Financial statement analysis involves using analytical tools and techniques to examine financial statement data in order to evaluate how numbers have changed over time and make predictions about a company. It is one source of information that both external and internal users rely on to assess the risk and return of an investment. Common types of financial statement analysis include horizontal analysis, vertical analysis, and ratio analysis, which are used to identify important trends, changes, and relationships between financial data. Key ratios analyze liquidity, solvency, profitability, and market performance.

1. Mark Kolta

2.  The application of analytical tools and techniques to
financial statement data.
 Allows users to focus on how numbers are related and
how they have changed over time

3.  External users rely on general purpose financial
statements
 Make predictions about an organization as an aid in
making decisions
 Users highlight important trends or changes

4.  Users try to balance the risk of an investment with its
expected return
 Generally the greater the risk, the higher the return
 Financial statement analysis is one source of
information for assessing risk and return

5.  Public companies must publish an annual financial
report
 Government reports
 SEC 10K, 10Q
 Financial service information
 Moody’s, Dow-Jones
 Financial newspapers and periodicals
 Wall Street Journal

6.  Horizontal analysis
 Vertical analysis
 Ratio analysis

7.  Amount of change = later year amount - Earlier year
amount
 Percentage change = Amount of change / Earlier year
amount
 Look for significant change

8.  Set all amounts in base year at 100%
 Compute percentages for a number of years
 Divide each statement amount by respective amount in
base year
 Shows degree of increase or decrease in individual
statement items
 Used to explain changes in operating performance

9.  Shows how each item in a financial statement
compares to the total of that statement
 Balance sheet
 Set both total assets and total equities at 100%
 Income statement
 Set net sales at 100%

10.  Identify significant dollar and percentage changes
 Explain the changes
 Identify whether they are favorable of unfavorable

11.  Shows the relative size of one financial statement
component to another.
 Effective only when used in combination with other
ratios, analysis, and information.

12.  Short-term liquidity
 Long-term solvency
 Profitability
 Market performance

13.  Current ratio
 Quick ratio
 Accounts receivable turnover
 Days’ sales in receivables
 Inventory turnover

14.  Common measure of liquidity
 Ability to pay debts as they come due
 Rule of thumb 2:1
 Consider other factors
Current Assets
Current Liabilities

15.  More strict measure of short-term liquidity
 Numerator includes only quick current assets
 Assets readily converted to cash
Cash + Short-term investments + Net
Current Receivables
Current liabilities

16.  How many times we turn accounts receivable into cash
during a period
Net sales
Average net accounts receivable

17.  How many days’ sales remain uncollected in accounts
receivable
Net sales per day =
Net sales
365 days
Average net accounts receivable
Net sales per day

18.  Number of times the company sells and replaces its
inventory during the period
 Holding inventory results in financing and storage
costs
Cost of goods sold
Average inventory

19.  Debt ratio
 Times Interest Earned

20.  Shows amount of total assets creditors provide
 Higher levels of debt financing means company has a
higher risk of not meeting interest and principal
payments
Total liabilities
Total assets

21.  Number of times the company earned interest expense
with current income
 Creditors want to know the firm’s ability to pay annual
interest charges
Net income + Income tax expense
+ Interest expense
Interest expense

22.  Profit margin
 Total asset turnover
 Return on total assets
 Return on owners’ equity
 Earning per share

23.  Percentage each sales dollar contributes to net income
Net income
Net sales

24.  Measures the efficiency of the company is using its
investment in assets to generate sales
Net sales
Average total assets

25.  Measures the amount a company earns on each dollar
of investment in assets
Net income
Average total assets

26.  Measures the earnings in relation to the owners’
investment in the company
Net income - Preferred dividends
Average owner’s equity

27.  Measures the net income available to each share of
common stock
 Discussed in depth in Chapter 14
Net income - Preferred dividends
Weighted average number of common
shares outstanding during the year

28.  Price/Earnings (P/E) ratio
 Dividend yield

29.  Number of times earnings per share the stock is
currently selling for in the market
Market price per share of common stock
Earnings per share

30.  Measure of dividend-paying performance of a
company
 Investors buy stock for two reasons
 Receive cash dividends
 Sell stock at a higher price
Dividends per share
Market price per share

31.  Historical nature of accounting information
 Changing economic conditions
 Comparisons with industry averages
 Seasonal factors
 Quality of reported income

32. Thanks