CHAPTER CHAPTER 1313

PowerPoint Author:LuAnn Bean, Ph.D., CPA, CIA, CFE

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Factors in Communicating Factors in Communicating Useful InformationUseful Information

The primary objective of accounting is to provide information useful for decision making. To provide

information that supports this objective, accountants must consider the following:

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Methods of AnalysisMethods of Analysis

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Milavec Company Milavec Company Financial StatementsFinancial Statements

2015 2014

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Milavec Company Balance SheetsMilavec Company Balance Sheets

2015 2014

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Horizontal and Horizontal and Percentage AnalysisPercentage Analysis

Horizontal analysis (or trend analysis) refers to studying the behavior of

individual financial statement items over several accounting periods.

Absolute Amounts

Percentage Analysis

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Milavec Company Milavec Company Horizontal AnalysisHorizontal Analysis

2015 2014

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Vertical AnalysisVertical Analysis

Vertical analysis Vertical analysis uses percentages to compare

individual components of financial statements to a key statement figure. A common-common-sizesize financial statement is a vertical analysis in which

each financial statement item is expressed as a

percentage.

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Vertical Analysis of Vertical Analysis of Income StatementIncome Statement

In income statements, all

items are usually

expressed as a percentage of

sales.

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Milavec Company Milavec Company Vertical AnalysisVertical Analysis

2015 2014

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Vertical Analysis of Vertical Analysis of Balance SheetBalance Sheet

In balance sheets, all items

are usually expressed as a percentage of total assets.

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2014 2015

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Liquidity RatiosLiquidity RatiosLiquidity ratios indicate a

company’s ability to pay short-term debts. They focus on current assets and current

liabilities.

1. Working Capital

2. Current Ratio

3. Quick Ratio

4. Accounts Receivable Ratios

5. Inventory Ratios

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Solvency RatiosSolvency Ratios

Solvency ratios are used to analyze a company’s long-term debt-

paying ability and its financing structure.

1. Debt to Assets Ratio

2. Debt to Equity Ratio

3. Number of Times Interest Earned

4. Plant Assets to Long-Term Liabilities

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Profitability RatiosProfitability Ratios

Profitability ratios measure a company’s ability to generate

earnings.

1. Net Margin (or Return on Sales)

2. Asset Turnover Ratio

3. Return on Investment

4. Return on Equity

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Stock Market RatiosStock Market Ratios

Stock market ratios analyze the earnings and dividends of a

company.

1. Earnings Per Share

2. Book Value

3. Price-Earnings (PE) Ratio

4. Dividend Yield

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Limitations of Financial Limitations of Financial Statement AnalysisStatement Analysis

Different Industries

Changing Economic

Environment

Accounting Principles

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End of Chapter 13End of Chapter 13