Chapter 13 - Fi - NT Analysis

Chapter
13
Financial
Statements
Analysis
100 Shares
Analysing
Financial Stmts?
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
The McGraw-Hill Companies, Inc., 2007
Learning
Learning Objectives
Objectives
Explain the purpose of
analysis.
Identify the building
blocks of analysis.
Describe standards for
comparisons in analysis.
Identify the tools of
analysis.
Explain and apply

methods of horizontal
analysis.
Describe and apply
methods of vertical
analysis.
Define and apply ratio
analysis.
Basics
Basics of
of Analysis
Analysis
Application
of analytical
tools
Reduces
uncertainty
Involves
transforming
data
Purpose
Purpose of
of Analysis
Analysis
Financial
Financial statement
statement analysis
analysis helps
helps users
users
make
make better
better decisions.
decisions.
Internal Users
Managers
Officers
Internal Auditors
External Users
Shareholders
Lenders
Customers
Building
Building Blocks
Blocks of
of Analysis
Analysis
Ability to meet
short-term
obligations and
to efficiently
generate
revenues
Ability to provide
financial rewards
sufficient to
attract and retain
financing
Liquidity
and
Efficiency
Solvency
Market
Profitability
Prospects
Ability to
generate future
revenues and
meet long-term
obligations
Ability to
generate
positive
market
expectations
Information
Information for
for Analysis
Analysis
Income Statement
Notes
Balance Sheet
Statement of
Changes in
Shareholders Equity
Statement of Cash
Flows
Standards
Standards for
for Comparison
Comparison
To help me interpret our
financial statements, I
use several standards of
comparison.
Intracompany
Intercompany
Industry
Guidelines
Tools
Tools of
of Analysis
Analysis
Horizontal
Horizontal Analysis
Analysis
Comparing a companys financial condition
and performance across time
Time
Tools
Tools of
of Analysis
Analysis
Comparing a companys
financial condition and
performance to a base amount
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Tools
Tools of
of Analysis
Analysis
Using key relations
among financial
statement items
Horizontal
Horizontal Analysis
Analysis
Time
Now, lets
look at
some ways
to use
horizontal
analysis.
The term horizontal analysis arises from

left-to-right (or right-to-left) movement of
our eyes as we review comparative
financial statements across time.
Comparative
Comparative Statements
Statements
Calculate Change in Dollar Amount
Dollar
Change
Analysis Period
Amount
Base Period
Amount
Since we are measuring the amount of

the change between 2005 and 2006, the
dollar amounts for 2005 become the
base period amounts.
Comparative
Comparative Statements
Statements
Calculate Change as a Percent
Percent
Change
Dollar Change
Base Period Amount
100%
$12,000 $23,500 = $(11,500)

($11,500 $23,500) 100% = 48.9%
Now, lets review the dollar

and percent changes for
the liabilities and
shareholders equity
accounts.
Now, lets
look at trend
analysis!
Trend
Trend Analysis
Analysis
Also called trend
percent analysis
or index number
trend analysis.
Trend
Trend analysis
analysis is
is used
used to
to reveal
reveal patterns
patterns in
in data
data
covering
covering successive
successive periods.
periods.
Trend
Percent
Analysis Period Amount

Base Period Amount
100%
Trend
Trend Analysis
Analysis
KRISPY KREME
INCOME INFORMATION
FOR THE YEARS ENDED 31 DECEMBER
2002 is the base period so its

amounts will equal 100%.
Trend
Trend Analysis
Analysis
KRISPY KREME
INCOME INFORMATION
(290,000 275,000)
(198,000 190,000)
(92,000
85,000)
Larson, Wild, Chiapetta,
Ropidah,
Haslinda,
Aryati, Liana
100% = 105%
100% = 104%
100% = 108%
Trend
Trend Analysis
Analysis
KRISPY KREME
INCOME INFORMATION
How would this trend analysis

look on a line graph?
Trend
Trend Analysis
Analysis
We can use the trend
percentages to construct a
graph so we can see the
trend over time.
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Now, lets look at some vertical

analysis tools!
Vertical
Vertical Analysis
Analysis
Vertical Analysis is also called as
common-size analysis
The term vertical analysis arises from the updown (down-up) movement of our eyes as we
review common-size financial statements.
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Common-Size
Common-Size Statements
Statements
Calculate Common-size Percent
Common-size
Percent
Analysis Amount
Base Amount
100%
Financial
FinancialStatement
Statement
Base
BaseAmount
Amount
Balance
BalanceSheet
Sheet
Total
TotalAssets
Assets
Income
IncomeStatement
Statement
Revenues
Revenues
($12,000 $315,000) 100% = 3.8%

($23,500 $289,700) 100% = 8.1%
Liquidity
and
Efficiency
Solvency
Profitability
Market
Lets use the following financial

statements for Norton Corporation for
our ratio analysis.
Liquidity
Liquidity and
and Efficiency
Efficiency
Current
Current
Ratio
Ratio
Inventory
Inventory
Turnover
Turnover
Acid-test
Acid-test
Ratio
Ratio
Days
DaysSales
Sales
Uncollected
Uncollected
Accounts
Accounts
Receivable
Receivable
Turnover
Turnover
Days
DaysSales
Sales
in
inInventory
Inventory
Total
TotalAsset
Asset
Turnover
Turnover
Use this information

to calculate the
liquidity and
efficiency ratios for
Krispy Kreme.
Working
Working Capital
Capital
Working capital represents current assets
financed from long-term capital sources that
do not require near-term repayment.
Current
Current Ratio
Ratio
Current
Current Assets
=
Ratio
Current Liabilities
Current
=
Ratio
$65,000
= 1.55 : 1
$42,000
This ratio measures the

short-term debt-paying
ability of the company.
Acid-Test
Acid-Test Ratio
Ratio
Quick Assets
Acid-Test =
Current Liabilities
Ratio
Quick assets are Cash, Short-Term Investments,
and Current Receivables.
Acid-Test = $50,000 = 1.19 : 1

$42,000
Ratio
This ratio is like the current
ratio but excludes current assets
such as inventories and prepaid
expenses that may be difficult to
quickly convert into cash.
Accounts
Accounts Receivable
Receivable Turnover
Turnover
Accounts
Sales on Account
Receivable = Average Accounts Receivable
Turnover
Accounts
$494,000
Receivable = ($17,000 + $20,000) 2 = 26.7 times
Turnover
This ratio measures how many
times a company converts its
receivables into cash each year.
Inventory
Inventory Turnover
Turnover
Inventory
Turnover
Inventory
Turnover
Cost of Sales
Average Inventory
$140,000
=
= 12.73 times
($10,000 + $12,000) 2
This ratio measures the number

of times merchandise
is sold and replaced during the year.
Days
Days Sales
Sales Uncollected
Uncollected
Days Sales
Accounts Receivable
=
365
Uncollected
Net Sales
Days Sales
$20,000
=
365 = 14.8 days
Uncollected
$494,000
This ratio measures the liquidity

of receivables.
Days
Days Sales
Sales in
in Inventory
Inventory
Days Sales
=
in Inventory
Ending Inventory
Cost of Sales
365
Days Sales
$12,000
365 = 31.29
=
in Inventory
$140,000
days
This ratio measures the liquidity

of inventory.
Total
Total Asset
Asset Turnover
Turnover
Total Asset
Net Sales
=
Turnover
Average Total Assets
Total Asset
$494,000
=
= 1.53 times
Turnover
($300,000 + $346,390) 2
This ratio measures the

efficiency of assets in producing
sales.
Solvency
Solvency
Debt
Debt
Ratio
Ratio
Equity
Equity
Ratio
Ratio
Pledged
PledgedAssets
Assets
to
to Secured
Secured
Liabilities
Liabilities
Times
Times
Interest
Interest
Earned
Earned
Use this information to calculate the

solvency ratios for Norton Corporation.
Debt
Debt Ratio
Ratio
Total Liabilities
Debt
Ratio =
Total Assets
Debt
Ratio =
$112,000
= 32.3%
$346,390
This ratio measures what portion of a

companys assets are contributed by
creditors.
Equity
Equity Ratio
Ratio
Total Equity
Equity
Ratio =
Total Assets
Equity
Ratio =
$234,390
= 67.7%
$346,390
This ratio measures what portion of a

companys assets are contributed by
owners.
Pledged
Pledged Assets
Assets to
to Secured
Secured Liabilities
Liabilities
Pledged
Book Value of Pledged Assets
Assets to
Secured = Book Value of Secured Liabilities
Liabilities
This ratio measures the protection to

secured creditors.
Times
Times Interest
Interest Earned
Earned
Times
Interest =
Earned
Profit before Interest Expense

and Income Taxes
Interest Expense
Times
$84,000
= 11.51
Interest =
$7,300
Earned
This is the most common measure of the
ability of a firms operations to provide
protection to the long-term creditor.
Profitability
Profitability
Basic
Basic
Earnings
Earningsper
per
Share
Share
Profit
Profit
Margin
Margin
Gross
Gross
Margin
Margin
Return
Return on
on
Total
TotalAssets
Assets
Book
BookValue
Value
per
per Common
Common
Share
Share
Return
Return on
on
Common
Common
Shareholders
Shareholders
Equity
Equity
Use this
information
to calculate
the
profitability
ratios for
Krispy
Kreme.
Profit
Profit Margin
Margin
Profit
Profit for the period
=
Margin
Net Sales
$53,690
Profit
= 10.87%
=
Margin $494,000
This ratio describes a
companys ability to earn a net
income from sales.
Gross
Gross Margin
Margin
Gross Net Sales - Cost of Sales
=
Margin
Net Sales
Gross $494,000 - $140,000
= 71.66%
=
Margin
$494,000
This ratio measures the amount
remaining from $1 in sales that is left
to cover operating expenses and a
profit after considering cost of sales.
Return
Return on
on Total
Total Assets
Assets
Return on = Profit for the period
Total Assets
Average Total Assets
Return on
$53,690
= ($300,000 + $346,390) 2 = 16.61%
Total Assets
This ratio is generally considered

the best overall measure of a
companys profitability.
Return
Return on
on Common
Common
Shareholders
Shareholders Equity
Equity
Return on
Common
Shareholders
Equity
Return on
Common
=
Shareholders
Equity
Profit for the period - Preferred Dividends

Average Common Shareholders
Equity
$53,690 - 0
($180,000 + $234,390) 2
= 25.9%
This measure indicates how well the

company employed the owners
investments to earn income.
Book
Book Value
Value per
per Common
Common Share
Share
Book Value Shareholders Equity Applicable to
per
Common Shares
=
Common
Number of Common Shares
Share
Outstanding
This ratio measures

liquidation at reported
amounts.
Basic
Basic Earnings
Earnings per
per Share
Share
Basic Earnings
per
=
Share
Basic Earnings
per
=
Share
Profit for the period - Preferred Dividends

Weighted-Average Common Shares
Outstanding
$53,690 - 0
= $1.96 per share
27,400
This measure indicates how much

income was earned for each share of
common shares outstanding.
Market
Market Prospects
Prospects
PricePriceEarnings
Earnings
Ratio
Ratio
Dividend
Dividend
Yield
Yield
Market
Market Prospects
Prospects
Use this
information
to calculate
the market
ratios for
Krispy
Kreme.
Price-Earnings
Price-Earnings Ratio
Ratio
Price-Earnings
Market Price Per Share
=
Ratio
Earnings Per Share
Price-Earnings
$15.00
=
= 7.65 times
Ratio
$1.96
This measure is often used by investors as a general

guideline in gauging share values. Generally, the
higher the price-earnings ratio, the more opportunity
a company has for growth.
Dividend
Dividend Yield
Yield
Dividend
Annual Dividends Per Share
=
Yield
Market Price Per Share
Dividend
$2.00
=
= 13.3%
Yield
$15.00
This ratio identifies the return, in terms of

cash dividends, on the current market
price of the share.
End of Chapter 13

Chapter 13 - Fi - NT Analysis

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Chapter

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Explain and apply

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The term horizontal analysis arises from

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Since we are measuring the amount of

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

$12,000 $23,500 = $(11,500)

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Now, lets review the dollar

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Analysis Period Amount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

2002 is the base period so its

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

How would this trend analysis

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Now, lets look at some vertical

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The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

($12,000 $315,000) 100% = 3.8%

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Lets use the following financial