Professional Documents
Culture Documents
Analysis
Chapter 14
Learning Objective 1
Perform a horizontal analysis
of financial statements
Evaluating Performance
of a Company
Performance can be judged in several
ways:
From year to year
Compared with a competitor
Compared with industry averages
Methods of Analysis
Three ways to analyze financial
statements
Horizontal analysis
Vertical analysis
Ratio analysis
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Horizontal Analysis
Step 1: Compute the dollar amount of the
change from the earlier period to the later
period.
Step 2: Divide the dollar amount of change by
the earlier period amount. We call the earlier
period the base period.
Increase (Decrease)
(amounts in
thousands)
Sales revenue
2014
$858,000
2013
$803,000
Amount
$55,000
$858,000 - $803,000 =
$55,000
Percentag
e
6.8%
E14-12A: Horizontal
Analysis Example
2014
Net sales $567,276
2013
Difference
$492,000
$75,276
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E14-12A (cont.)
Mariner Designs
Horizontal Analysis of Comparative Income Statement
Years Ended December 31, 2014 and 2013
Incr.(Decr.)
2014
2013 AMT
%
$492,00
Total revenues
$567,276
$75,276 15%
0
Expenses:
19,30
8%
Cost of goods sold
266,805 247,500
5
8,750
6%
Operating expenses
148,750 140,000 8,640
38.0
Other expenses
31,140 22,500
36,69 9.0%
%
Total expenses
446,695 410,000
5 47.0
38,58
Net income
120,581 82,000
1
%
Copyright 2015 Pearson Education, Inc.
Trend Percentages
Trend percentages are a form of
horizontal analysis
Trends indicate the direction a business
is taking
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Net revenue
Net income
(in thousands)
Net revenue
Net income
2014
2013
2012 2011
2010
$
1,700
$
180
2014
$
1,250
$ 120
2010
136%
106%
102%
92%
100%
150%
125%
95%
90%
100%
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Learning Objective 2
Perform a vertical analysis of
financial statements
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17
18
19
20
Copyright 2015 Pearson Education, Inc.
Learning Objective 3
Prepare and use common-size
financial statements
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$567,276
2013
$492,00
0
Expenses:
$247,50
0
Operating expenses
148,750 140,000
Other expenses
31,140 22,500
$410,00
2015 Pearson Education,
Inc.
Total expenses Copyright
$446,695
Cost of goods sold
$266,805
2013
2014
100.0%
100.0%
47.0%
50.0%
26.0%
28.0%
5.0%
5.0%
79.0%
83.0%
21.0%
17.0%
Learning Objective 4
Compute the standard
financial ratios
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Ratio Analysis
A means of evaluating the
relationships between key components
of the financial statements
The information needed can be found
in the companys financial statements
A few ratios require the amount of the
companys closing market price
Some ratios require knowledge of the
number of shares outstanding
Copyright 2015 Pearson Education, Inc.
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*Average inventory =
(Beginning inventory + Ending inventory) / 2
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Ability to Collect
Receivables
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Current ratio =
$178,750 / 125,000
= 1.43
Acid test =
$16,500 + $10,750 +
$49,000 / $125,000 =
0.61
Inventory turnover =
$319,000
($81,000
+ $78,500)
Days sales
in A/R =/
2
= 4.0 + $77,360) /
( $49,000
2 ($427,050 / 365) =
33
Copyright 2015 Pearson Education,
Inc.
54 days
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Times-interest-earned (interest
coverage)how many times
operating income covers interest
expense
The 2014 and 2013 times-interest-earned ratio for Supermart follows:
35
Measuring Profitability
Rate of return on net sales (profit
margin)percentage of each sales
dollar that is earned as net income
The 2014 and 2013 rate of return on sales for Supermart follows:
36
Measuring Profitability
Rate of return on total assetshow
successful the business is using its
assets to earn a profit
The 2014 rate of return on total assets for Supermart follows:
37
Measuring Profitability
Rate of return on common stockholders equity
how much income is earned for every $1 invested
by the common stockholder
The 2014 rate of return on common stockholders equity for Supermart follows:
38
Measuring Profitability
Trading on the equity (using
leverage)company borrows at a
lower rate, then invests the money
to earn a higher rate
A company is favorably leveraged if
return on assets is greater than the
return on stockholders equity
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Measuring Profitability
Earnings per share of common stock
income generated by one share of
stock
The 2014 and 2013 earnings per share for Supermart follows:
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Analyzing Stock as an
Investment
Price/earnings ratio
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Analyzing Stock as an
Investment
Dividend yieldpercentage of a
stocks market value that is returned
annually as dividends
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Analyzing Stock as an
Investment
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$17.50 /$0.875
20
Dividend yield
ratio
0.245/17.50
1.4%
772,000
205,000 /
81,000
$7.00
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End of Chapter
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