Copyright © 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Financial Statement Financial Statement AnalysisAnalysis

Chapter 14

14-2

Resultsin standardized,

m eaningfulsubtotals.

Item s w ith certaincharacteristics aregrouped together.

C lass ifiedF in an c ial

S ta tem en ts

Helps identifysignificant

changes andtrends.

Am ounts fromseveral years

appear side by side.

C o m p ara tiveF in an c ial

S ta tem en ts

Presented as ifthe two companies

are a singlebusiness unit.

Inform ation for theparent and subsidiary

are presented.

C o nso lida tedF in an c ial

S ta tem en ts

Financial Statements Are Financial Statements Are Designed for AnalysisDesigned for Analysis

14-3

Dollar & Percentage

Changes

Trend Percentages

Component Percentages Ratios

Tools of AnalysisTools of Analysis

14-4

Dollar and Percentage Dollar and Percentage ChangesChanges

Dollar Change:

Analysis Period Amount

Base PeriodAmount

DollarChange = –

Percentage Change:

Dollar Change Base PeriodAmount

PercentChange = ÷

14-5

Dollar and Percentage Dollar and Percentage ChangesChanges

Sales and earningsshould increase at

more than the rateof inflation.

In measuring quarterlychanges, compare tothe same quarter inthe previous year.

Percentages may bemisleading when the

base amount is small.

Evaluating Percentage Changes in Sales and Earnings

14-6

Trend PercentagesTrend Percentages

Trend analysis is used to reveal patterns in data covering successive periods.

Trend analysis is used to reveal patterns in data covering successive periods.

TrendPercentages

Analysis Period Amount Base Period Amount

100%= ×

14-7

Component PercentagesComponent PercentagesExamine the relative size of each item in the financial statements by computing component

(or common-sized) percentages.

Component Percentage

100%Analysis Amount

Base Amount= ×

Financial Statement Base Amount

Balance Sheet Total Assets

Income Statement Revenues

Financial Statement Base Amount

Balance Sheet Total Assets

Income Statement Revenues

14-8

Quality of EarningsQuality of Earnings

Investors are interest in companies that demonstrate an ability to earn income at a

growing rate each year. Stability of earnings growth helps investors predict future prospects

for the company.

Investors are interest in companies that demonstrate an ability to earn income at a

growing rate each year. Stability of earnings growth helps investors predict future prospects

for the company.

Financial analyst often speak of the “quality of earnings” at one company being higher than

another company in the same industry.

Financial analyst often speak of the “quality of earnings” at one company being higher than

another company in the same industry.

14-9

Quality of Assets and the Quality of Assets and the Relative Amount of DebtRelative Amount of Debt

While satisfactory earnings may be a good indicator of a company’s ability to

pay its debts and dividends, we must also consider the composition of assets, their

condition and liquidity, the timing of repayment of liabilities, and the total

amount of debt outstanding

While satisfactory earnings may be a good indicator of a company’s ability to

pay its debts and dividends, we must also consider the composition of assets, their

condition and liquidity, the timing of repayment of liabilities, and the total

amount of debt outstanding

14-10

Past performance topresent perform ance.

O ther com panies toyour com pany.

Along w ith dollar and percentage changes,trend percentages, and com ponent percentages,

ratios can be used to compare:

A ratio is a sim ple m athematical expressionof the relationship betw een one item and another.

RatiosRatios

14-11

Operating CycleOperating Cycle

Cash

InventoryAccounts

Receivable

1. Purchase of Merchandise

2. Sale of merchandise on account

3. C

olle

ctio

n of

acco

unts

rece

ivabl

e

14-12

End of Chapter 14End of Chapter 14