Profitability
NORTON CORPORATION
Use this 2007
information to Number of common shares
calculate the outstanding all year 27,400
profitability Net income $ 53,690
ratios for Shareholders' equity
Norton Beginning of year 180,000
Corporation. End of year 234,390
Revenues 494,000
Cost of sales 140,000
Total assets
End of year 346,390
13-55
P3
Profit Margin
Profit Net Income

=
Margin Net Sales
Profit $53,690
= = 10.87%
Margin $494,000
This ratio describes a

company’s ability to earn a net
income from sales.

13-56
P3
Gross Margin
Gross Net Sales - Cost of Sales

=
Margin Net Sales
Gross $494,000 - $140,000
= = 71.66%
Margin $494,000
This ratio measures the amount

remaining from $1 in sales that is left
to cover operating expenses and a
profit after considering cost of sales.
13-57
P3
Return on Total Assets
Return on = Net Income

Total Assets Average Total Assets
Return on $53,690
= = 16.61%
Total Assets ($300,000 + $346,390) ÷ 2
This ratio is generally considered

the best overall measure of a
company’s profitability.

13-58
P3 Return on Common
Stockholders’ Equity
Return on
Common Net Income - Preferred Dividends
=
Stockholders’ Average Common Stockholders’
Equity Equity
Return on
Common = $53,690 - 0
= 25.9%
Stockholders’ ($180,000 + $234,390) ÷ 2
Equity
This measure indicates how well the
company employed the owners’
investments to earn income.
13-59
P3
Book Value per Common Share
Book Value Shareholders’ Equity Applicable to

per Common Shares
=
Common Number of Common Shares
Share Outstanding
This ratio measures

liquidation at reported
amounts.

13-60
P3
Basic Earnings per Share
Basic
Earnings Net Income - Preferred Dividends
=
per Weighted-Average Common
Share Shares Outstanding
Basic
Earnings $53,690 - 0
= = $1.96 per share
per 27,400
Share
This measure indicates how much
income was earned for each share of
common stock outstanding.
13-61
P3
Market Prospects
Price-
Earnings
Ratio
Dividend
Yield

13-62
P3
Market Prospects
Use this NORTON CORPORATION

information December 31, 2007
to calculate Earnings per Share $ 1.96
the market Market Price 15.00
ratios for Annual Dividend per Share 2.00
Norton
Corporation.

13-63
P3
Price-Earnings Ratio
Price-Earnings Market Price Per Share

=
Ratio Earnings Per Share
Price-Earnings $15.00
= = 7.65 times
Ratio $1.96
This measure is often used by investors as a general

guideline in gauging stock values. Generally, the
higher the price-earnings ratio, the more opportunity
a company has for growth.
13-64
P3
Dividend Yield
Dividend Annual Dividends Per Share

=
Yield Market Price Per Share
Dividend $2.00
= = 13.3%
Yield $15.00
This ratio identifies the return, in terms of

cash dividends, on the current market
price of the stock.
13-65
A2
Reporting Income and Equity
Extraordinary
Items
Changes in
Discontinued Accounting
Segments Principles
Continuing
Operations Net Income
13-66
A2
Continuing Operations
Revenues, expenses
and income generated
by the company’s
continuing operations.
Continuing
Operations Net Income
13-67
A2
Discontinued Segments
Income from operating the discontinued segment prior
to its disposal and gain or loss on the sale of the net
assets of the segment.
Discontinued
Segments
Net Income
13-68
A2
Extraordinary Items
Extraordinary
Items
A gain or loss that

is unusual in nature
and infrequent in
occurrence.
Net Income
13-69
A2
Changes in Accounting Principles
The increase or
decrease in income Changes in
when changing from Accounting
one generally accepted Principles
accounting principle to
another.
Net Income
13-70
A2
Income Statement
Campus, Inc.
Partial Income Statement
For Year Ended December 31, 2008
Income from continuing operations $ 1,389,500
Discontinued operations:
Income from operating Radio Division (net
of $105,000 income taxes) $ 420,000
Loss on disposal of Radio Division (net of
$38,500 tax benefit) (154,000) 266,000
Extraordinary item:
Loss from earthquake damage (net of
$157,500 tax benefit) (630,000)
Net income $ 1,025,500

13-71
End of Chapter 13

Analyzing Financial Statements

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Analyzing Financial Statements

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Chapter 13

Analyzing and Interpreting Financial

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Conceptual Learning Objectives

C1: Explain the purpose of analysis

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Analytical Learning Objectives

A1: Summarize and report results of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Procedural Learning Objectives

P1: Explain and apply methods of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Financial statement analysis helps users

Internal Users External Users

Ability to provide Ability to

Income Statement Notes

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

To help me interpret our

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Calculate Change in Dollar Amount

Since we are measuring the amount of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Calculate Change as a Percent

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Revenues $24,548 $27,433 $2,885 11.75%

Diluted Earnings (Loss) Per Share

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Trend analysis is used to reveal patterns in data

Trend Analysis Period Amount

2001 is the base period so its

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Item 2005 2004 2003 2002 2001

(290,000 ¸ 275,000) ´ 100% = 105%

Item 2005 2004 2003 2002 2001

How would this trend analysis

Calculate Common-size Percent

Financial Statement Base Amount

This is a graphical analysis of Clover

Total liabilities and shareholders' equity

Acid-test Days’ Sales

Use this information Cash $ 30,000

Working capital represents current assets

Dec. 31, 2007

Current Current Assets

This ratio measures the

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Acid-Test = $50,000 = 1.19 : 1

Accounts Sales on Account

This ratio measures how many

Inventory Cost of Goods Sold

This ratio measures the number

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Days’ Sales Uncollected

Days’ Sales Ending Accounts Receivable

Days’ Sales $20,000

This ratio measures the liquidity

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2008

Days’ Sales Ending Inventory

Days’ Sales $12,000

This ratio measures the liquidity