Financial statements II by Jimmy Gentry

Accounting II: Tools for Analysis
Strictly Financials
Jan. 3, 2012

Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
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James K. Gentry, Ph.D.
Clyde M. Reed Teaching Professor
School of Journalism and Mass Communications
University of Kansas
[email_address]
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Common Size Analysis
A technique that turns all financial statement entries into percentage of revenue
Then can look at percentage change and percentage point change
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Why Common Size
Identify trends
Identify what causes changes in totals on financial statements
Easier to compare percentages than raw numbers
Easier to compare companies
Easier to compare company with industry averages
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Doing Common Size
For IS, divide Revenue into all entries.
For BS, divide each total category into its category items. For example, divide Total Assets into each category of assets.
For CF, divide each total category into its category items.
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Comparable Statements
Often have to restructure Income Statement to the In-the-Box format we have studied
Typical problems come from items we would consider Other Income/Expenses
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Trends in Margins
How have Cost of Goods Sold (CGS) and Sales, General and Administrative (SGA) changed?
What does that mean for Gross Profit Margin and Operating Profit Margin?
How does Net Profit Margin move?
Importance of using Basis Points
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Common Size, Ratios
These techniques let you drill below the surface and start developing a more complete picture of the company’s performance
Strengths
Weaknesses
Strategic effectiveness of the firm
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Financial statements II by Jimmy Gentry

by Reynolds Center for Business Journalism

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