Analysis of Financial Statements Topic 7
Analytical Objectives <ul><li>Horizontal Analysis </li></ul><ul><li>Common-Size Financial Statements </li></ul><ul><li>Rat...
Framework for Financial Statement Analysis <ul><li>Horizontal Analysis (Trend Analysis):  </li></ul><ul><li>Analysis of a ...
Change since  Current year amount – Base year amount base period =  Base year amount Current results  Current year amount ...
1997   1996  1995  1994  1993  $41,296  $38,064  $34,835  $33,110  $30,518 135%  125%  114%  108%  100% SEARS, ROEBUCK AND...
<ul><li>Common-Size Financial Statements (Vertical Analysis) : Analysis of a company’s single-year financial statements.  ...
Common-Size Income Statement <ul><li>Remember  that for Common-Size Income Statements, the denominator -- the entire pie -...
<ul><li>Condensed Comparative Income Statement </li></ul><ul><li>19X1 Percent 19X0 Percent </li></ul><ul><li>Net sales $5,...
Common-Size Balance Sheet <ul><li>Remember  that for Common-Size Balance Sheets, the denominator  -- the entire pie --  is...
<ul><li>Condensed Comparative Balance Sheet </li></ul><ul><li>19X1 % 19X0 % </li></ul><ul><li>Cash $  200 4.76 $  300 7.14...
<ul><li>Ratio Analysis : Analysis of a company’s financial statements by computing ratios and comparing them against both ...
LIMITATIONS OF FINANCIAL ANALYSIS <ul><li>ESTIMATES:  F/S CONTAIN ESTIMATES (EX. DEPR. EXP.) IF THESE ARE INACCURATE, RATI...
Ratio Analysis <ul><li>Liquidity ratios </li></ul><ul><ul><li>Current Ratio  </li></ul></ul><ul><ul><li>Quick Ratio </li><...
Ratio Analysis <ul><li>Profitability ratios </li></ul><ul><ul><li>Profit Margin </li></ul></ul><ul><ul><li>Assets Turnover...
<ul><li>Long-term solvency ratios </li></ul><ul><ul><li>Debt-Equity ratio </li></ul></ul><ul><ul><li>Interest Coverage Rat...
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Analysis of Financial Statements Topic 7

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  • Analysis of Financial Statements Topic 7

    1. 1. Analysis of Financial Statements Topic 7
    2. 2. Analytical Objectives <ul><li>Horizontal Analysis </li></ul><ul><li>Common-Size Financial Statements </li></ul><ul><li>Ratio Analysis </li></ul>Financial Statement Analysis is the examination of both the relationships among financial statement numbers and the trends of those numbers over time. Major Tools Include
    3. 3. Framework for Financial Statement Analysis <ul><li>Horizontal Analysis (Trend Analysis): </li></ul><ul><li>Analysis of a company’s a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place , expressed as either an amount or percentage. It is used primarily in intracompany comparisons. </li></ul>
    4. 4. Change since Current year amount – Base year amount base period = Base year amount Current results Current year amount in relation to = base period Base year amount 1997 1996 1995 1994 1993 $41,296 $38,064 $34,835 $33,110 $30,518 SEARS, ROEBUCK AND CO. Net sales (in million)
    5. 5. 1997 1996 1995 1994 1993 $41,296 $38,064 $34,835 $33,110 $30,518 135% 125% 114% 108% 100% SEARS, ROEBUCK AND CO. Net sales (in million) in relation to base period 1993
    6. 6. <ul><li>Common-Size Financial Statements (Vertical Analysis) : Analysis of a company’s single-year financial statements. Financial statements are standardized by a measure of size, either sales or total assets. All amounts are stated in terms of a percentage of the size measure. </li></ul>
    7. 7. Common-Size Income Statement <ul><li>Remember that for Common-Size Income Statements, the denominator -- the entire pie -- is equal to Net Sales. </li></ul>100% = Net Sales
    8. 8. <ul><li>Condensed Comparative Income Statement </li></ul><ul><li>19X1 Percent 19X0 Percent </li></ul><ul><li>Net sales $5,700 100.0 $6,600 100.0 </li></ul><ul><li>Cost of goods sold 4,000 70.2 4,800 72.7 </li></ul><ul><li>Gross profit on sales $1,700 29.8 $1,800 27.3 </li></ul><ul><li>Selling expense $1,120 19.7 $1,200 18.2 </li></ul><ul><li>General expense 400 7.0 440 6.7 </li></ul><ul><li>Total operating expenses $1,520 26.7 $1,640 24.9 </li></ul><ul><li>Operating income (loss) $ 180 3.1 $ 160 2.4 </li></ul><ul><li>Other revenue (expense) 80 1.4 130 2.0 </li></ul><ul><li>Income before taxes $ 260 4.5 $ 290 4.4 </li></ul><ul><li>Income tax 80 1.4 85 1.3 </li></ul><ul><li>Net income $ 180 3.1 $ 205 3.1 </li></ul>Common-Size Income Statement
    9. 9. Common-Size Balance Sheet <ul><li>Remember that for Common-Size Balance Sheets, the denominator -- the entire pie -- is equal to the total assets for the year. </li></ul><ul><li>The denominator can also be total liabilities </li></ul>100% = Total Assets
    10. 10. <ul><li>Condensed Comparative Balance Sheet </li></ul><ul><li>19X1 % 19X0 % </li></ul><ul><li>Cash $ 200 4.76 $ 300 7.14 </li></ul><ul><li>Inventory 1,000 23.80 800 19.04 </li></ul><ul><li>Land & Building (net) 3,000 71.43 3,200 76.19 </li></ul><ul><li>Total Assets $4,200 100 $4,300 100 </li></ul><ul><li>Accounts Payable $ 800 19.4 $1,000 23.80 </li></ul><ul><li>Long-Term Debt 3,000 71.43 1,500 35.71 </li></ul><ul><li>Total Equity 400 9.52 1,800 42.85 </li></ul><ul><li>Total Liab. & Equity $4,200 100 $4,300 100 </li></ul>Common-Size Balance Sheet
    11. 11. <ul><li>Ratio Analysis : Analysis of a company’s financial statements by computing ratios and comparing them against both trends and industry averages. </li></ul>
    12. 12. LIMITATIONS OF FINANCIAL ANALYSIS <ul><li>ESTIMATES: F/S CONTAIN ESTIMATES (EX. DEPR. EXP.) IF THESE ARE INACCURATE, RATIOS AND % ARE INACCURATE. </li></ul><ul><li>COST: F/S ARE BASED ON COST AND ARE NOT ADJUSTED FOR INFLATION </li></ul><ul><li>ALTERNATIVE ACCT’G METHODS : A CO. MAY USE FIFO, ANOTHER LIFO. </li></ul><ul><li>END-OF-YEAR DATA MAY NOT BE TYPICAL OF THE FINANCIAL CONDITION DURING THE YEAR. </li></ul>
    13. 13. Ratio Analysis <ul><li>Liquidity ratios </li></ul><ul><ul><li>Current Ratio </li></ul></ul><ul><ul><li>Quick Ratio </li></ul></ul><ul><ul><li>Receivable Turnover </li></ul></ul><ul><ul><li>Average Days’ Sales Uncollected </li></ul></ul><ul><ul><li>Inventory Turnover </li></ul></ul><ul><ul><li>Average Days’ Inventory On Hand </li></ul></ul>
    14. 14. Ratio Analysis <ul><li>Profitability ratios </li></ul><ul><ul><li>Profit Margin </li></ul></ul><ul><ul><li>Assets Turnover </li></ul></ul><ul><ul><li>Return on Asset </li></ul></ul><ul><ul><li>Return on Equity </li></ul></ul><ul><ul><li>Earnings per Share </li></ul></ul><ul><ul><li>Price-Earnings Ratio </li></ul></ul><ul><ul><li>Pay-Out Ratio </li></ul></ul>
    15. 15. <ul><li>Long-term solvency ratios </li></ul><ul><ul><li>Debt-Equity ratio </li></ul></ul><ul><ul><li>Interest Coverage Ratio </li></ul></ul><ul><ul><li>Debt to Total Asset Ratio </li></ul></ul><ul><li>Cash Flow Adequacy ratios </li></ul><ul><ul><li>Cash Flow Yield </li></ul></ul><ul><ul><li>Cash Flow to Asset </li></ul></ul><ul><ul><li>Free Cash Flow </li></ul></ul>Ratio Analysis
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