BF 305 FINANCIAL STATEMENT

ANALYSIS
•CHAPTER 9

•Prof. Dr. Yüksel Akay ÜNVAN

Horizontal (Trend)
Analysis
• Horizontal analysis, also called trend analysis, is
a technique for evaluating a series of financial
statement data over a period of time.
• Purpose is to determine the increase or
decrease that has taken place.
• Commonly applied to the balance sheet, income
statement and statement of retained earnings.
Horizontal (Trend) Analysis
Horizontal analysis refers to studying the behavior of individual financial statement items over
several accounting periods.

Trend analysis determines the direction upwards or downwards and involves the computation
of the percentage relationship that each item bears to the same item in the base year.

In trend analysis, we learn about the behaivour of the same item over a given time period.

This analysis is a technique of studying several financial statements over a series of years.
Horizontal (Trend) Analysis
• In this analysis the trend percentages are calculated for each item by taking the
figure of that item for the year taken as 100.
• Generally, the first year is taken as a base year.
• The analyst is able to see the trend of figures, whether moving upward or
downward.

In brief, the procedure for calculating trends is as:

One year is taken as a base year which is generally is the first year or last year.
Trend percentages are calculated in relation to base year.
 Horizontal (Trend)
Analysis
• Trend analysis for percentage change calculated as follows:

Trend analysis for percentage change: Any Year Amount (Herhangi bir yıl tutarı) x100
(Yüzde değişim) Base Year Amount (Baz alınan yıl tutarı)
Horizontal (Trend) Analysis
• Example 1: The comparative condensed income statement of Whiteday
Corporation are presented below. Prepare a horizontal analysis of the income
statement data for Whiteday Corporation using 2020 as a base.
2020 2021 2022
Net Sales (Net Satışlar) 1.235.0000 2.106.000 2.221.100
Cost of Goods Sold (Satılan Malın Maliyeti) 800.000 1.500.000 1.700.000
Gross Profit (Brüt Kâr) 400.000 600.000 200.000
Operating Expenses (Faaliyet Giderleri)
Research and Development Expenses 200.000 400.000 200.000
(Araştırma ve Geliştirme Giderleri)
Operating Income (Faaliyet Kârı) 200.000 200.000 -
Interest Expenses (Faiz Giderleri) 50.000 30.000 (20.000)
Earning Before Tax (Vergi Öncesi Kazanç) 150.000 170.000 180.000
Income Tax (Gelir Vergisi) 30.000 34.000 36.000
Net Income (Net Kâr) 120.000 136.000 144.000
Horizontal (Trend) Analysis
• Solution of Example 1:
Trend analysis for percentage change: Any Year Amount x100
Base Year Amount
For Net Sales Account (2021) : 2.106.000 x100 =170,5%
(Net Satışlar Hesabı için) 1.235.000
For Net Sales Account (2022) : 2.221.100 x100 =179,8%
1.235.000
For Cost of Goods Sold Account (2021) : 1.500.000 x100 =187,5%
(Satışların Maliyeti Hesabı için) 800.000
For Cost of Goods Sold Account (2022) : 1.700.000 x100 =212,5%
800.000
Horizontal (Trend) Analysis
• Solution of Example 1:
Trend analysis for percentage change: Any Year Amount x100
Base Year Amount
For Gross Profit Account (2021) : 600.000 x100 =150%
(Brüt Kâr Hesabı için) 400.000
For Gross Profit Account (2022) : 200.000 x100 =50%
400.000
For Net Income Account (2021) : 136.000 x100 =113,3%
(Net Kâr Hesabı için) 120.000
For Net Income Account (2022) : 144.000 x100 =120%
120.000
Horizontal (Trend) Analysis
• Solution of Example 1:
2020 2021 2022 Indexed %
2020 2021 2022
Net Sales (Net Satışlar) 1.235.0000 2.106.000 2.221.100 100 170,5 212,5

Cost of Goods Sold (Satılan Malın Maliyeti) 800.000 1.500.000 1.700.000 100 187,5 212,5

Gross Profit (Brüt Kâr) 400.000 600.000 200.000 100 150 50

Operating Expenses (Faaliyet Giderleri)

Research and Development Expenses 200.000 400.000 200.000 100 200 100
(Araştırma ve Geliştirme Giderleri)
Operating Income (Faaliyet Kârı) 200.000 200.000 - 100 100 -

Interest Expenses (Faiz Giderleri) 50.000 30.000 (20.000) 100 60 (40)

Earning Before Tax (Vergi Öncesi Kazanç) 150.000 170.000 180.000 100 113,3 120

Income Tax (Gelir Vergisi) 30.000 34.000 36.000 100 113,3 120

Net Income (Net Kâr) 120.000 136.000 144.000 100 113,3 120
Vertical (Common-
Size) Analysis
• Vertical analysis, also called common-size
analysis, is a technique that expresses each
financial statement item as a percent of a base
amount.
• Vertical analysis is commonly used to the
balance sheet and the income statement.
• On an income statement, we might say that
selling expenses are % of net sales.
Vertical (Common-Size) Analysis

• Common-size analysis uses percentages to compare individual components of

financial statements to a key statement figure.
• A common-size financial statement is a vertical analysis in which each financial
statement item is expressed as a percentage.
• Common-size statement are used to compare financial statement of different size
of companies or of the same company over different periods.
• The structure of the common-size statement uses a common base figure, and
assigns a percentage or that figure to each line item or category reflected on the
document.
Vertical (Common-Size) Analysis
A company can choose to utilize common-size statement to present a quick snapshot of how much of the
company generated revenue is going toward each operational function within the organization.

The use of a common-size statement can make it possible to quickly identify areas that may be utilizing
more of the operating capital than is practical at the time.

The common-size statement can also be a helpful tool in comparing the financial structures and
operation strategies of two different companies.

The use of percentages in the common-size statement removes the issue of the which company
generates more revenue, and brings the focus on how the revenue is utilized within each of the two
business.
Vertical (Common-Size) Analysis
Percentage analysis consists of reducing a series of related amounts to a series of percentages of a
given base.

For example, analysts frequently express all items in an income statement as a per centage of sales or
sometimes as a percentage of cost of goods sold.

They may analyze a balance sheet on the basis of total assets.

Percentage analysis facilitates comparison and is helpful in evaluating the relative size of items or the
relative change in items.

A conversion of absolute dollar amounts to percentages may also facilitate comparison between
companies of different size.
 Vertical (Common-Size) Analysis

Common-Size Balance Sheet

• A useful for analyzing the balance sheet is a common-size balance sheet.
• Common-size financial statements are a form of vertical ratios analysis that allows for
comparison of firms with different levels of sales or total assets by introducing a common
denominator.
• The common size statements are shown in analytical percentages.
• The figures of these statements are shown as percentages of total assets, total liabilities and
total sales respectively.
• Take the example of Balance Sheet. The total assets are taken as 100 and different assets
are expressed as a percentage of the total.
• Similarly, various liabilities are taken as a part of total liabilities.
 Vertical (Common-Size)
Analysis
Common-Size Balance Sheet
Common size statements;
Expresses each item on the balance sheet as a percentage of
total assets
Reveals the composition of assets
Form of vertical ratio analysis
Useful for evaluating trends within a firm
Allows for making industry comparisons.
 Vertical (Common-Size) Analysis

Common-Size Balance Sheet

In balance sheets, all items are usually expressed as a percentage of total assets.
Common-size analysis for balance sheet calculated as follows:

Common-size analysis for balance sheet =___Each balance sheet item (Her bir bilanço kalemi) x100
(Bilanço için dikey analiz) Total Assets (or Total Liabilities and Shareholders Equity)
(Toplam varlıklar (veya toplam yükümlülükler ve özkaynaklar)
Vertical (Common-Size)
Analysis
Common-Size Balance Sheet

Thus, the common size statement may be prepared in the

following way.
• The total assets or liabilities are taken as 100. (Toplam
varlık veya yükümlülükler 100 olarak alınmıştır.)
• The individual assets are expressed as a percentage of
total assets i.e. 100 and different liabilities are calculated
in relation to total liabilities. (Bireysel varlıklar toplam
varlıkların yüzdesi olarak ifade edilir, ve farklı
yükümlülükler toplam yükümlülüklere göre hesaplanır.)
Vertical (Common-Size) Analysis - Common-Size Balance Sheet
Example 2:The following is the balance sheets of Whiteday Corporation for the year 2021.
ASSETS (VARLIKLAR) 2021 2020
Current Assets (Dönen Varlıklar) 1.020.000 945.000
Non-current Assets (Duran Varlıklar)
-Tangible Assets (Maddi Duran Varlıklar) 800.000 632.500
-Intangible Assets (Maddi Olmayan Duran Varlıklar) 15.000 17.500
TOTAL ASSETS (TOPLAM VARLIKLAR) 1.835.000 1.595.000
LIABILITIES (YÜKÜMLÜLÜKLER)
Current Liabilities (Kısa Vadeli Yükümlülükler) 344.500 303.000
Non-Current Liabilities (Uzun Vadeli Yükümlülükler) 487.500 497.000
TOTAL LIABILITIES (TOPLAM YÜKÜMLÜLÜKLER) 832.000 800.000
SHAREHOLDERS’ EQUITY (ÖZKAYNAKLAR)
Common Stock (Sermaye) 275.400 270.000
Retained Earnings (Dağıtılmamış Kârlar) 727.600 525.000
TOTAL SHAREHOLDERS’ EQUITY (TOPLAM ÖZKAYNAKLAR) 1.003.000 795.000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1.835.000 1.595.000
Vertical (Common-Size) Analysis - Common-Size Balance Sheet
Required: Prepare the common-size analysis of balance sheets for Whiteday Corporation

Solution of Example 2:
Common-size analysis for balance sheet =_________Each balance sheet item___ ______x100
Total Assets (or Total Liabilities and Shareholders Equity)

• For Current Assets Account (2021): 1.020.000 x100 =55,59

1.835.000

• For Current Liabilities Account (2020): 303.000 x 100 =19

1.595.000

• For Common Stock Account (2021): 275.400 x 100 =15,01

1.835.000
Vertical (Common-Size) Analysis - Common-Size Balance Sheet
Solution of Example 2:
ASSETS (VARLIKLAR) 2021 2020 2021 2020
Current Assets (Dönen Varlıklar) 1.020.000 945.000 55,59 59,25
Non-current Assets (Duran Varlıklar)
-Tangible Assets (Maddi Duran Varlıklar) 800.000 632.500 43,60 39,66
-Intangible Assets (Maddi Olmayan Duran Varlıklar) 15.000 17.500 0,82 1,10
TOTAL ASSETS (TOPLAM VARLIKLAR) 1.835.000 1.595.000 100 100
LIABILITIES (YÜKÜMLÜLÜKLER)
Current Liabilities (Kısa Vadeli Yükümlülükler) 344.500 303.000 18,77 19
Non-Current Liabilities (Uzun Vadeli Yükümlülükler) 487.500 497.000 26,57 31,16
TOTAL LIABILITIES (TOPLAM YÜKÜMLÜLÜKLER) 832.000 800.000 45,34 50,16
SHAREHOLDERS’ EQUITY (ÖZKAYNAKLAR)
Common Stock (Sermaye) 275.400 270.000 15,01 16,93
Retained Earnings (Dağıtılmamış Kârlar) 727.600 525.000 39,65 32,92
TOTAL SHAREHOLDERS’ EQUITY (TOPLAM ÖZKAYNAKLAR) 1.003.000 795.000 54,66 49,84
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 1.835.000 1.595.000 100 100
 Vertical (Common-
Size) Analysis
Common- size income statement
Common-size financial statements are calculated by
dividing all financial statement amounts for a given year
by sales for that year.
The items in income statement can be shown as
percentages of sales to show the relations of each item
to sales.
A common-size income statement reveals the number
of pennies of each expense for each dollar of sales.
In income statements, all items are usually expressed
as a percentage of sales.
 Vertical (Common-Size) Analysis

Common- size income statement

Common-size analysis for income statement calculated as follows:

Common-size analysis for income statement = Each income statement item (Her bir gelir tablosu kalemi) x100
(Gelir tablosu için dikey analiz) Net Sales (Net Satışlar)
 Vertical (Common-Size) Analysis

Common- size income statement

Common-Size Income Statement;
• Are a useful analytical tool to
• Compare firms with different levels of sales or total assets
• Facilitate internal or structural analysis
• Evaluate trends
• Make industry comparisons
• Expresses each income statement item as a percentage of net sales
• Shows the relative magnitude of various expenses relative to sales, the profit percentages, and the
relative importance of other revenues and expenses.
Vertical (Common-Size) Analysis -Common- size income statement

Example 3: The following is the income statements of Whiteday Corporation for

the year 2021.
Sales (Satışlar) 160.000
Sales Returns and Discounts (Satış İadeleri ve İndirimler) -19.000
Net Sales (Net Satışlar) 141.000
Cost of Sales (Satışların Maliyeti) -70.000
Gross Profit (Brüt Kâr) 71.000
Operating Expenses (Faaliyet Giderleri) -24.000
Income (loss) from operating activities (Faaliyetlerden kâr veya zararlar) 47.000
Other Revenue and Gains (Diğer Gelir ve Kazançlar) 18.000
Other Expenses and Losses (Diğer Gider ve Zararlar) -7.000
Income from continuing operating before taxes (Sürdürülen faaliyetlerden vergi öncesi kâr) 58.000
Income Taxes (Gelir Vergisi) 12.000
Income From Continuing Operating (Sürdürülen Faaliyetlerden Kâr) 46.000

Required: Prepare the vertical (common-size) income statement?

Vertical (Common-Size) Analysis -Common- size income statement

Solution of Example 3

Common-size analysis for income statement=Each income statement item x100

Net Sales
• For Cost of Sales Account: 70.000 x100 =49,65%
(Satışların maliyeti hesabı için) 141.000
• For Gross Profit Account: 71.000 x 100 =50,35%
(Brüt Kâr hesabı için) 141.000
• For Operating Expenses Account: 24.000 x 100 =17,02%
(Faaliyet Giderleri hesabı için) 141.000
Vertical (Common-Size) Analysis -Common- size income statement

Solution of Example 3: Common Size %

Sales (Satışlar) 160.000 113,47

Sales Returns and Discounts (Satış İadeleri ve İndirimler) -19.000 13,47

Net Sales (Net Satışlar) 141.000 100
Cost of Sales (Satışların Maliyeti) -70.000 49,65
Gross Profit (Brüt Kâr) 71.000 50,35
Operating Expenses (Faaliyet Giderleri) -24.000 17,02
Income (loss) from operating activities (Faaliyetlerden kâr veya zararlar) 47.000 33,33
Other Revenue and Gains (Diğer Gelir ve Kazançlar) 18.000 12,76
Other Expenses and Losses (Diğer Gider ve Zararlar) -7.000 4,96
Income from continuing operating before taxes (Sürdürülen faaliyetlerden vergi öncesi kâr) 58.000 41,13
Income Taxes (Gelir Vergisi) 12.000 8,51
Income From Continuing Operating (Sürdürülen Faaliyetlerden Kâr) 46.000 32,62
FINANCIAL RATIOS

Financial ratios are a relationship between two financial expressions.

It measures business performance and financial situation on a given parameter, such

as the ratio between the company's current assets and its current liabilities.

The basic source of these ratios is the company's income statement and balance
sheet that contain all the financial details and other information about that company.

The ratios provide these details to light and identify the financial strengths and
weaknesses of the company.
Financial Ratios

• Financial ratios provide a second method for standardizing the financial

information on the income statement and balance sheet.
• A ratio by itself may have no meaning.
• Hence, a given ratio is compared to:
 ratios from previous years -time series analysis; or
 ratios of other firms in the same industry-cross-sectional
analysis.
Financial Ratios

If the differences in the ratios are significant, more in-depth

analysis must be done.

Key financial ratios

Standardize financial
Expressed as percentages
data in terms of Extremely valuable  Have limitations
or times
mathematical relationships
Financial Ratios
Key financial ratios
• Ratios are mathematical calculations that the
company can use to evaluate its performance.
• They help the company to determine whether trends
are improving or deteriorating.
• They are calculated by comparing two numbers with
each other.
• The most valuable use that can be made of ratios is
to compare the ratios for this year with the same
ratios for the previous year and with the ratios of
other companies in a similar business.
Financial Ratios
• Financial ratios provide more of an overview.
• They help management to monitor the company's
performance over a period of time, perhaps a
week or a month.

Ratio analysis involves studying various

relationships between different items reported in
a set of financial statements.
An analytical technique that typically involves a
comparison of the relationship between two
financial items.
 There are five ratios types as follows;

 Liquidity Ratios (Likidite Oranları)

Types of  Leverage Ratios (Kaldıraç Oranları)

Ratios  Activity Ratios (Faaliyet Oranları)

 Profitability Ratios (Kârlılık Oranları)

 Market Ratios (Pazar Oranları)

Types of Ratios
• Liquidity ratios indicate a company's ability to pay short-term debts.
They focus on current assets and current liabilities.
• Leverage (Solvency) ratios are used to analyze a company's long-term
debt-paying ability and its financing structure.
• Activity ratios measure the effectiveness of management's use of the
firm's resources.
• Profitability ratios measure a company's ability to generate earnings.
• Stock market ratios analyze the earnings and dividends of a company.
Types of Ratios
1. Liquidity Ratios
• The liquidity ratios are used to test the short-term liquidity position of
the company.
• It enables to know whether short-term liabilities can be paid out of
short-term assets.
• This ratio also indicates whether a firm has adequate working capital
to carry out routine business activity.
Types of Ratios
1. Liquidity Ratios
Liquidity ratios measure a company's ability to pay off its
short-term debt using assets that can be easily liquidated.

In this case, the current ratio measures a company's current

assets against its current liabilities.

Generally, higher numbers are better, implying that the firm

has a higher amount of current assets when compared to
current liabilities and should easily be able to pay off its short-
term debt.

These ratios measure ability to meet cash needs as they arise.

Types of Ratios
1. Liquidity Ratios

Liquidity Ratios: Short-Term Solvency include;

Current Ratio (Cari Oran)
Quick Ratio (Acid-Test Ratio) (Asit-Test Oranı)
Cash Ratio (Nakit Oran)
Types of Ratios
1. Liquidity Ratios
Current Ratio (Cari Oran)
Current ratio, also called as working capital ratio, is the most
widely used of all analytical devices based on the balance sheet.
It establishes the relationship between total current assets and
current liabilities.
It is the barometer of general measure of liquidity and state of
trading.
 Types of Ratios
1. Liquidity Ratios
 Current Ratio
Current ratio is the proportion of current assets to current liabilities. Commonly used measure of the ability of a firm to meet
its debt requirements as they come due
Limited by its components
Some analysts eliminate prepaid assets.

• Necessary to evaluate the trend of liquidity over a period of time and compare with industry competitors.
• The current ratio compares current assets with current liabilities.

 Current Ratio = Current Assets (Dönen Varlıklar) _

(Cari Oran) Current Liabilities (Kısa Vadeli Yabancı Kaynaklar)

 Desirable current ratio of 1.5 times is a good indicator of a company's position in Turkey.
(It is required to be over 1.5.)
 Types of Ratios
1. Liquidity Ratios
Quick Ratio (Acid-Test Ratio)
The quick ratio, also known as the acid test ratio, is a liquidity into that is more refined
and more stringent than the current ratio.
 Instead of using current assets in the numerator, the quick ratio uses a figure that
focuses on the most liquid assets.
The main asset left out is inventory, which can be hard to liquidate at market value in a
timely fashion.
The quick ratio is more conservative than the current ratio and focuses on cash, short-
term investments and accounts receivable.
It is a refinement of the current ratio and a second testing device for the working capital
position.
 Types of Ratios
1. Liquidity Ratios

Quick Ratio (Acid-Test Ratio)

The quick assets are defined as those assets which are quickly convertible into cash.
While calculating quick assets we exclude the closing stock and prepaid expenses from the current assets.
Because of exclusion of non-liquid current asset, it is considered better than current ratio as a meane of liquidity
position of business.
It is calculated to serve as a supplementary check on liquidity position of the and is therefore, also known as
acid-test ratio.

 Quick Ratio =Current Assets-Inventory-Prepaid Expenses (Dönen Varlıklar-Stoklar-Önceden Ödenmiş Giderler)

(Asit Test Oranı) Current Liabilities (Kısa Vadeli Yabancı Kaynaklar)
 Desirable quick ratio of 0.80 times is a good indicator of a company's position.
(It is required to be over 0.80.)
 Types of Ratios
1. Liquidity Ratios
Cash Ratio
The cash ratio is the most conservative of the three liquidity ratios covered
in this article.
As the name implies, this ratio is simply the ratio of cash and equivalents
compared to current liabilities.
This ratio looks only at assets that can be most easily used to pay off short-
term debt, and it disregards receivables and short-term investments.
The argument for using the cash ratio is that receivables and short-term
investments often cannot be liquidated in a timely manner.
 Types of Ratios
1. Liquidity Ratios

Cash Ratio
Receivables can be sold, or monetized, but the firm will not be able to get the full value of the receivables
sold.
Keep in mind that, due to their high liquidity, short-term treasuries are considered cash equivalents, not short-
term investments.
The formula for the cash ratio is as follows:

 Cash Ratio= Cash and Equivalents (Nakit ve Nakit Benzerleri)

(Nakit Oran) Current Liabilities (Kısa Vadeli Yabancı Kaynaklar)

 Desirable cash ratio of 0.20 times is a good indicator of a company's position.

(It is required to be over 0.20.)
 Types of Ratios
1. Liquidity Ratios
Example 1: Presented below are selected accounts of Whiteday Air Corporation
at December 31, 2021:
Net Sales (Net Satışlar) 148.000 Inventory (Stoklar) 37.500
Cost of goods sold (Satışların Maliyeti) 98.000 Property, plant and equipment (Fixed Asset) 41.500
(Duran Varlıklar)
Operating income (Faaliyet Gelirleri) 17.000 Current liabilities (Kısa Vadeli Yabancı Kaynaklar) 46.750
Profit for the period (Dönem Kârı) 19.000 Total assets (Toplam Varlıklar) 135.000
Net income (Net Kâr) 14.500 Shareholders’ equity (Özkaynaklar) 85.000
Account receivable (Alacak Hesapları) 25.000 Long-term liabilities (Uzun Vadeli Borçlar) 3.250
Cash and cash equivalent (Nakit ve Nakit Benzerleri) 28.000 Prepaid expenses (Önceden Ödenmiş Giderler) 3.000
Cash flow from operating activities 10.150 Interest Expenses (Faiz Giderleri) 20.000
(İşletme faaliyetlerinden kaynaklanan nakit akışı)
Debt repayment (Borç Geri Ödemesi) 1.500 Rent expenses (Kira Giderleri) 13.000
Capital expenditure (Sermaye Harcamaları) 14.000 Dividend paid (Ödenen Temettü) 4.500
 Types of Ratios
1. Liquidity Ratios
Solution of Example 1:
Current Ratio (Cari Oran) = Current Assets (Dönen Varlıklar)
Current Liabilities (Kısa Vadeli Yabancı Kaynaklar)
Current Ratio = 28.000+25.000+37.500+3.000 =93.500 = 2,0
46.750 46.750
Quick Ratio =Current Assets-Inventory-Prepaid Expenses (Dönen Varlıklar-Stoklar-Önceden Ödenmiş Giderler)
(Asit-Test Oranı) Current Liabilities (Kısa Vadeli Yabancı Kaynaklar)
Quick Ratio = 93.500-37.500-3.000 = 1,13
46.750
Cash Ratio= Cash and Equivalents (Nakit ve Nakit Benzerleri) =28.000 =0,60
(Nakit Oran) Current Liabilities (Kısa Vadeli Yabancı Kaynaklar) 46.750