ANALYSIS : II Mobin Shaikh GNLU ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS FINANCIAL STATEMENT ANALYSIS Non-accounting majors, especially, relate well to this topic It looks at accounting information from users’ perspective What is financial statement analysis? ”Tearing apart” the financial statements
and looking at the relationships
FINANCIAL STATEMENT ANALYSIS Information is available from 627 628 Published annual reports (1) Financial statements (2) Notes to financial statements (3) Letters to stockholders (4) Auditor’s report (Independent accountants) (5) Management’s discussion and analysis Reports filed with the government FINANCIAL STATEMENT ANALYSIS Information is available from 627 628 Other sources (1) Newspapers (e.g., Wall Street Journal ) (2) Periodicals (e.g. BS, Forbes, Fortune) (3) Financial information organizations such
as: Moody’s, Standard & Poor’s, SEBI Reports,
Investopedia, Individual Research Agencies (4) Other business publications METHODS OF FINANCIAL STATEMENT ANALYSIS
Using Using comparative comparative financial financial statements statements to to calculate calculate Rupee Rupee or or percentage percentage changes changes inin aa financial financial statement statement item item from from one one period period to to the the next next HORIZONTAL ANALYSIS Comparison of absolute data or percentage of two or more years. It is a comparative analysis of increase or decrease in percentages between the corresponding items in financial statements of previous year and current year. Item wise figures are compared between the statements of two periods, the increase or decrease is noted down and the percentage is calculated keeping the previous year’s figure as the base. HORIZONTAL ANALYSIS If the horizontal analysis includes three or more year’s figures for item wise comparison, the percentage increase or decrease may be calculated keeping figures of the earliest year as the base for comparing all the later year figures or each year’s item-wise figures may be compared with immediately preceding year’s figures. HORIZONTAL ANALYSIS EXAMPLE The management of Xerox Corporation provides you with comparative balance sheets of the years ended March 31, 2010 and 2011. Management asks you to prepare a horizontal analysis on the information. XEROX CORPORATION Comparative Balance Sheets March 31, 2010 and 2011
Increase (Decrease) 2011 2010 Amount % Assets Current assets: Cash ₹ 12,000.00 ₹ 23,500.00 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 ₹ 315,000.00 ₹ 289,700.00 HORIZONTAL ANALYSIS EXAMPLE Calculating Change in Rupee Amounts
Rupee Current Year Base Year
Change = Figure – Figure HORIZONTAL ANALYSIS EXAMPLE Calculating Change in Rupee Amounts
Rupee Current Year Base Year
Change = Figure – Figure
Since we are measuring the amount of the
change between 2010 and 2011, the rupee amounts for 2010 become the “base” year figures. HORIZONTAL ANALYSIS EXAMPLE Calculating Change as a Percentage
Percentage Rupee Change
Change = Base Year Figure × 100% HORIZONTAL ANALYSIS EXAMPLE XEROX CORPORATION Comparative Balance Sheets March 31, 2010 and 2011 Increase (Decrease) 2010 2011 Amount % Assets Current assets: Cash ₹ 12,000.00 ₹ 23,500.00 ₹ -11,500.00 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: 12,000 –23,500 = (11,500) Land 40,000 40,000 Buildings and equipment, net 120,000 85,000 Total property and equipment 160,000 125,000 Total assets ₹ 315,000.00 ₹ 289,700.00 HORIZONTAL ANALYSIS EXAMPLE
(11,500 ÷ 23,500) × 100% = 48.9%
HORIZONTAL ANALYSIS EXAMPLE XEROX CORPORATION Comparative Balance Sheets March 31, 2011 and 2010 Increase (Decrease) 2011 2010 Amount % Assets Current assets: Cash ₹ 12,000.00 ₹ 23,500.00 ₹ -11,500.00 (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 ₹ 315,000.00 ₹ 289,700.00 ₹ 25,300.00 8.7 HORIZONTAL ANALYSIS EXAMPLE
Let’s apply the same
procedures to the liability and stockholders’ equity sections of the balance sheet. ZEROX CORPORATION Comparative Balance Sheets December 31, 2011 and 2010 Increase (Decrease) 2011 2010 Amount % Liabilities and Stockholders' Equity Current liabilities: Accounts payable ₹ 67,000.00 ₹ 44,000.00 ₹ 23,000.00 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' ₹ 315,000.00 ₹ 289,700.00 ₹ 25,300.00 8.7 equity HORIZONTAL ANALYSIS EXAMPLE
Now, let’s apply the
procedures to the income statement. XEROX CORPORATION Comparative Income Statements For the Years Ended Marchr 31, 2011 and 2010 Increase (Decrease) 2011 2010 Amount % Net sales ₹ 520,000.00 ₹ 480,000.00 ₹ 40,000.00 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 ₹ 17,500.00 ₹ 22,400.00 ₹ -4,900.00 (21.9) XEROX CORPORATION Comparative Income Statements For the Years Ended March 31, 2011 and 2010 Increase (Decrease) 2011 2010 Amount % Net sales ₹ 520,000.00 ₹ 480,000.00 ₹ 40,000.00 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 Sales increased by 8.3% while6,400 7,000 net income decreased by (600) (8.6) Net income 21.9%. before taxes 25,000 32,000 (7,000) (21.9) Less income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income ₹ 17,500.00 ₹ 22,400.00 ₹ -4,900.00 (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. XEROX CORPORATION Comparative Income Statements For the Years Ended March 31, 2011 and 2010 Increase (Decrease) 2011 2010 Amount % Net sales ₹ 520,000.00 ₹ 480,000.00 ₹ 40,000.00 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 ₹ 17,500.00 ₹ 22,400.00 ₹ -4,900.00 (21.9) VERTICAL ANALYSIS
For For aa single single financial financial statement, statement, eacheach item item is is expressed expressed as as aa percentage percentage of of aa significant significant total, total, e.g., e.g., all all income income statement statement items items areare expressed expressed as as aa percentage percentage of of sales sales Vertical Vertical analysis analysis helps helps the the management management to to compare compare the the percentage percentage ofof different different components components with with competitive competitive enterprises enterprises percentages percentages or or industry industry average average percentages. percentages. VERTICAL ANALYSIS EXAMPLE The management of Sample Company asks you to prepare a vertical analysis for the comparative balance sheets of the company. VERTICAL ANALYSIS EXAMPLE Sample Company Balance Sheet (Assets) At December 31, 1999 and 1998 % of Total Assets 1999 1998 1999 1998 Cash ₹ 82,000.00 ₹ 30,000.00 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 ₹ 483,000.00 ₹ 387,000.00 100% 100% VERTICAL ANALYSIS EXAMPLE Sample Company Balance Sheet (Assets) At December 31, 1999 and 1998 % of Total Assets 1999 1998 1999 1998 Cash ₹ 82,000.00 ₹ 30,000.00 17% 8% Accts. Rec. 120,000 100,000 25% 26% Inventory 87,000 82,000 18% 21% Land 101,000 90,000 21% 23% 82,000 ÷ 483,000 Equipment = 17% rounded 110,000 100,000 23% 26% 30,000 Accum. ÷ 387,000 Depr. = 8% rounded (17,000) (15,000) -4% -4% Total ₹ 483,000.00 ₹ 387,000.00 100% 100% VERTICAL ANALYSIS EXAMPLE Sample Company Balance Sheet (Liabilities & Stockholders' Equity) At December 31, 1999 and 1998 % of Total Assets 1999 1998 1999 1998 Acts. Payable ₹ 76,000.00 ₹ 60,000.00 16% 16% Wages Payable 33,000 17,000 7% 4% Notes Payable 50,000 50,000 10% 13% 76,000 Common Stock÷ 483,000 = 16% rounded 170,000 160,000 35% 41% Retained Earnings 154,000 100,000 32% 26% Total ₹ 483,000.00 ₹ 387,000.00 100% 100% TREND PERCENTAGES
Show Show changes changes over over time time in in given given financial financial statement statement items items (can (can help help evaluate evaluate financial financial information information of of several several years) years) 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 ₹ 2,405.00 ₹ 2,244.00 ₹ 2,112.00 ₹ 1,991.00 ₹ 1,820.00 Expenses 2,033 1,966 1,870 1,803 1,701 Net income ₹ 372.00 ₹ 278.00 ₹ 242.00 ₹ 188.00 ₹ 119.00 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 ₹ 2,405.00 ₹ 2,244.00 ₹ 2,112.00 ₹ 1,991.00 ₹ 1,820.00 Expenses 2,033 1,966 1,870 1,803 1,701 Net income ₹ 372.00 ₹ 278.00 ₹ 242.00 ₹ 188.00 ₹ 119.00
1,991 - 1,820 = $171
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 Trend line 140 for Sales 130 % of 100 Base
Financial Financial statements statements that that show show only only percentages percentages and and nono absolute absolute Rupee Rupee amounts amounts
