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23-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Transcript of 23-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 1: 23-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

23-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Financial Statement AnalysisFinancial Statement Analysis

Section 1: Vertical Analysis

Chapter

23

Section Objectives

1. Use vertical analysis techniques to analyze a comparative income statement and balance sheet.

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Phases of Statement Analysis

1. Computation Phase: Vertical analysis

Horizontal analysis

Ratio analysis

2. Interpretation Phase: Comparison of ratios

Budgeted ratios

Industry Averages

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Comparative Statement

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Common-size Statement

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Each item is expressed as either a percentage of total assets or of total liabilities plus stockholders’ equity.

Vertical Analysis of the Balance Sheet

CashTotal assets =

$115,231$555,711

= 20.7%

Accounts payable Total liabilities plus Stkhldrs’ equity

=$ 71,000$ 555,711

= 12.8%

Total stockholders’ equityTotal liabilities plus Stkhldrs’ equity

= $316,306$ 555,711

= 56.9%

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23-7

Financial Statement AnalysisFinancial Statement Analysis

Section 2: Horizontal Analysis

Chapter

23

Section Objectives2. Use horizontal analysis techniques to analyze

a comparative income statement and balance sheet.

3. Use trend analysis to evaluate financial statements.

4. Interpret the results of statement analyses by comparison with industry averages.

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Evaluates financial statements for two or more periods.

Compares items in each line to determine the change in dollar amounts.

Uses the same method for both the income statement and the balance sheet.

Horizontal Analysis

A percentage change can be shown by using the earlier figure as the base

Use horizontal analysis techniques to analyze a comparative income statement and balance sheet

Objective 2

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Trend analysis compares selected ratios and percentages over a period of time.

ANSWER:

QUESTION:

What is trend analysis?

Often the time period is five years

Use trend analysis to evaluate financial statementsObjective 3

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Trend Analysis

The percentage of gross profit on sales to net sales decreased from 41.7 percent in 2012 to 41.0 percent in 2013.

2009 2010 2011 2012 2013

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Using Industry Averages Trade associations survey their members to obtain

financial information and other data.

Data is converted to a uniform presentation, usually in common-size statements arranged by company size.

Individual companies compare their results to industry averages.

Interpret the results of the statement analyses by comparison with industry averages

Objective 4

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Financial Statement AnalysisFinancial Statement Analysis

Section 3: Ratios

Chapter

23

Section Objectives5. Compute and interpret financial ratios that measure

profitability, operating results, and efficiency.

6. Compute and interpret financial ratios that measure financial strength.

7. Compute and interpret financial ratios that measure liquidity

8. Recognize shortcomings in financial statement analysis.

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Ratio Analysis

Financial ratios have three classifications:

1. Profitability, operating results, and efficiency

2. Financial strength

3. Liquidity

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Rate of return on sales. Rate of return on common stockholders’ equity. Earnings per share of common stock (EPS). Price-earnings ratio. Yield on common stock. Rate of return on total assets. Asset turnover.

Ratios Measuring Profitability, Operating Results, and Efficiency

Compute and interpret financial ratios that measure profitability, operating results, and efficiency

Objective 5

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Number of times bond interest earned.

Ratio of stockholders’ equity to total equities.

Ratio of stockholders’ equity to total liabilities.

Book value per share of stock.

Ratios Measuring Financial StrengthRatios Measuring Financial Strength

Compute and interpret financial ratios that measure financial strength

Objective 6

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Working capital

Current ratio

Acid-test ratio

Inventory turnover

Accounts receivable turnover

Ratios Measuring LiquidityRatios Measuring Liquidity

Compute and interpret financial ratios that measure liquidityObjective 7

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Financial statements use book values. Book value depends on accounting policies and procedures. Businesses have choices about certain things, such as

depreciation methods and useful lives. Financial statements assume that the dollar is a stable monetary unit. No two companies are exactly the same:

Different legal entities Different product mixes Different financing methods

Precautionary Notes on Statement AnalysisPrecautionary Notes on Statement Analysis

Financial statement analysis is useful only if these limitations are understood

Recognize shortcomings in financial statement analysisObjective 8


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