Chapter 15 Financial Statement Analysis Financial and Managerial Accounting 8th Edition Warren Reeve...

Chapter Chapter 1515Financial Statement Financial Statement

AnalysisAnalysisFinancial and Managerial Accounting

8th Edition

Warren Reeve Fess

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1. List the basic financial statement analytical procedures.

2. Apply financial statement analysis to assess the solvency of a business.

3. Apply financial statement analysis to assess the profitability of a business.

4. Summarize the uses and limitations of analytical measures.

5. Describe the contents of corporate annual reports.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Horizontal AnalysisHorizontal AnalysisHorizontal AnalysisHorizontal Analysis

What is horizontal analysis?

What is horizontal analysis?

Horizontal AnalysisHorizontal AnalysisHorizontal AnalysisHorizontal Analysis

It’s an analysis of the percentage increases and decreases of

related items in comparative financial statements.

It’s an analysis of the percentage increases and decreases of

related items in comparative financial statements.

Lincoln CompanyComparative Balance SheetDecember 31, 2006 and 2005

AssetsCurrent assets $ 550,000 $ 533,000 $ 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 — Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred 6% stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5%Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)

2006 2005 Amount Percent

Balance SheetBalance SheetBalance SheetBalance SheetIncrease (Decrease)


Horizontal Analysis: Horizontal Analysis:


Difference $17,000

Base year (2005) $533,000= 3.2%

2006 2005 Amount PercentIncrease (Decrease)

AssetsCurrent assets $ 550,000 $ 533,000 $ 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 — Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5%Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)


Difference $(82,500)

Base year (2005) $177,500= (46.5%)





Difference ?

Base year (2005) ?= ?


2006 2005 Amount PercentIncrease (Decrease)Okay, go to the next slide

and calculate the percentage change for

fixed assets.

Okay, go to the next slide and calculate the

percentage change for fixed assets.



(5.4%)(5.4%)


Sales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8%Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%Operating income $ 160,000 $ 135,600 $ 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) $ 168,500 $ 146,600 $ 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income $ 91,000 $ 76,500 $ 14,500 19.0%

Lincoln CompanyComparative Income Statement

December 31, 2006 and 2005


Income StatementIncome StatementIncome StatementIncome Statement

Sales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%Operating income $ 160,000 $ 135,600 $ 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) $ 168,500 $ 146,600 $ 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income $ 91,000 $ 76,500 $ 14,500 19.0%

Horizontal Analysis:Horizontal Analysis:

Increase amount $296,500

Base year (2005) $1,234,000= 24.0%

24.0%




Sales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%Operating income $ 160,000 $ 135,600 $ 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) $ 168,500 $ 146,600 $ 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income $ 91,000 $ 76,500 $ 14,500 19.0%


Increase amount $298,000

Base year (2005) $1,200,000= 24.8%

24.8%




Vertical AnalysisVertical AnalysisVertical AnalysisVertical Analysis

A percentage analysis can be used to show the relationship of each component to a total

within a single statement.

A percentage analysis can be used to show the relationship of each component to a total

within a single statement.

The total, or 100% item, on the balance sheet is

“total assets.”

The total, or 100% item, on the balance sheet is

“total assets.”

Vertical AnalysisVertical AnalysisVertical AnalysisVertical Analysis

Lincoln CompanyComparative Balance Sheet

AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Property, plant, & equip. (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1

Total assets $1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3

Total liabilities $ 310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, 6%, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2

Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0% Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%

December 31, 2006 December 31, 2005 Amount Percent Amount Percent

Vertical Analysis: Vertical Analysis:

Current assets $550,000

Total assets $1,139,500= 48.3%

48.3%

Balance Balance SheetSheet

Balance Balance SheetSheet




Total liabilities $ 310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2



Current assets $533,000

Total assets $1,230,500= 43.3%

43.3%





Total liabilities $ 310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2



Sales $1,530,500 102.2% $1,234,000 102.8%Sales returns 32,500 2.2 34,000 2.8Net sales $1,498,000 100.0% $1,200,000 100.0%Cost of goods sold 1,043,000 69.6 820,000 68.3Gross profit $ 455,000 30.4% $ 380,000 31.7%Selling expenses $ 191,000 12.8% $ 147,000 12.3%Administrative expenses 104,000 6.9 97,400 8.1Total operating expenses $ 295,000 19.7% $ 244,400 20.4%Income from operations $ 160,000 10.7 $ 135,600 11.3%Other income 8,500 0.6 11,000 0.9 $ 168,500 11.3% $ 146,600 12.2%Other expense 6,000 0.4 12,000 1.0Income before income tax $ 162,500 10.9% $ 134,600 11.2%Income tax expense 71,500 4.8 58,100 4.8Net income $ 91,000 6.1% $ 76,500 6.4%

2006 2005 Amount Percent Amount Percent

Net sales Net sales is 100.0%is 100.0%Net sales Net sales is 100.0%is 100.0%


For the Years Ended December 31, 2006 and 2005Income Income

StatementStatementIncome Income

StatementStatement


For the Years Ended December 31, 2006 and 2005

Sales $1,530,500 102.2% $1,234,000 102.8%Sales returns 32,500 2.2 34,000 2.8Net sales $1,498,000 100.0% $1,200,000 100.0%Cost of goods sold 1,043,000 69.6 820,000 68.3Gross profit $ 455,000 30.4% $ 380,000 31.7%Selling expensesSelling expenses $ 191,000$ 191,000 12.8% $ 147,000 12.3%Administrative expenses 104,000 6.9 97,400 8.1Total operating expenses $ 295,000 19.7% $ 244,400 20.4%Income from operations $ 160,000 10.7 $ 135,600 11.3%Other income 8,500 0.6 11,000 0.9 $ 168,500 11.3% $ 146,600 12.2%Other expense 6,000 0.4 12,000 1.0Income before income tax $ 162,500 10.9% $ 134,600 11.2%Income tax expense 71,500 4.8 58,100 4.8Net income $ 91,000 6.1% $ 76,500 6.4%



Selling expenses $191,000

Net sales $1,498,000= 12.8%

12.8%

Sales $1,530,500 102.2% $1,234,000 102.8%Sales returns 32,500 2.2 34,000 2.8Net sales $1,498,000 100.0% $1,200,000 100.0%Cost of goods sold 1,043,000 69.6 820,000 68.3Gross profit $ 455,000 30.4% $ 380,000 31.7%Selling expenses $ 191,000 12.8% $ 147,000 12.3%Administrative expenses 104,000 6.9 97,400 8.1Total operating expenses $ 295,000 19.7% $ 244,400 20.4%Income from operations $ 160,000 10.7 $ 135,600 11.3%Other income 8,500 0.6 11,000 0.9 $ 168,500 11.3% $ 146,600 12.2%Other expense 6,000 0.4 12,000 1.0Income before income tax $ 162,500 10.9% $ 134,600 11.2%Income tax expense 71,500 4.8 58,100 4.8Net income $ 91,000 6.1% $ 76,500 6.4%



For the Years Ended December 31, 2006 and 2005

Common Size StatementsCommon Size StatementsCommon Size StatementsCommon Size Statements

Vertical analysis with both dollar and percentage amounts is also useful in

comparing one company with another or with industry averages. Such

comparisons are easier to make with the use of common-size statements in

which all items are expressed in percentages.

Vertical analysis with both dollar and percentage amounts is also useful in

comparing one company with another or with industry averages. Such

comparisons are easier to make with the use of common-size statements in

which all items are expressed in percentages.

Common-Size Income StatementCommon-Size Income StatementCommon-Size Income StatementCommon-Size Income Statement

Solvency AnalysisSolvency AnalysisSolvency AnalysisSolvency Analysis Solvency is the ability of a business to meet

its financial obligations (debts) as they are due.

Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.

This ability is normally assessed by examining balance sheet relationships.

Current Position AnalysisCurrent Position Analysis

Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capital $340,000 $290,000

Current ratioCurrent ratio 2.6 2.6 2.2 2.2

Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio

Use: To indicate the ability to meet currently maturing obligations.

Use: To indicate the ability to meet currently maturing obligations.

2006 2005

Divide current

assets by current

liabilities

Divide current

assets by current

liabilities

Quick RatioQuick RatioQuick RatioQuick Ratio

Use: To indicate instant debt-paying ability.Use: To indicate instant debt-paying ability.

2006 2005Quick assets:

Cash $ 90,500 $ 64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total $280,500 $244,700

Current liabilities $210,000 $243,000Quick ratioQuick ratio 1.3 1.3 1.0 1.0

Current Position AnalysisCurrent Position Analysis

Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover

Net sales on account $1,498,000 $1,200,000Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000

Average (Total ÷ 2) $ 117,500 $ 130,000

2006 2005

Accounts Receivable AnalysisAccounts Receivable Analysis

Net sales on accountAverage accounts

receivable

Net sales on accountAverage accounts

receivable

Use: To assess the efficiency in collecting receivables and in the management of credit.


Net sales on account $1,498,000 $1,200,000Accounts receivable (net):


Average $ 117,500 $ 130,000

Accounts receivable turnoverAccounts receivable turnover 12.7 12.7 9.2 9.2

2006 2005


Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover

Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables

Accounts receivable (net),end of year $ 115,000 $ 120,000

Net sales on account $1,498,000 $1,200,000Average daily sales on

account (sales ÷ 365) $ 4,104 $ 3,288

2006 2005


Accounts receivable, end of year

Average daily sales on account

Accounts receivable, end of year

Average daily sales on account

Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables



Number of days’ sales inNumber of days’ sales in receivables 28.0 36.5receivables 28.0 36.5

Accounts receivable (net),end of year $ 115,000 $ 120,000

Net sales on account $1,498,000 $1,200,000Average daily sales on

account (sales ÷ 365) $ 4,104 $ 3,288

2006 2005


Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover2006 2005

Cost of goods sold $1,043,000 $ 820,000Inventories:


Average (Total ÷ 2) $ 273,500 $ 297,000

Inventory AnalysisInventory Analysis

Cost of goods sold

Average inventory

Cost of goods sold

Average inventoryInventory turnover =

Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover

Use: To assess the efficiency in the management of inventory.


2006 2005Cost of goods sold $1,043,000 $ 820,000Inventories:


Average (Total ÷ 2) $ 273,500 $ 297,000

Inventory turnoverInventory turnover 3.8 3.8 2.8 2.8


Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory

2006 2005Inventories, end of year $ 264,000 $283,000Cost of goods sold $1,043,000 $820,000Average daily cost of

goods sold (COGS ÷ 365) $ 2,858 $ 2,247


Inventories, end of year

Average daily cost of goods sold

Inventories, end of year

Average daily cost of goods sold

Number of Days’ Sales in Inventory

=

Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory



Inventories, end of year $ 264,000 $283,000Cost of goods sold $1,043,000 $820,000Average daily cost of

goods sold (COGS ÷ 365) $ 2,858 $ 2,247

Number of days’ sales Number of days’ sales

in inventoryin inventory 92.4 92.4 125.9 125.9


2006 2005

Use: To indicate the margin of safety to long-term creditors.

Use: To indicate the margin of safety to long-term creditors.

2006 2005

Fixed assets (net) $444,500 $470,000Long-term liabilities $100,000 $200,000

Ratio of fixed assets toRatio of fixed assets to

long-term liabilitieslong-term liabilities 4.4 4.4 2.4 2.4

Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities

Long-Term CreditorsLong-Term Creditors

Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity

Use: To indicate the margin of safety to creditors.

Use: To indicate the margin of safety to creditors.

Total liabilities $310,000 $443,000Total stockholders’ equity $829,500 $787,500Ratio of liabilities toRatio of liabilities to

stockholders’ equitystockholders’ equity 0.37 0.37 0.56 0.56


2006 2005

Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned

2006 2005

Income before income tax $ 900,000 $ 800,000Add interest expense 300,000 250,000Amount available for interest $1,200,000 $1,050,000


Income beforeincome tax + interest expense

Interest expense

Income beforeincome tax + interest expense

Interest expense

Number of Times Interest

Charges Earned=

Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned

Use: To assess the risk to debtholders in terms of number of times interest charges were earned.

Use: To assess the risk to debtholders in terms of number of times interest charges were earned.

2006 2005

Income before income tax $ 900,000 $ 800,000Add interest expense 300,000 250,000Amount available for interest $1,200,000 $1,050,000

Number of times earnedNumber of times earned 4.0 4.0 4.2 4.2


Profitability AnalysisProfitability AnalysisProfitability AnalysisProfitability Analysis

Profitability is the ability of an entity to earn profits.

This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.

Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets2006 2005

Net sales $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average (Total ÷ 2) $1,048,750 $1,031,500

The Common StockholderThe Common Stockholder

Excludes long-term investmentsExcludes long-term investments


Use: To assess the effectiveness of the use of assets.

Use: To assess the effectiveness of the use of assets.

Ratio of net sales to assets 1.4 1.2Ratio of net sales to assets 1.4 1.2

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets2006 2005

Net sales $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average (Total ÷ 2) $1,048,750 $1,031,500

Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets

Use: To assess the profitability of the assets.Use: To assess the profitability of the assets.

2006 2005

Rate earned on total assets 8.2% 7.3%Rate earned on total assets 8.2% 7.3%

Net income $ 91,000 $ 76,500Plus interest expense 6,000 12,000

Total $ 97,000 $ 88,500Total assets:

Beginning of year $1,230,500 $1,187,500End of year 1,139,500 1,230,500Total $2,370,000 $2,418,000Average (Total ÷ 2) $1,185,000 $1,209,000


Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity

Use: To assess the profitability of the investment by stockholders.

Use: To assess the profitability of the investment by stockholders.

Rate earned on stockholders’Rate earned on stockholders’equity 11.3% 10.0% equity 11.3% 10.0%

Net income $ 91,000 $ 76,500Stockholders’ equity:

Beginning of year $ 787,500 $ 750,000End of year 829,500 787,500Total $1,617,000 $1,537,500Average (Total ÷ 2) $ 808,500 $ 768,750

2006 2005


Leverage10%

5%

0%

Rate earned on total assets

Rate earned on stockholders’ equity

8.2%

11.3%

Leverage 3.1%

2006

7.3%

10.0%Leverage

2.7%

2005

Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity

2006 2005


Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Common stockholders’ equity:

Beginning of year $ 637,500 $ 600,000End of year 679,500 637,500Total $1,317,000 $1,237,500Average (Total ÷ 2) $ 658,500 $ 618,750

Use: To assess the profitability of the investment by common stockholders.


2006 2005

Rate earned on commonRate earned on common stockholders’ equity 12.5% 10.9%stockholders’ equity 12.5% 10.9%

Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000$ 82,000 $ 67,500$ 67,500Common stockholders’ equity:

Beginning of year $ 637,500 $ 600,000End of year 679,500 637,500Total $1,317,000 $1,237,500Average (Total ÷ 2) $ 658,500$ 658,500 $ 618,750 $ 618,750

The Common StockholderThe Common StockholderRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity

Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock

2006 2005

Earnings per share on common stock $1.64 $1.35Earnings per share on common stock $1.64 $1.35

Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Shares of common stock 50,000 50,000




Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio

Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.

Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.

2006 2005

Price-earnings ratio on common stock 25 20Price-earnings ratio on common stock 25 20

Market price per share of common $41.00 $27.00Earnings per share on common ÷ 1.64 ÷ 1.35


Dividends and Earnings Per Share

Dividends Earnings

$0.80

$1.64

2006

$0.60

$1.35

2005

Per share

$2.00$2.00

$1.50$1.50

$1.00$1.00

$0.50$0.50

$0.00

Dividend Yield on Common StockDividend Yield on Common StockDividend Yield on Common StockDividend Yield on Common Stock

Use: To indicate the rate of return to common stockholders in terms of dividends.

Use: To indicate the rate of return to common stockholders in terms of dividends.

2006 2005

Dividend yield on common stock 1.95% 2.22% Dividend yield on common stock 1.95% 2.22%

Dividends per share of common $ 0.80 $ 0.60Market price per share of common ÷ 41.00 ÷ 27.00


Corporate Annual ReportsCorporate Annual ReportsCorporate Annual ReportsCorporate Annual Reports

In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report.

The MDA includes an analysis of the results of operations and discusses management’s

opinion about future performance. It compares the prior year’s income statement with the current year’s. It also contains an analysis of the firm’s financial condition.

Corporate Annual ReportsCorporate Annual ReportsCorporate Annual ReportsCorporate Annual Reports

In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report.

Before issuing annual statements, all publicly held corporations are required to have an independent audit of their financial statements. The CPAs who conduct the audit render an opinion as

to the fairness of the statements.

The EndThe End

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