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# Chapter 13 Financial Statement Analysis

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### Chapter 13 Financial Statement Analysis

1. 1. Chapter 13 Financial Statement Analysis
2. 2. Learning Objectives <ul><li>Perform a horizontal analysis of comparative financial statements </li></ul><ul><li>Perform a vertical analysis of financial statements </li></ul><ul><li>Prepare and use common-size financial statements </li></ul><ul><li>Use the statement of cash flows for decisions </li></ul>
3. 3. Types of Analysis <ul><li>Horizontal Analysis </li></ul><ul><ul><li>Study of percentage changes in comparative financial statements </li></ul></ul><ul><ul><li>Considers changes over time. </li></ul></ul><ul><li>Compute the dollar amount of the change from the base period to the later period </li></ul><ul><li>Divide the dollar amount of the change by the base period amount </li></ul>
4. 4. Horizontal Analysis Compute the dollar amount of change from 2002 to 2003 \$8,380 - \$7,757 = \$623 Divide the dollar amount of the change by the base period amount to get the percentage change. \$623 / \$7,757 = 8.0%
5. 5. Horizontal Analysis
6. 6. Trend Percentages <ul><li>Horizontal analysis over a period of several years. </li></ul><ul><li>Indicates the direction a business is taking. </li></ul>
7. 7. Vertical Analysis <ul><li>Shows the relationship of a financial statement item to its base. </li></ul><ul><li>Income Statement base is usually Total Revenue </li></ul><ul><li>Balance Sheet base is usually Total Assets </li></ul>
8. 8. Vertical Analysis
9. 9. Other Financial Analysis Tools <ul><li>Common-size statements </li></ul><ul><ul><li>similar to vertical analysis except no dollar amounts are shown </li></ul></ul><ul><ul><li>allows one to compare companies of different sizes </li></ul></ul><ul><li>Benchmarking </li></ul><ul><ul><li>comparison of a company to a standard set by others </li></ul></ul>
10. 10. Ratio Analysis <ul><li>A ratio expresses the relationship of one number to another </li></ul><ul><li>Common types of ratios </li></ul><ul><ul><li>Ability to pay current liabilities </li></ul></ul><ul><ul><li>Ability to sell inventory and collect receivables </li></ul></ul><ul><ul><li>Ability to pay long-term debt </li></ul></ul><ul><ul><li>Profitability </li></ul></ul><ul><ul><li>Analyze stock as an investment </li></ul></ul>
11. 11. Ability to Pay Current Liabilities Working Capital = Current assets – Current liabilities Current Ratio = Current assets / Current liabilities Acid-Test Ratio = Cash + Short-term investments + Net current receivables Current liabilities
12. 12. Ability to Sell Inventory and Collect Receivables One day’s sales = Net sales / 365 Inventory Turnover = Cost of Goods Sold Average Inventory Accounts Receivable Turnover Net Sales Average net accounts receivable = Days’ sales in average accounts receivable = Average net accounts receivable One day’s sales
13. 13. Ability to Pay Long-Term Debt Debt Ratio = Total Liabilities Total Assets Times Interest Earned Operating Income Interest Expense =
14. 14. Measure Profitability Return on Sales = Net Income Net Sales Rate of Return on Total Assets Net Income + Interest Expense Average total assets = Rate of Return on Common Stockholders’ Equity = Average Common Stockholders’ Equity Preferred Dividends Net Income -
15. 15. Measure Profitability Earnings per share of common stock = Number of shares of common stock outstanding Preferred Dividends Net Income -
16. 16. Analyzing Stock Investments Price/Earnings Ratio = Market price per share of common stock Earnings per Share Dividend yield on common stock = Market price per share of common stock Dividend per share of common stock
17. 17. Analyzing Stock Investments Book value per share of common stock = Number of shares of common stock outstanding Preferred equity Total stockholders’ equity -
18. 18. Efficient Markets <ul><li>A capital market in which market prices fully reflect all information available to the public. </li></ul>