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The document discusses financial statement analysis. It provides information on the purpose of analysis for internal and external users of financial statements. It also outlines some common measures used to analyze and rank corporate performance, such as growth in sales, return to shareholders, profit margins, and return on equity. Additionally, it discusses how financial statements are designed to facilitate analysis through comparative, classified, and consolidated statements.

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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-1 FINANCIAL STATEMENT ANALYSIS Chapter 14
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-2 Internal Users External Users Financial statement analysis helps users make better decisions. Financial statement analysis helps users make better decisions. Managers Officers Internal Auditors Shareholders Lenders Customers Purpose of AnalysisPurpose of Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-3 G r o w t h i n s a l e s R e t u r n t o s t o c k h o l d e r s P r o f i t m a r g i n s R e t u r n o n e q u i t y D e t e r m i n e d b y a n a l y z i n g t h e f i n a n c i a l s t a t e m e n t s . F i n a n c i a l m e a s u r e s a r e o f t e n u s e d t o r a n k c o r p o r a t e p e r f o r m a n c e . E x a m p l e m e a s u r e s i n c l u d e : Purpose of AnalysisPurpose of Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-4 R e s u l t s i n s t a n d a r d i z e d , m e a n i n g f u l s u b t o t a l s . I t e m s w i t h c e r t a i n c h a r a c t e r i s t i c s a r e g r o u p e d t o g e t h e r . C l a s s i f i e d F i n a n c i a l S t a t e m e n t s H e l p s i d e n t i f y s i g n i f i c a n t c h a n g e s a n d t r e n d s . A m o u n t s f r o m s e v e r a l y e a r s a p p e a r s i d e b y s i d e . C o m p a r a t i v e F i n a n c i a l S t a t e m e n t s P r e s e n t e d a s i f t h e t w o c o m p a n i e s a r e a s i n g l e b u s i n e s s u n i t . I n f o r m a t i o n f o r t h e p a r e n t a n d s u b s i d i a r y a r e p r e s e n t e d . C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Financial Statements Are Designed for Analysis Financial Statements Are Designed for Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-5 Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of AnalysisTools of Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-6 Dollar Change: Analysis Period Amount Base Period Amount Dollar Change = – Percentage Change: Dollar Change Base Period Amount Percent Change = ÷%% Dollar and Percentage ChangesDollar and Percentage Changes
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-7 S a l e s a n d e a r n i n g s s h o u l d i n c r e a s e a t m o r e t h a t t h e r a t e o f i n f l a t i o n . I n m e a s u r i n g q u a r t e r l y c h a n g e s , c o m p a r e t o t h e s a m e q u a r t e r i n t h e p r e v i o u s y e a r . P e r c e n t a g e s m a y b e m i s l e a d i n g w h e n t h e b a s e a m o u n t i s s m a l l . E v a l u a t i n g P e r c e n t a g e C h a n g e s i n S a l e s a n d E a r n i n g s Dollar and Percentage ChangesDollar and Percentage Changes
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-8 Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and 2002. Compute the dollar change and the percentage for cash. Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and 2002. Compute the dollar change and the percentage for cash. Dollar and Percentage Changes Example Dollar and Percentage Changes Example
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-9 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 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$ * Percent rounded to one decimal point.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-10 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 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$ * Percent rounded to one decimal point. $12,000 – $23,500 = $(11,500)$12,000 – $23,500 = $(11,500)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-11 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 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$ * Percent rounded to one decimal point. ($11,500 ÷ $23,500) × 100% = 48.94%($11,500 ÷ $23,500) × 100% = 48.94% Complete the analysis for the other assets. Complete the analysis for the other assets.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-12 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 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% * Percent rounded to one decimal point.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-13 Trend analysis is used to reveal patterns in data covering successive periods. Trend analysis is used to reveal patterns in data covering successive periods. Trend Percent Analysis Period Amount Base Period Amount 100%= × Trend AnalysisTrend Analysis
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-14 1999 is the base period so its amounts will equal 100%. 1999 is the base period so its amounts will equal 100%. Berry Products Income Information For the Years Ended December 31, Item 2003 2002 2001 2000 1999 Revenues 400,000$ 355,000$ 320,000$ 290,000$ 275,000$ Cost of sales 285,000 250,000 225,000 198,000 190,000 Gross profit 115,000 105,000 95,000 92,000 85,000 Item 2003 2002 2001 2000 1999 Revenues 105% 100% Cost of sales 104% 100% Gross profit 108% 100% Item 2003 2002 2001 2000 1999 Revenues 145% 129% 116% 105% 100% Cost of sales 150% 132% 118% 104% 100% Gross profit 135% 124% 112% 108% 100% (290,000 ÷ 275,000) × 100% = 105% (198,000 ÷ 190,000) × 100% = 104% (92,000 ÷ 85,000) × 100% = 108% Trend Analysis - ExampleTrend Analysis - Example
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-15 Examine the relative size of each item in the financial statements by computing component (or common- sized) percentages. Component Percent 100% Analysis Amount Base Amount = × Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues Component PercentagesComponent Percentages
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-16 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% 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$ 100.0% 100.0% * Percent rounded to first decimal point. Complete the common-size analysis for the other assets. ($12,000 ÷ $315,000) × 100% = 3.8%($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%($23,500 ÷ $289,700) × 100% = 8.1% 13-16
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-17 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% Accounts receivable, net 60,000 40,000 19.0% 13.8% Inventory 80,000 100,000 25.4% 34.5% Prepaid expenses 3,000 1,200 1.0% 0.4% Total current assets 155,000$ 164,700$ 49.2% 56.9% Property and equipment: Land 40,000 40,000 12.7% 13.8% Buildings and equipment, net 120,000 85,000 38.1% 29.3% Total property and equipment 160,000$ 125,000$ 50.8% 43.1% Total assets 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. 13-17
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-18 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ Notes payable 3,000 6,000 Total current liabilities 70,000$ 50,000$ Long-term liabilities: Bonds payable, 8% 75,000 80,000 Total liabilities 145,000$ 130,000$ Shareholders' equity: Preferred stock 20,000 20,000 Common stock 60,000 60,000 Additional paid-in capital 10,000 10,000 Total paid-in capital 90,000$ 90,000$ Retained earnings 80,000 69,700 Total shareholders' equity 170,000$ 159,700$ Total liabilities and shareholders' equity 315,000$ 289,700$ * Percent rounded to first decimal point. Complete the common-size analysis for the liabilities and equity accounts. CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ 21.3% 15.2% Notes payable 3,000 6,000 1.0% 2.1% Total current liabilities 70,000$ 50,000$ 22.2% 17.3% Long-term liabilities: Bonds payable, 8% 75,000 80,000 23.8% 27.6% Total liabilities 145,000$ 130,000$ 46.0% 44.9% Shareholders' equity: Preferred stock 20,000 20,000 6.3% 6.9% Common stock 60,000 60,000 19.0% 20.7% Additional paid-in capital 10,000 10,000 3.2% 3.5% Total paid-in capital 90,000$ 90,000$ 28.6% 31.1% Retained earnings 80,000 69,700 25.4% 24.1% Total shareholders' equity 170,000$ 159,700$ 54.0% 55.1% Total liabilities and shareholders' equity 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. 13-18
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-19 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues 520,000$ 480,000$ Costs and expenses: Cost of sales 360,000 315,000 Selling and admin. 128,600 126,000 Interest expense 6,400 7,000 Income before taxes 25,000$ 32,000$ Income taxes (30%) 7,500 9,600 Net income 17,500$ 22,400$ Net income per share 0.79$ 1.01$ Avg. # common shares 22,200 22,200 * Rounded to first decimal point. Compute the common-size percentages for revenues and expenses. CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues 520,000$ 480,000$ 100.0% 100.0% Costs and expenses: Cost of sales 360,000 315,000 69.2% 65.6% Selling and admin. 128,600 126,000 24.7% 26.3% Interest expense 6,400 7,000 1.2% 1.5% Income before taxes 25,000$ 32,000$ 4.8% 6.7% Income taxes (30%) 7,500 9,600 1.4% 2.0% Net income 17,500$ 22,400$ 3.4% 4.7% Net income per share 0.79$ 1.01$ Avg. # common shares 22,200 22,200 * Rounded to first decimal point. 13-19
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-20 P a s t p e r f o r m a n c e t o p r e s e n t p e r f o r m a n c e . O t h e r c o m p a n i e s t o y o u r c o m p a n y . A l o n g w i t h d o l l a r a n d p e r c e n t a g e c h a n g e s , t r e n d p e r c e n t a g e s , a n d c o m p o n e n t p e r c e n t a g e s , r a t i o s c a n b e u s e d t o c o m p a r e : A r a t i o i s a s i m p l e m a t h e m a t i c a l e x p r e s s i o n o f t h e r e l a t i o n s h i p b e t w e e n o n e i t e m a n d a n o t h e r . RatiosRatios
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-21 NORTON CORPORATION 2003 Cash 30,000$ Accounts receivable, net Beginning of year 17,000 End of year 20,000 Inventory Beginning of year 10,000 End of year 15,000 Total current assets 65,000 Total current liabilities 42,000 Total liabilities 103,917 Total assets Beginning of year 300,000 End of year 346,390 Revenues 494,000 Use this information to calculate the liquidity ratios for Norton Corporation.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-22 Working capitalWorking capital is the excess of current assets over current liabilities. Working capitalWorking capital is the excess of current assets over current liabilities. Working CapitalWorking Capital
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-23 Current Ratio Current Assets Current Liabilities = Current Ratio $65,000 $42,000 = = 1.55 : 1 This ratio measures the short-term debt- paying ability of the company. This ratio measures the short-term debt- paying ability of the company. Current RatioCurrent Ratio
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-24 Quick assets are cash, marketable securities, and receivables. Quick assets are cash, marketable securities, and receivables. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. Quick Assets Current Liabilities =Quick Ratio Quick RatioQuick Ratio
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-25 Quick Assets Current Liabilities =Quick Ratio $50,000 $42,000 = 1.19 : 1=Quick Ratio This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. Quick RatioQuick Ratio
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-26 A measure of creditor’s long-term risk.A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. A measure of creditor’s long-term risk.A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. Debt RatioDebt Ratio
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-27 R a t i o s h e l p u s e r s u n d e r s t a n d f i n a n c i a l r e l a t i o n s h i p s . R a t i o s p r o v i d e f o r q u i c k c o m p a r i s o n o f c o m p a n i e s . U s e s M a n a g e m e n t m a y e n t e r i n t o t r a n s a c t i o n s m e r e l y t o i m p r o v e t h e r a t i o s . R a t i o s d o n o t h e l p w i t h a n a l y s i s o f t h e c o m p a n y 's p r o g r e s s t o w a r d n o n f i n a n c i a l g o a l s . L im it a t io n s Uses and Limitations of Financial Ratios Uses and Limitations of Financial Ratios
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-28 An income statement can be prepared in either a multiple-step or single-step format. An income statement can be prepared in either a multiple-step or single-step format. The single-step format is simpler. The multiple-step format provides more detailed information. The single-step format is simpler. The multiple-step format provides more detailed information. Measures of ProfitabilityMeasures of Profitability
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-29 Proper Heading { Gross Margin { Operating Expenses { { Non- operating Items Income Statement (Multiple-Step) Example Income Statement (Multiple-Step) Example Remember to compute EPS. Remember to compute EPS.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-30 Proper Heading { Income Statement (Single-Step) ExampleIncome Statement (Single-Step) Example Expenses & Losses { Revenues & Gains { Remember to compute EPS. Remember to compute EPS.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-31 Use this information to calculate the profitability ratios for Norton Corporation. NORTON CORPORATION 2003 Number of common shares outstanding all of 2003 27,400 Net income 53,690$ Shareholders' equity Beginning of year 180,000 End of year 234,390 Revenues 494,000 Cost of sales 140,000 Total assets Beginning of year 300,000 End of year 346,390
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-32 This ratio is generally considered the best overall measure of a company’s profitability. This ratio is generally considered the best overall measure of a company’s profitability. Return On Assets (ROA)Return On Assets (ROA)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-33 This measure indicates how well the company employed the owners’ investments to earn income. This measure indicates how well the company employed the owners’ investments to earn income. Return On Equity (ROE)Return On Equity (ROE)
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-34 C a n b e a u d i t e d o r u n a u d i t e d . A n n u a l a n d q u a r t e r ly f i n a n c ia l r e p o r t s . R e p o r t s f i le d w i t h t h e S E C b y p u b l i c l y o w n e d c o m p a n ie s . I n t e r n e t a n d o t h e r f r e e s o u r c e s . D e t a i l e d a n a l y s e s b y f in a n c i a l a n a ly s t s . Sources of Financial InformationSources of Financial Information
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 4-35 End of Chapter 14 No more ratios, please!

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Whbm14

  • 1.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-1 FINANCIAL STATEMENT ANALYSIS Chapter 14
  • 2.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-2 Internal Users External Users Financial statement analysis helps users make better decisions. Financial statement analysis helps users make better decisions. Managers Officers Internal Auditors Shareholders Lenders Customers Purpose of AnalysisPurpose of Analysis
  • 3.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-3 G r o w t h i n s a l e s R e t u r n t o s t o c k h o l d e r s P r o f i t m a r g i n s R e t u r n o n e q u i t y D e t e r m i n e d b y a n a l y z i n g t h e f i n a n c i a l s t a t e m e n t s . F i n a n c i a l m e a s u r e s a r e o f t e n u s e d t o r a n k c o r p o r a t e p e r f o r m a n c e . E x a m p l e m e a s u r e s i n c l u d e : Purpose of AnalysisPurpose of Analysis
  • 4.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-4 R e s u l t s i n s t a n d a r d i z e d , m e a n i n g f u l s u b t o t a l s . I t e m s w i t h c e r t a i n c h a r a c t e r i s t i c s a r e g r o u p e d t o g e t h e r . C l a s s i f i e d F i n a n c i a l S t a t e m e n t s H e l p s i d e n t i f y s i g n i f i c a n t c h a n g e s a n d t r e n d s . A m o u n t s f r o m s e v e r a l y e a r s a p p e a r s i d e b y s i d e . C o m p a r a t i v e F i n a n c i a l S t a t e m e n t s P r e s e n t e d a s i f t h e t w o c o m p a n i e s a r e a s i n g l e b u s i n e s s u n i t . I n f o r m a t i o n f o r t h e p a r e n t a n d s u b s i d i a r y a r e p r e s e n t e d . C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s Financial Statements Are Designed for Analysis Financial Statements Are Designed for Analysis
  • 5.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-5 Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of AnalysisTools of Analysis
  • 6.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-6 Dollar Change: Analysis Period Amount Base Period Amount Dollar Change = – Percentage Change: Dollar Change Base Period Amount Percent Change = ÷%% Dollar and Percentage ChangesDollar and Percentage Changes
  • 7.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-7 S a l e s a n d e a r n i n g s s h o u l d i n c r e a s e a t m o r e t h a t t h e r a t e o f i n f l a t i o n . I n m e a s u r i n g q u a r t e r l y c h a n g e s , c o m p a r e t o t h e s a m e q u a r t e r i n t h e p r e v i o u s y e a r . P e r c e n t a g e s m a y b e m i s l e a d i n g w h e n t h e b a s e a m o u n t i s s m a l l . E v a l u a t i n g P e r c e n t a g e C h a n g e s i n S a l e s a n d E a r n i n g s Dollar and Percentage ChangesDollar and Percentage Changes
  • 8.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-8 Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and 2002. Compute the dollar change and the percentage for cash. Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and 2002. Compute the dollar change and the percentage for cash. Dollar and Percentage Changes Example Dollar and Percentage Changes Example
  • 9.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-9 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 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$ * Percent rounded to one decimal point.
  • 10.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-10 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 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$ * Percent rounded to one decimal point. $12,000 – $23,500 = $(11,500)$12,000 – $23,500 = $(11,500)
  • 11.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-11 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 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$ * Percent rounded to one decimal point. ($11,500 ÷ $23,500) × 100% = 48.94%($11,500 ÷ $23,500) × 100% = 48.94% Complete the analysis for the other assets. Complete the analysis for the other assets.
  • 12.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-12 CLOVER CORPORATION Comparative Balance Sheets December 31, 2003 2002 Dollar Change Percent Change* Assets Current assets: Cash and equivalents 12,000$ 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% * Percent rounded to one decimal point.
  • 13.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-13 Trend analysis is used to reveal patterns in data covering successive periods. Trend analysis is used to reveal patterns in data covering successive periods. Trend Percent Analysis Period Amount Base Period Amount 100%= × Trend AnalysisTrend Analysis
  • 14.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-14 1999 is the base period so its amounts will equal 100%. 1999 is the base period so its amounts will equal 100%. Berry Products Income Information For the Years Ended December 31, Item 2003 2002 2001 2000 1999 Revenues 400,000$ 355,000$ 320,000$ 290,000$ 275,000$ Cost of sales 285,000 250,000 225,000 198,000 190,000 Gross profit 115,000 105,000 95,000 92,000 85,000 Item 2003 2002 2001 2000 1999 Revenues 105% 100% Cost of sales 104% 100% Gross profit 108% 100% Item 2003 2002 2001 2000 1999 Revenues 145% 129% 116% 105% 100% Cost of sales 150% 132% 118% 104% 100% Gross profit 135% 124% 112% 108% 100% (290,000 ÷ 275,000) × 100% = 105% (198,000 ÷ 190,000) × 100% = 104% (92,000 ÷ 85,000) × 100% = 108% Trend Analysis - ExampleTrend Analysis - Example
  • 15.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-15 Examine the relative size of each item in the financial statements by computing component (or common- sized) percentages. Component Percent 100% Analysis Amount Base Amount = × Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues Component PercentagesComponent Percentages
  • 16.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-16 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% 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$ 100.0% 100.0% * Percent rounded to first decimal point. Complete the common-size analysis for the other assets. ($12,000 ÷ $315,000) × 100% = 3.8%($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%($23,500 ÷ $289,700) × 100% = 8.1% 13-16
  • 17.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-17 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Assets Current assets: Cash and equivalents 12,000$ 23,500$ 3.8% 8.1% Accounts receivable, net 60,000 40,000 19.0% 13.8% Inventory 80,000 100,000 25.4% 34.5% Prepaid expenses 3,000 1,200 1.0% 0.4% Total current assets 155,000$ 164,700$ 49.2% 56.9% Property and equipment: Land 40,000 40,000 12.7% 13.8% Buildings and equipment, net 120,000 85,000 38.1% 29.3% Total property and equipment 160,000$ 125,000$ 50.8% 43.1% Total assets 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. 13-17
  • 18.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-18 CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ Notes payable 3,000 6,000 Total current liabilities 70,000$ 50,000$ Long-term liabilities: Bonds payable, 8% 75,000 80,000 Total liabilities 145,000$ 130,000$ Shareholders' equity: Preferred stock 20,000 20,000 Common stock 60,000 60,000 Additional paid-in capital 10,000 10,000 Total paid-in capital 90,000$ 90,000$ Retained earnings 80,000 69,700 Total shareholders' equity 170,000$ 159,700$ Total liabilities and shareholders' equity 315,000$ 289,700$ * Percent rounded to first decimal point. Complete the common-size analysis for the liabilities and equity accounts. CLOVER CORPORATION Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Liabilities and Shareholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ 21.3% 15.2% Notes payable 3,000 6,000 1.0% 2.1% Total current liabilities 70,000$ 50,000$ 22.2% 17.3% Long-term liabilities: Bonds payable, 8% 75,000 80,000 23.8% 27.6% Total liabilities 145,000$ 130,000$ 46.0% 44.9% Shareholders' equity: Preferred stock 20,000 20,000 6.3% 6.9% Common stock 60,000 60,000 19.0% 20.7% Additional paid-in capital 10,000 10,000 3.2% 3.5% Total paid-in capital 90,000$ 90,000$ 28.6% 31.1% Retained earnings 80,000 69,700 25.4% 24.1% Total shareholders' equity 170,000$ 159,700$ 54.0% 55.1% Total liabilities and shareholders' equity 315,000$ 289,700$ 100.0% 100.0% * Percent rounded to first decimal point. 13-18
  • 19.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-19 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues 520,000$ 480,000$ Costs and expenses: Cost of sales 360,000 315,000 Selling and admin. 128,600 126,000 Interest expense 6,400 7,000 Income before taxes 25,000$ 32,000$ Income taxes (30%) 7,500 9,600 Net income 17,500$ 22,400$ Net income per share 0.79$ 1.01$ Avg. # common shares 22,200 22,200 * Rounded to first decimal point. Compute the common-size percentages for revenues and expenses. CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues 520,000$ 480,000$ 100.0% 100.0% Costs and expenses: Cost of sales 360,000 315,000 69.2% 65.6% Selling and admin. 128,600 126,000 24.7% 26.3% Interest expense 6,400 7,000 1.2% 1.5% Income before taxes 25,000$ 32,000$ 4.8% 6.7% Income taxes (30%) 7,500 9,600 1.4% 2.0% Net income 17,500$ 22,400$ 3.4% 4.7% Net income per share 0.79$ 1.01$ Avg. # common shares 22,200 22,200 * Rounded to first decimal point. 13-19
  • 20.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-20 P a s t p e r f o r m a n c e t o p r e s e n t p e r f o r m a n c e . O t h e r c o m p a n i e s t o y o u r c o m p a n y . A l o n g w i t h d o l l a r a n d p e r c e n t a g e c h a n g e s , t r e n d p e r c e n t a g e s , a n d c o m p o n e n t p e r c e n t a g e s , r a t i o s c a n b e u s e d t o c o m p a r e : A r a t i o i s a s i m p l e m a t h e m a t i c a l e x p r e s s i o n o f t h e r e l a t i o n s h i p b e t w e e n o n e i t e m a n d a n o t h e r . RatiosRatios
  • 21.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-21 NORTON CORPORATION 2003 Cash 30,000$ Accounts receivable, net Beginning of year 17,000 End of year 20,000 Inventory Beginning of year 10,000 End of year 15,000 Total current assets 65,000 Total current liabilities 42,000 Total liabilities 103,917 Total assets Beginning of year 300,000 End of year 346,390 Revenues 494,000 Use this information to calculate the liquidity ratios for Norton Corporation.
  • 22.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-22 Working capitalWorking capital is the excess of current assets over current liabilities. Working capitalWorking capital is the excess of current assets over current liabilities. Working CapitalWorking Capital
  • 23.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-23 Current Ratio Current Assets Current Liabilities = Current Ratio $65,000 $42,000 = = 1.55 : 1 This ratio measures the short-term debt- paying ability of the company. This ratio measures the short-term debt- paying ability of the company. Current RatioCurrent Ratio
  • 24.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-24 Quick assets are cash, marketable securities, and receivables. Quick assets are cash, marketable securities, and receivables. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. Quick Assets Current Liabilities =Quick Ratio Quick RatioQuick Ratio
  • 25.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-25 Quick Assets Current Liabilities =Quick Ratio $50,000 $42,000 = 1.19 : 1=Quick Ratio This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. Quick RatioQuick Ratio
  • 26.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-26 A measure of creditor’s long-term risk.A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. A measure of creditor’s long-term risk.A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. Debt RatioDebt Ratio
  • 27.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-27 R a t i o s h e l p u s e r s u n d e r s t a n d f i n a n c i a l r e l a t i o n s h i p s . R a t i o s p r o v i d e f o r q u i c k c o m p a r i s o n o f c o m p a n i e s . U s e s M a n a g e m e n t m a y e n t e r i n t o t r a n s a c t i o n s m e r e l y t o i m p r o v e t h e r a t i o s . R a t i o s d o n o t h e l p w i t h a n a l y s i s o f t h e c o m p a n y 's p r o g r e s s t o w a r d n o n f i n a n c i a l g o a l s . L im it a t io n s Uses and Limitations of Financial Ratios Uses and Limitations of Financial Ratios
  • 28.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-28 An income statement can be prepared in either a multiple-step or single-step format. An income statement can be prepared in either a multiple-step or single-step format. The single-step format is simpler. The multiple-step format provides more detailed information. The single-step format is simpler. The multiple-step format provides more detailed information. Measures of ProfitabilityMeasures of Profitability
  • 29.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-29 Proper Heading { Gross Margin { Operating Expenses { { Non- operating Items Income Statement (Multiple-Step) Example Income Statement (Multiple-Step) Example Remember to compute EPS. Remember to compute EPS.
  • 30.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-30 Proper Heading { Income Statement (Single-Step) ExampleIncome Statement (Single-Step) Example Expenses & Losses { Revenues & Gains { Remember to compute EPS. Remember to compute EPS.
  • 31.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-31 Use this information to calculate the profitability ratios for Norton Corporation. NORTON CORPORATION 2003 Number of common shares outstanding all of 2003 27,400 Net income 53,690$ Shareholders' equity Beginning of year 180,000 End of year 234,390 Revenues 494,000 Cost of sales 140,000 Total assets Beginning of year 300,000 End of year 346,390
  • 32.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-32 This ratio is generally considered the best overall measure of a company’s profitability. This ratio is generally considered the best overall measure of a company’s profitability. Return On Assets (ROA)Return On Assets (ROA)
  • 33.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-33 This measure indicates how well the company employed the owners’ investments to earn income. This measure indicates how well the company employed the owners’ investments to earn income. Return On Equity (ROE)Return On Equity (ROE)
  • 34.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-34 C a n b e a u d i t e d o r u n a u d i t e d . A n n u a l a n d q u a r t e r ly f i n a n c ia l r e p o r t s . R e p o r t s f i le d w i t h t h e S E C b y p u b l i c l y o w n e d c o m p a n ie s . I n t e r n e t a n d o t h e r f r e e s o u r c e s . D e t a i l e d a n a l y s e s b y f in a n c i a l a n a ly s t s . Sources of Financial InformationSources of Financial Information
  • 35.
    © The McGraw-HillCompanies, Inc., 2002McGraw-Hill/Irwin Slide 4-35 End of Chapter 14 No more ratios, please!