CHAPTER 9: ANALYSIS OF FINANCIAL STATEMENTS TECHNIQUES AND FORMULAS TECHNIQUES: A. Horizontal or Trend Analysis- per period of time a.

Increase/Decrease Method i. Comparison year Base year (earlier) ii. Answer (i.) / Base year b. Trend Percentages/Index Numbers i. Base year =100% ii. Express each item as percentage of its base year amount B. Vertical Analysis- percentage of a base 1. Common-size statements/100% statements: a. Common-size statement of financial position- TOTAL ASSET=100% b. Common-size statement of comprehensive income- NET SALES= 100% C. Financial Mix Ratio 1. Indicators of Profitability- (RGRORRROT) Return on Sale NI/NS Gross Profit Ratio GP/NS Return on Total Assets NI+IE+Tax/ATA Operating Ratio COS + OE/NS Rate of Return on NI/AWC Working Capital Return on Owners Equity NI/Average owners equity Return on Ordinary EACS/Average ordinary Shareholders equity Shareholders Equity Operating Leverage Contribution Margin/NI Times Preferred Dividend NI/Preferred dividend requirements Earned 2. Indicators of Liquidity/Short-term Solvency- CACRCWPCN Current Ratio CA/CL Acid Test Ratio QA/CL Current Asset to Total Asset CA/TA Receivable turnover NCS/AR Cash turnover Cash operating expenses/ Average Cash Balance Working capital turnover NS/AWC Payable turnover NCP/AP Cash and marketable COS+OE/Average Cash and marketable securities turnover securities Number or days operations 360/ Cash and marketable securities covered by cash and turnover marketable securities

3. Indicators of Growth- EDPDDB Earnings per share EACS/Average common shares outstanding Diluted earnings per Adjusted EACS/ Ordinary shares+ ordinary shares share equivalents Price-earnings ratio Market price per share/EPS Dividend-yield ratio DPS/Market price per share Dividend-payout ratio DPS/EPS Book value per share Shareholders equity/ Average shares outstanding 4. Ratios that indicate leverage- DDEETFFTN Debt to Equity Ratio TD/TSE Debt to Asset Ratio TD/TA Equity to Asset NSE/TA Equity multiplier TA/NSE Times interest earned EBIT/IE Financial leverage EBIT/EBIT-IE-Preferred dividend before tax Fixed charges rate Cash flows before fixed charges/ Total fixed charges Total assets to Total liabilities TA/TL ratio Non-current Assets to Long NCA/LTL term Liabilities 5. Efficiency ratios Asset turnover ratio S/ATA Number or days sales in 360/Receivable turnover average receivables AR/Average daily sales Merchandise Inventory COGS/AI Work in Process Inventory COGM/Average work in process inventory turnover Raw materials turnover RMU/Average raw materials inventory Number of days supply in 360/Inventory turnover inventory 6. Operating Cycle a. Merchandising OC= Number of days supply in inventory + Average collecting period b. Manufacturing OC= Number of days supply in raw materials, work in process and Finished goods+ Average collecting period