Fundamental-Accounting-Principles-(17)

AnalysisofFinancialStatementsChapter17PowerPointEditor:BethKane,MBA,CPACopyright©2015McGraw-HillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGraw-HillEducation.17-C1:PurposeofAnalysis217-3ApplicationofanalyticaltoolsInvolvestransformingdataReducesuncertaintyBasicsofAnalysisFinancialstatementanalysishelpsusersmakebetterdecisions.InternalUsersManagersOfficersInternalAuditorsExternalUsersShareholdersLendersCustomersC1317-4BuildingBlocksofAnalysisC1LiquidityandefficiencySolvencyMarketprospectsProfitability417-5InformationforAnalysisC11.IncomeStatement2.BalanceSheet3.StatementofStockholders’Equity4.StatementofCashFlows5.NotestotheFinancialStatements517-C2:StandardsforComparisons617-7IntracompanyCompetitorsIndustryGuidelinesStandardsforComparisonC2Whenweinterpretouranalysis,itisessentialtocomparetheresultsweobtainedtootherstandardsorbenchmarks.717-8HorizontalAnalysisComparingacompany’sfinancialconditionandperformanceacrosstime.ToolsofAnalysisVerticalAnalysisComparingacompany’sfinancialconditionandperformancetoabaseamount.RatioAnalysisMeasurementofkeyrelationsbetweenfinancialstatementitems.C2817-P1:ComparativeStatements917-10HorizontalAnalysisP1Horizontalanalysisreferstoexaminationoffinancialstatementdataacrosstime.Horizontalanalysisreferstoexaminationoffinancialstatementdataacrosstime.1017-11ComparativeStatementsCalculateChangeinDollarAmountDollarchangeAnalysisperiodamountBaseperiodamount=–Whenmeasuringtheamountofthechangeindollaramounts,comparetheanalysisperiodbalancetothebaseperiodbalance.Theanalysisperiodisusuallythecurrentyearwhilethebaseperiodisusuallytheprioryear.P11117-12ComparativeStatementsCalculateChangeasaPercentPercentchangeDollarchangeBaseperiodamount100=×P1Whencalculatingthechangeasapercentage,dividetheamountofthedollarchangebythebaseperiodamount,andthenmultiplyby100toconverttoapercentage.1217-13HorizontalAnalysisP11317-14HorizontalAnalysisP11417-15TrendAnalysisTrendanalysisisusedtorevealpatternsindatacoveringsuccessiveperiods.TrendpercentAnalysisperiodamountBaseperiodamount100=×P11517-16Using2009asthebaseyearwewillgetthefollowingtrendinformation:P1TrendAnalysis1617-17TrendAnalysisWecanusethetrendpercentagestoconstructagraphsowecanseethetrendovertime.P117NEED-TO-KNOWComputetrendpercentsforthefollowingaccounts,using20X1asthebaseyear(roundpercentstowholenumbers).Statewhetherthesituationasrevealedbythetrendsappearstobefavorableorunfavorableforeachaccount.($inmillions)20X420X320X220X1Sales$500$350$250$200Costofgoodssold40017510050Salestrendpercents250%175%125%100%$500/$200$350/$200$250/$200$200/$200Costofgoodssoldtrendpercents800%350%200%100%$400/$50$175/$50$100/$50$50/$50P11817-P2:Common-SizeStatements1917-20VerticalAnalysisCommon-SizeStatementsCommon-sizepercentAnalysisamountBaseamount100=×FinancialStatementBaseAmountBalanceSheetTotalAssetsIncomeStatementRevenuesP22017-21Common-SizeBalanceSheetP22117-22Common-SizeIncomeStatementP22217-23Common-SizeGraphicsP2Common-SizeGraphicofAssetComponentsCommon-SizeGraphicofIncomeStatement23NEED-TO-KNOWExpressthefollowingcomparativeincomestatementsincommon-sizepercentsandassesswhetherornotthiscompany’ssituationhasimprovedinthemostrecentyear(roundpercentstowholenumbers).($inmillions)20X220X1Sales$800$500Totalexpenses560400Netincome$240$100Common-sizepercentsSales100%100%($800/$800)($500/$500)Totalexpenses70%80%($560/$800)($400/$500)Netincome30%20%($240/$800)($100/$500)Eachitemisexpressedasa%ofcurrentyear’ssalesP22417-P3:RatioAnalysis2517-26RatioAnalysisP3LiquidityandefficiencySolvencyMarketprospectsProfitability2617-27CurrentRatioAcid-testRatioAccountsReceivableTurnoverInventoryTurnoverDays’SalesUncollectedDays’SalesinInventoryTotalAssetTurnoverLiquidityandEfficiencyP32717-28WorkingCapitalWorkingcapitalrepresentscurrentassetsfinancedfromlong-termcapitalsourcesthatdonotrequirenear-termrepayment.Currentassets–Currentliabilities=WorkingcapitalMoreworkingcapitalsuggestsastrongliquiditypositionandanabilitytomeetcurrentobligations.P32817-29Thisratiomeasurestheshort-termdebt-payingabilityofthecompany.Ahighercurrentratiosuggestsastrongliquidityposition.CurrentRatioCurrentratio=CurrentassetsCurrentliabilitiesP32917-30Thisratioislikethecurrentratiobutexcludescurrentassetssuchasinventoriesandprepaidexpensesthatmaybedifficulttoquicklyconvertintocash.Acid-TestRatioAcid-testratio=Cash+Short-terminvestments+CurrentreceivablesCurrentliabilitiesReferredtoasQuickAssetsP33017-31Thisratiomeasureshowmanytimesacompanyconvertsitsreceivablesintocasheachyear.AccountsReceivableTurnoverAccountsreceivable=turnoverNetsalesAverageaccountsreceivable,netAverageaccountsreceivable=(Beginningacct.rec.+Endingacct.rec.)2P33117-32Thisratiomeasuresthenumberoftimesmerchandiseissoldandreplacedduringtheyear.InventoryTurnoverInventoryturnover=CostofgoodssoldAverageinventoryAverageinventory=(Beginninginventory+Endinginventory)2P33217-33Providesinsightintohowfrequentlyacompanycollectsitsaccountsreceivable.Days’SalesUncollectedDay'ssales=uncollectedAccountsreceiv