ࡱ> ac` &bjbj 4Tuuz+DD8,"4t ###"43333333$5883 ""  3##3@@@ F##3@ 3@@ 0u2#̊|f^0330"408|84u28u2  @     33@   "4    8         D M: ACCT 102 - Professor Farina Lecture Notes Chapter 13: ANALYZING FINANCIAL STATEMENTS BASICS OF ANALYSIS Purpose of Analysis Who analyzes financial statements? Internal users, such as management, internal auditors, and consultants use financial statement analysis to improve company efficiency and effectiveness in providing products and services. External users, such as stockbrokers and lenders, to make better and more informed investing and lending decisions. Others, such as suppliers, to establish credit terms, or analyst services such as Standard & Poors, in making buy-sell ratings on stocks and in setting credit ratings. Information for Analysis External users rely on the financial statements (the income statement, balance sheet, statement of retained earnings, statement cash flows, and the notes to the financial statements), for the data needed to perform financial analyses. Internal users receive special reports not available to those outside the company. Standards for Comparison Data derived from financial analysis is not useful unless compared to a benchmark. Common benchmarks are: Intracompany: Comparing data from the current year to the prior years for the company analyzed can indicate useful trends in performance. Industry: Comparing financial analysis data from a company to its industry average lets us know how a company compares to its competitors. Competitor: Comparing a companys financial data to one of its competitors is especially useful in making investing decisions. Analysis Tools The three most common financial statement analysis tools are: Horizontal analysis Vertical analysis Ratio analysis Horizontal analysis Horizontal analysis compares changes in accounts across time. For example, assume Company A had the following data available: 2019 2018 Net sales $110,000 $100,000 Cost of goods sold 60,000 51,000 Gross profit 50,000 49,000 A horizontal analysis for this data would be: Dollar Percent 2019 2018 Change Change Net sales $110,000 $100,000 $10,000 10.0% (1) Cost of goods sold 60,000 51,000 9,000 17.6% Gross profit 50,000 49,000 1,000 2.0% The percent change is calculated as: Dollar change / older period amount = Percent change. ($10,000 / $100,000 = 10%.) What does this tell us? Even though sales increased by 10% from 2018 to 2019, gross profit only increased by 2%. Why? We dont know; financial analysis doesnt give us answers to questions, but does highlight questions we would direct to management. A type of horizontal analysis which may also be performed is called trend analysis, or trend percents. Using 2018 as the base year, the trend percentages for the example above would be: 2019 2018 Net sales 110% 100% Cost of goods sold 118% 100% Gross profit 102% 100% This analysis tell us that net sales increased by 10%, but gross profit only by 2%. Here is a guided example illustrating the use of common size comparisons. HYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1307/ex1307.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1307/ex1307.html The following guided example focuses on computing trend percentages. HYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1303/ex1303.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1303/ex1303.html Vertical analysis Vertical analysis expresses each financial statement as a dollar amount and a percentage. The percentage is calculated on a base amount. For a balance sheet vertical analysis, the base amount is usually total assets. For an income statement vertical analysis, the base amount is usually revenues. Using the above example, a vertical analysis would be: Common-Size Percents 2019 2018 2019 2018 Net sales $110,000 $100,000 100.0% 100.0% Cost of goods sold 60,000 51,000 54.5% 51.0% Gross profit 50,000 49,000 45.5% 49.0% The common-size percents for cost of goods sold are calculated as follows: 2019: $60,000 / $110,000 =54.5% 2018: $51,000 / $100,000 = 51.0% What does this tell us? Even though sales increased, gross profit, as a percentage of net sales decreased. Why? If you were a bank loan officer, and Company A was applying for a loan, this would be a good question to ask Company As chief financial officer. Ratio Analysis Several ratios were covered in ACCT 101. This chapter organizes and applies them in a summary framework. A ratio is simply a mathematical relationship between two or more items in the financial statements. Usually, their calculation involves division. The ratio result may be expressed as a percentage or a number, depending on the ratio. There is a summary of ratios, and their formulas, may be found in Exhibit 13.16. We will be working exercises and problems in class to review how these ratios are calculated and used. These ratios are included in four different areas, which are summarized as follows: NameDescriptionRatios includedLiquidity and Efficiency RatiosLiquidity refers to the amount of assets available to meet short-term cash requirements. Efficiency ratios measure the productivity of a company in using its assets to generate revenue or cash flow.Current ratio; acid-test ratio; Accounts receivable turnover; Inventory turnover; Days sales uncollected; Days sales in inventory; and Total asset turnover.Solvency RatiosSolvency is the companys ability to cover long-term debt obligations over the long run.Debt ratio; Equity ratio; Debt-to-equity ratio; and Times interest earned.Profitability RatiosThese ratios measure the companys ability to use its assets to produce profits and positive cash flows.Profit margin ratio; Gross margin ratio; Return on total assets; Return on common stockholders equity; Book value per common share; and Basic earnings per share.Market Prospects RatiosUsed primarily by stock analysts of publicly-traded companies, these ratios are used to measure investors expectations for the company based on prior periods results of operations.Price-earnings ratio and Dividend yield. We need to understand that ratio computations are worthless unless compared to the companys industry average; prior historical results; or directly to a competitors ratios. Below are several guided examples for many of these ratios. Name of ratioGuided example linkCurrent and acid-test HYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1308/ex1308.html" http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1308/ex1308.htmlA/R and Inventory Turnover; days sales in A/R and in InventoryHYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1309/ex1309.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1309/ex1309.html Debt and Equity; Debt to Equity; Times Interest EarnedHYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1310/ex1310.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1310/ex1310.html Profit Margin Ratio; Total Asset Turnover; Return on Total AssetsHYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1311/ex1311.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1311/ex1311.html Return on Common Stockholders Equity and the Price-Earnings RatioHYPERLINK "http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1312/ex1312.html"http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1312/ex1312.html       PAGE \* MERGEFORMAT 1 $)5Vbjklw| } z :;q  ()18TV\]_`ǿ߻hLhL>*hLh^$>*hL hD>*h^$h^$>*hu,h^$h^$6h^$h^$hrq5h^$h^$5hrqh~[h~[5hsh~[ h~[5hNMht ht5 hs5 hVG58WXkl_ | } X n ;O & Fgd^$gdrq & Fgd~[gd~[^gdNM & FgdtgdtgdsOapq>f6w"#gdkyn & F gdDgdu,gdJgd^$ & Fgd^$`aefyz15NTWXY]ijklpquwegnoh淯ϯǧˣˣ hSH>*h^$hSH>*hSHhLhu,5hDha>*hDhu,>*hLhu,>*hkynhD hu,hu,hJhLh^$5hahu,hLh^$hLhL>* ha>*:'CDgdgdkyngdSH "&BCDE?@CKLMRT`bcfgvxyǿhDh0>*hDh\|>* hDh0hLh0>*h\|hD hu,h0hkynh0h0hkyn6h0h06hJ(h0Jhwih0JjhUhhLhSH5hSH hSHhSH6?y,-.yz78"#/0123gd0gdkyn$&+,-.}~/89:>?JK[ d!e!r!!!I"J"K""""""">#?#######+$,$~$$$$$$$#%$%v%w%ȤȤh hn60Jjhn6Uh h0JjXhUjhUhn6h*?h76h7hy- hy-6hy-hy-6 h\|h\|hDhh\|h0=3456789:?K[\ckd$$IflF ,"   t06    44 layt*? $Ifgdkyngdkyn \|CLh_ $Ifgd7kd$$IflF ,"   t06    44 layt*? $Ifgdkynqhhh $Ifgdkynkd$$IflF ,"   t06    44 layt*? qhhh $Ifgdkynkd$$IflF ,"   t06    44 layt*? d!e!f!g!h!i!j!k!l!m!qlllllllllllgdkynkd4$$IflF ,"   t06    44 layt*? m!n!o!p!q!r!!!!!$$Ifa$gd l $Ifgdkynl gdkyn !!!"oo$Ifgdkynl }kd$$Ifl^0 (` 8 t0644 layt """##q^q$Ifgdl $Ifgdkynl {kd$$Ifl0 (` 8 t0644 layt ###$$q^q$Ifgdn6l $Ifgdkynl {kd$$Ifl0 (` 8 t0644 layt $$$x%y%q^q$Ifgdn6l $Ifgdkynl {kd$$Ifl0 (` 8 t0644 layt w%x%z%%%%&&o&p&q&y&z&{&}&~&&&&&&&&&&&&&&&̿Ȼh*hn6mHnHuh?jh?Uh jh U hy-hUh hn60Jjhn6Uhhn6y%z%%q&r&qq^$Ifgdkynl $Ifgdn6l {kd@$$Ifl0 (` 8 t0644 layt r&s&t&u&v&w&x&y&z&|&}&&&&zxzxzgdPgdkyn{kd$$Ifl0 (` 8 t0644 layt &&&&&&&&&gdkyn$a$gdP21h:p/ =!"#$% $$If!vh5 5 5 #v :V l t065 yt*?$$If!vh5 5 5 #v :V l t065 yt*?$$If!vh5 5 5 #v :V l t065 yt*?$$If!vh5 5 5 #v :V l t065 yt*?$$If!vh5 5 5 #v :V l t065 yt*?$$If!vh55h"#v#vh":V l^ t065` 58yt /DyK yK http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1308/ex1308.htmlyX;H,]ą'c$$If!vh55h"#v#vh":V l t065` 58yt $$If!vh55h"#v#vh":V l t065` 58yt $$If!vh55h"#v#vh":V l t065` 58yt $$If!vh55h"#v#vh":V l t065` 58yt $$If!vh55h"#v#vh":V l t065` 58yt ^ 666666666vvvvvvvvv666666>6666666666666666666666666666666666666666666666666hH6666666666666666666666666666666666666666666666666666666666666666662 0@P`p2( 0@P`p 0@P`p 0@P`p 0@P`p 0@P`p 0@P`p8XV~_HmH nH sH tH @`@ NormalCJ_HaJmH sH tH DA`D Default Paragraph FontRi@R 0 Table Normal4 l4a (k ( 0No List 4@4 P0Header H$66 P0 Header CharCJaJ4 @4 P0Footer H$6!6 P0 Footer CharCJaJj@3j A Table Grid7:V06U`A6 0 Hyperlink >*B*phFVQF 0FollowedHyperlink >*B*phPK![Content_Types].xmlj0Eжr(΢Iw},-j4 wP-t#bΙ{UTU^hd}㨫)*1P' ^W0)T9<l#$yi};~@(Hu* Dנz/0ǰ $ X3aZ,D0j~3߶b~i>3\`?/[G\!-Rk.sԻ..a濭?PK!֧6 _rels/.relsj0 }Q%v/C/}(h"O = C?hv=Ʌ%[xp{۵_Pѣ<1H0ORBdJE4b$q_6LR7`0̞O,En7Lib/SeеPK!kytheme/theme/themeManager.xml M @}w7c(EbˮCAǠҟ7՛K Y, e.|,H,lxɴIsQ}#Ր ֵ+!,^$j=GW)E+& 8PK!Ptheme/theme/theme1.xmlYOo6w toc'vuر-MniP@I}úama[إ4:lЯGRX^6؊>$ !)O^rC$y@/yH*񄴽)޵߻UDb`}"qۋJחX^)I`nEp)liV[]1M<OP6r=zgbIguSebORD۫qu gZo~ٺlAplxpT0+[}`jzAV2Fi@qv֬5\|ʜ̭NleXdsjcs7f W+Ն7`g ȘJj|h(KD- dXiJ؇(x$( :;˹! 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