Chapter

Thirteen
Financial
Statement
Analysis
McGraw-Hill/Irwin
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!
Factors in Communicating
Useful Information
Users
Types of
Decisions
Information
Analysis
The primary objective of accounting is to provide
information useful for decision making. To provide
information that supports this objective, accountants
must consider the following:
13-2
Methods of Analysis
Horizontal
Analysis
Vertical
Analysis
Ratio
Analysis
13-3
Horizontal Analysis
Horizontal analysis (or trend analysis) refers
to studying the behavior of individual
financial statement items over several
accounting periods.
Absolute
Amounts
Percentage
Analysis
13-4
Milaec Company Horizontal
Analysis
2012 2011
13-5
!ertical Analysis
Vertical analysis
Vertical analysis
uses
uses
percentages to compare
percentages to compare
individual components of
individual components of
financial statements to a key
financial statements to a key
statement figure. A
statement figure. A
common-
common-
size
size financial statement is a
vertical analysis in which each
financial statement item is
expressed as a percentage.
13-6
!ertical Analysis of Income
Statement
In income
statements, all
items are
usually
expressed as a
percentage of
sales.
13-7
Milaec Company !ertical
Analysis
2012 2011
13-8
!ertical Analysis of "alance
Sheet
In balance
sheets, all items
are usually
expressed as a
percentage of
total assets.
13-9
#atio Analysis
Ratio analysis
involves studying
various
relationships
between different
items reported in a
set of financial
statements.
13-10
$i%uidity #atios
Liquidity ratios indicate a companys
ability to pay short-term debts. They
focus on current assets and current
liabilities.
1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable ratios
5. Inventory ratios
13-11
Solency #atios
Solvency ratios are used to analyze
a companys long-term debt-
paying ability and its financing
structure.
1. Debt to assets ratio
2. Debt to equity ratio
3. Number of times interest earned
4. Plant assets to long-term liabilities
13-12
Profitability #atios
Profitability ratios measure a
companys ability to generate
earnings.
1. Net margin (or return on sales)
2. Asset turnover ratio
3. Return on investment
4. Return on equity
13-13
Stoc& Mar&et #atios
Stock market ratios analyze the
earnings and dividends of a
company.
1. Earnings per share
2. Book value per share
3. Price-earnings (P E) ratio
4. Dividend yield
13-14
$imitations of Financial Statement
Analysis
Different
Industries
Changing
Economic
Environment
Accounting
Principles
13-15
'nd of Chapter Thirteen
13-16