Professional Documents
Culture Documents
14-1
Chapter 14
Financial Statement
Analysis
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Financial
Financial Statement
Statement Analysis
Analysis
Basics of
Horizontal and Earning Power
Financial Quality of
Vertical Ratio Analysis and Irregular
Statement Earnings
Analysis Items
Analysis
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Basics
Basics of
of Financial
Financial Statement
Statement Analysis
Analysis
Comparison Tools of
Characteristics
Bases Analysis
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14-6
SO 3 Explain and apply horizontal analysis.
Horizontal
Horizontal Analysis
Analysis
Statement of
Financial
Position
These changes
suggest that the
company expanded
its asset base during
2011 and financed
this expansion
primarily by
retaining income
rather than assuming
additional long-term
debt.
Illustration 14-5
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14-7
SO 3 Explain and apply horizontal analysis.
Horizontal
Horizontal Analysis
Analysis
Income
Statement
Overall, gross profit
and net income were
up substantially.
Gross profit
increased
17.1%, and net
income, 26.5%.
Quality’s profit trend
appears favorable.
Illustration 14-6
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14-8
SO 3 Explain and apply horizontal analysis.
Horizontal
Horizontal Analysis
Analysis
Retained
Earnings
Statement
Illustration 14-7
Slide
14-9
SO 3 Explain and apply horizontal analysis.
Horizontal
Horizontal Analysis
Analysis
Illustration: Summary financial information for
Rosepatch Company is as follows.
Solution
Slide
14-10
SO 4 Describe and apply horizontal analysis.
Vertical
Vertical Analysis
Analysis
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14-11
SO 4 Describe and apply vertical analysis.
Vertical
Vertical Analysis
Analysis
Statement of
Financial
Position
These results
reinforce the earlier
observations that
Quality is
choosing to
finance its growth
through retention
of earnings rather
than through
issuing additional
debt.
Illustration 14-8
Slide
14-12
SO 4 Describe and apply vertical analysis.
Vertical
Vertical Analysis
Analysis
Income
Statement
Quality appears
to be a profitable
enterprise that is
becoming even
more successful.
Illustration 14-9
Slide
14-13
SO 4 Describe and apply vertical analysis.
Vertical
Vertical Analysis
Analysis
Enables a comparison of companies of different sizes.
Illustration 14-10
Intercompany income
statement comparison
Park Street earned net income more than 4,208 times larger than Quality’s, Park
Street’s net income as a percent of each sales euro (5.6%) is only 44% of
Quality’s (12.6%).
Slide
14-14
SO 4 Describe and apply vertical analysis.
Ratio
Ratio Analysis
Analysis
Liquidity Ratios
The 2011 ratio of 2.96:1 means that for every euro of current
liabilities, Quality has €2.96 of current assets.
Illustration 14-27
Summary of liquidity ratios
Profitability Ratios
Solvency Ratios
Discontinued Operations
(a) Refers to the disposal of a significant component
of a business.
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14-44 SO 6
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14-45
Earning
Earning Power
Power and
and Irregular
Irregular Items
Items
Comprehensive Income
Why are gains and losses on available-for-sale
securities excluded from net income?
Because disclosing them separately
1. reduces the volatility of net income due to fluctuations in
fair value,
Slide
14-49
SO 7 Understand the concept of quality of earnings.
Quality
Quality of
of Earnings
Earnings
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14-50
SO 7 Understand the concept of quality of earnings.
Quality
Quality of
of Earnings
Earnings
Improper Recognition
Some managers have felt pressure to continually increase
earnings and have manipulated the earnings numbers to meet
these expectations.
Abuses include:
Improper recognition of revenue (channel stuffing).
Improper capitalization of operating expenses (WorldCom).
Failure to report all liabilities (Enron).
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14-51
SO 7 Understand the concept of quality of earnings.
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Financial Statement
Key Differences
Analysis
Under GAAP, items that are considered to be both unusual in
nature and infrequent in occurrence are reported as
“extraordinary items” in a separate line item at the bottom of
the income statement, net of tax. Under IFRS, there is no
classification for extraordinary items. In other words,
extraordinary item treatment is prohibited under IFRS. In recent
years, the types of items that can receive extraordinary item
treatment under GAAP has been reduced to the point where the
classification is rarely used.
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14-54
Copyright
Copyright
“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”
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