Accounts Materials .. Financial Statmenent analaysis

1. LVC 04
INTRODUCTION TO ACCOUNTING
&
Financial Statement Analysis

2. Agenda
• Depreciation Accounting
• Financial Statement Analysis
• Comparative Analysis
• Common Size Analysis
• Trend Analysis

4. Causes for Depreciation

5. Causes for Depreciation

7. Methods of Depreciation

8. Straight Line Method

12. • What do internal users use it for?
Planning, evaluating and controlling company operations
• What do external users use it for?
Assessing past performance and current financial position and making
predictions about the future profitability and solvency of the
company as well as evaluating the effectiveness of management
Financial Statement Analysis

13. • Horizontal Analysis
• Vertical Analysis
• Common-Size Statements
• Trend Percentages
• Ratio Analysis
Methods of
Financial Statement Analysis

14. Horizontal/Comparative Analysis
Using comparative financial
statements to calculate Amount
or percentage changes in a
financial statement item from
one period to the next

15. Vertical/Common size Analysis
For a single financial
statement, each item
is expressed as a
percentage of a
significant total,
e.g., all income
statement items are
expressed as a
percentage of sales

16. Common-Size Statements
Financial statements that show
only percentages and no
absolute rupees amounts

17. Trend Percentages
Show changes over time in
given financial statement items
(can help evaluate financial
information of several years)

18. Horizontal Analysis Example
The management of mis Company provides you with
comparative balance sheets of the years ended
December 31, 1999 and 1998. Management asks
you to prepare a horizontal analysis on the
information.

19. CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decre
1999 1998 Amount %
Assets
Current assets:
Cash 12,000
$ 23,500
$
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets 155,000 164,700
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment 160,000 125,000
Total assets 315,000
$ 289,700
$

20. Calculating Change in Amounts
Change
Current Year
Figure
Base Year
Figure
= –
Horizontal Analysis Example

21. Calculating Change in Dollar Amounts
Since we are measuring the amount of
the change between 1998 and 1999, the
dollar amounts for 1998 become the
“base” year figures.
Dollar
Change
Current Year
Figure
Base Year
Figure
= –
Horizontal Analysis Example

22. Calculating Change as a Percentage
Percentage
Change
Dollar Change
Base Year Figure
100%
= ×
Horizontal Analysis Example

23. CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash 12,000
$ 23,500
$ (11,500)
$
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets 155,000 164,700
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment 160,000 125,000
Total assets 315,000
$ 289,700
$
12,000 – 23,500 = (11,500)
Horizontal Analysis Example

24. CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash 12,000
$ 23,500
$ (11,500)
$ (48.9)
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets 155,000 164,700
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment 160,000 125,000
Total assets 315,000
$ 289,700
$
(11,500 ÷ 23,500) × 100% = 48.9%
Horizontal Analysis Example

25. CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash 12,000
$ 23,500
$ (11,500)
$ (48.9)
Accounts receivable, net 60,000 40,000 20,000 50.0
Inventory 80,000 100,000 (20,000) (20.0)
Prepaid expenses 3,000 1,200 1,800 150.0
Total current assets 155,000 164,700 (9,700) (5.9)
Property and equipment:
Land 40,000 40,000 - 0.0
Buildings and equipment, net 120,000 85,000 35,000 41.2
Total property and equipment 160,000 125,000 35,000 28.0
Total assets 315,000
$ 289,700
$ 25,300
$ 8.7
Horizontal Analysis Example

26. Let’s apply the same
procedures to the
liability and stockholders’
equity sections of the
balance sheet.
Horizontal Analysis Example

27. CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 67,000
$ 44,000
$ 23,000
$ 52.3
Notes payable 3,000 6,000 (3,000) (50.0)
Total current liabilities 70,000 50,000 20,000 40.0
Long-term liabilities:
Bonds payable, 8% 75,000 80,000 (5,000) (6.3)
Total liabilities 145,000 130,000 15,000 11.5
Stockholders' equity:
Preferred stock 20,000 20,000 - 0.0
Common stock 60,000 60,000 - 0.0
Additional paid-in capital 10,000 10,000 - 0.0
Total paid-in capital 90,000 90,000 - 0.0
Retained earnings 80,000 69,700 10,300 14.8
Total stockholders' equity 170,000 159,700 10,300 6.4
Total liabilities and stockholders' equity 315,000
$ 289,700
$ 25,300
$ 8.7

28. Now, let’s apply the
procedures to the
income statement.
Horizontal Analysis Example

29. CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net sales 520,000
$ 480,000
$ 40,000
$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 128,600 126,000 2,600 2.1
Net operating income 31,400 39,000 (7,600) (19.5)
Interest expense 6,400 7,000 (600) (8.6)
Net income before taxes 25,000 32,000 (7,000) (21.9)
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income 17,500
$ 22,400
$ (4,900)
$ (21.9)

30. CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net sales 520,000
$ 480,000
$ 40,000
$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 128,600 126,000 2,600 2.1
Net operating income 31,400 39,000 (7,600) (19.5)
Interest expense 6,400 7,000 (600) (8.6)
Net income before taxes 25,000 32,000 (7,000) (21.9)
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income 17,500
$ 22,400
$ (4,900)
$ (21.9)
Sales increased by 8.3% while net
income decreased by 21.9%.

31. CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net sales 520,000
$ 480,000
$ 40,000
$ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 128,600 126,000 2,600 2.1
Net operating income 31,400 39,000 (7,600) (19.5)
Interest expense 6,400 7,000 (600) (8.6)
Net income before taxes 25,000 32,000 (7,000) (21.9)
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income 17,500
$ 22,400
$ (4,900)
$ (21.9)
There were increases in both cost of goods
sold (14.3%) and operating expenses (2.1%).
These increased costs more than offset the
increase in sales, yielding an overall
decrease in net income.

32. Vertical Analysis Example
The management of Sample Company asks you to
prepare a vertical analysis for the comparative
balance sheets of the company.

33. Sample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998
Cash 82,000
$ 30,000
$ 17% 8%
Accts. Rec. 120,000 100,000 25% 26%
Inventory 87,000 82,000 18% 21%
Land 101,000 90,000 21% 23%
Equipment 110,000 100,000 23% 26%
Accum. Depr. (17,000) (15,000) -4% -4%
Total 483,000
$ 387,000
$ 100% 100%
Vertical/Common size Analysis Example

34. Vertical Analysis Example
Sample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998
Cash 82,000
$ 30,000
$ 17% 8%
Accts. Rec. 120,000 100,000 25% 26%
Inventory 87,000 82,000 18% 21%
Land 101,000 90,000 21% 23%
Equipment 110,000 100,000 23% 26%
Accum. Depr. (17,000) (15,000) -4% -4%
Total 483,000
$ 387,000
$ 100% 100%
82,000 ÷ 483,000 = 17% rounded
30,000 ÷ 387,000 = 8% rounded

35. Sample Company
Balance Sheet (Liabilities & Stockholders' Equity)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998
Acts. Payable 76,000
$ 60,000
$ 16% 16%
Wages Payable 33,000 17,000 7% 4%
Notes Payable 50,000 50,000 10% 13%
Common Stock 170,000 160,000 35% 41%
Retained Earnings 154,000 100,000 32% 26%
Total 483,000
$ 387,000
$ 100% 100%
Vertical Analysis Example
76,000 ÷ 483,000 = 16% rounded

36. Trend Percentages Example
Wheeler, Inc. provides you with the following
operating data and asks that you prepare a trend
analysis.
Wheeler, Inc.
Operating Data
1999 1998 1997 1996 1995
Revenues 2,405
$ 2,244
$ 2,112
$ 1,991
$ 1,820
$
Expenses 2,033 1,966 1,870 1,803 1,701
Net income 372
$ 278
$ 242
$ 188
$ 119
$

37. Trend Percentages Example
Wheeler, Inc. provides you with the following
operating data and asks that you prepare a trend
analysis.
Wheeler, Inc.
Operating Data
1999 1998 1997 1996 1995
Revenues 2,405
$ 2,244
$ 2,112
$ 1,991
$ 1,820
$
Expenses 2,033 1,966 1,870 1,803 1,701
Net income 372
$ 278
$ 242
$ 188
$ 119
$
1,991 - 1,820 = 171

38. Trend Percentages Example
Using 1995 as the base year, we develop the
following percentage relationships.
Wheeler, Inc.
Operating Data
1999 1998 1997 1996 1995
Revenues 132% 123% 116% 109% 100%
Expenses 120% 116% 110% 106% 100%
Net income 313% 234% 203% 158% 100%
1,991 - 1,820 = 171
171 ÷ 1,820 = 9% rounded

39. THANK YOU