Financial statement analysis презентация

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Learning Objectives Describe basic financial statement analytical methods. Use financial statement analysis to assess the solvency of a business. Use financial statement analysis to assess the profitability of a business.

Слайд 1
Financial Statement Analysis
Chapter 17
© 2012 Cengage Learning. All Rights Reserved. May

not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

Reeve Warren Duchac


PRINCIPLES OF FINANCIAL ACCOUNTING


PRINCIPLES OF ACCOUNTING


ACCOUNTING PRINCIPLES
Using excel for Success

12e

24e

2e

Слайд 2Learning Objectives
Describe basic financial statement analytical methods.
Use financial statement analysis to

assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.
Describe the contents of corporate annual reports.

Слайд 3Learning Objective 1
Describe basic financial statement analytical methods.

Слайд 4Basic Analytical Methods
Users analyze a company’s financial statements using a variety

of analytical methods. Three such methods are as follows:
Horizontal analysis
Vertical analysis
Common-sized statements

LO 1

Слайд 5Horizontal Analysis
The percentage analysis of increases and decreases in related items

in comparative financial statements is called horizontal analysis.

LO 1

Слайд 6Horizontal Analysis
LO 1

Слайд 7LO 1
Horizontal Analysis

Слайд 8Horizontal Analysis
LO 1

Слайд 9Horizontal Analysis

LO 1

Слайд 10Horizontal Analysis
LO 1

Слайд 11Horizontal Analysis
LO 1

Horizontal Analysis:
Difference

$296,500
Base year (2011) $1,234,000

= 24.0%


Слайд 12LO 1
Horizontal Analysis

Слайд 13
Horizontal Analysis:
Difference

$37,500
Base year (2011) $ 100,000

= 37.5%


LO 1

Horizontal Analysis

Слайд 14EE 17-1

Слайд 15Vertical Analysis
A percentage analysis used to show the relationship of each

component to the total within a single financial statement is called vertical analysis.

LO 1

Слайд 16Vertical Analysis
In a vertical analysis of the balance sheet, each asset

item is stated as a percent of the total assets.
Each liability and stockholders’ equity item is stated as a percent of the total liabilities and stockholders’ equity.

LO 1

Слайд 17LO 1
Vertical Analysis

Слайд 18Vertical Analysis

Vertical Analysis:
Current Assets $550,000

Total Assets $ 1,139,500

= 48.3%


LO 1

Слайд 19LO 1
Vertical Analysis
In a vertical analysis of the income statement, each

item is stated as a percent of net sales.

Слайд 20LO 1
Vertical Analysis

Слайд 21Vertical Analysis
LO 1

Vertical Analysis:
Selling expenses $191,000
Net sales

$1,498,000

= 12.8%


Слайд 22EE 17-2

Слайд 23LO 1
Common-Sized Statements
In a common-sized statement, all items are expressed as

percentages with no dollar amounts shown.
Common-sized statements are useful for comparing the current period with prior periods, individual businesses with one another, or one business with industry averages.

Слайд 24LO 1
Common-Sized Statements

Слайд 25Learning Objective 2
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.

Слайд 26LO 2
Solvency Analysis
All users of financial statements are interested in the

ability of a company to do the following:
Meet its financial obligations (debts), called solvency.
Earn income, called profitability.

Слайд 27Solvency Analysis
Solvency analysis focuses on the ability of a business to

pay its current and noncurrent liabilities.
Solvency and profitability are interrelated. A company that cannot pay its debts will have difficulty obtaining credit, which can decrease its profitability.

LO 2

Слайд 28Current Position Analysis
A company’s ability to pay its current liabilities is

called current position analysis. It is of special interest to short-term creditors.

LO 2

Слайд 29Working Capital
The excess of current assets over current liabilities is called

working capital. Working capital is often used to evaluate a company’s ability to pay current liabilities.
Working capital is computed as follows:

LO 2

Working Capital = Current Assets – Current Liabilities

Слайд 30Current Ratio
The current ratio, sometimes called the working capital ratio or

bankers’ ratio, also measures a company’s ability to pay its current liabilities.
The current ratio is computed as follows:

LO 2

Слайд 31LO 2
Current Ratio
The current ratio for Lincoln Company is computed below.

2012 2011

Current assets $550,000 $533,000
Current liabilities $210,000 $243,000

Current ratio 2.6 2.2

Слайд 32LO 2
Quick Ratio
A ratio that measures the “instant” debt-paying ability of

a company is called the quick ratio, or acid-test ratio. It is computed as follows:

Quick assets are cash and other assets that can be easily converted to cash.


Слайд 33






LO 2
Quick Assets
The quick ratio for Lincoln Company is computed below.




2012 2011

Quick ratio 1.3 1.0

Quick assets:
Cash $ 90,500 $ 64,700
Temporary Investments 75,000 60,000
Accounts receivable (net) 115,000 120,000
Total quick assets $280,500 $244,700
Current liabilities $210,000 $243,000

Слайд 34EE 17-3

Слайд 35Accounts Receivable Turnover
The relationship between sales and accounts receivable may be

stated as accounts receivable turnover. Collecting accounts receivable as quickly as possible improves a company’s solvency.
The accounts receivable turnover is computed as follows:

LO 2

Слайд 36 Accounts receivable turnover

12.7 9.2

Net sales $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,000 120,000
Total $ 235,000 $ 260,000
Average (Total ÷ 2) $ 117,500 $ 130,000

2012 2011

Accounts Receivable Turnover

LO 2

The accounts receivable turnover for Lincoln Company is computed below.

Слайд 37Number of Days’ Sales in Receivables
The number of days’ sales in

receivables is an estimate of the length of time (in days) the accounts receivable have been outstanding. It is computed as follows:

LO 2

Слайд 38LO 2
Number of Days’ Sales in Receivables




Number of days’ sales in

receivables 28.6 39.5

The number of days’ sales in receivables for Lincoln Company is computed below.

Слайд 39EE 17-4

Слайд 40Inventory Turnover
The relationship between the volume of goods (merchandise) sold and

inventory may be stated as the inventory turnover. The purpose of this ratio is to assess the efficiency of a firm in managing its inventory.
The inventory turnover is computed as follows:

LO 2

Слайд 41



LO 2
Inventory Turnover
Inventory turnover

3.8 2.8

2012 2011

Cost of goods sold $1,043,000 $820,000
Inventories:
Beginning of year $ 283,000 $311,000
End of year 264,000 283,000
Total $ 547,000 $594,000
Average (Total ÷ 2) $ 273,500 $297,000

Lincoln’s inventory balance at the beginning of 2011 is $311,000.

Слайд 42LO 2
Number of Days’ Sales in Inventory
The number of days’ sales

in inventory is a rough measure of the length of time it takes to purchase, sell, and replace the inventory.
The number of days’ sales in inventory is computed as follows:

Слайд 43



Average Inventory $273,500 $297,000


LO 2
Number of Days’ Sales in Inventory
The number of days’

sales in inventory for Lincoln Company is computed below.

$547,000 ÷ 2

$594,000 ÷ 2

2012 2011

(continued)

Слайд 44Average Inventory $273,500 $297,000
Average daily cost of goods sold $2,858 $2,247


2012 2011
LO

2

Number of Days’ Sales in Inventory

The number of days’ sales in inventory for Lincoln Company is computed below.

$1,043,000 ÷ 365

$820,000 ÷ 365

Number of days’ sales in inventory 95.7 132.2

Слайд 45EE 17-5

Слайд 46Ratio of Fixed Assets to Long-Term Liabilities
The ratio of fixed assets

to long-term liabilities is a solvency measure that indicates the margin of safety of the note-holders or bondholders. It also indicates the ability of the business to borrow additional funds on a long-term basis.
The ratio is computed as follows:

LO 2

Слайд 47LO 2
Ratio of Fixed Assets to Long-Term Liabilities
Ratio of fixed

assets to
long-term liabilities 4.4 2.4

To illustrate, the ratio of fixed assets to long-term liabilities for Lincoln Company is computed below.

Слайд 48Ratio of Liabilities to Stockholders’ Equity
The relationship between the total claims

of the creditors and the owners—the ratio of liabilities to stockholders’ equity—is a solvency measure that indicates the margin of safety for creditors.
The ratio is computed as follows:

LO 2

Слайд 49LO 2
Ratio of Liabilities to Stockholders’ Equity
Ratio of liabilities to


stockholders’ equity 0.4 0.6

The ratio of liabilities to stockholders’ equity for Lincoln Company is computed below.

Слайд 50EE 17-6

Слайд 51Number of Times Interest Charges Earned
Corporations in some industries normally have

high ratios of debt to stockholders’ equity. For such corporations, the relative risk of the debt-holders is normally measured as the number of times interest charges are earned (during the year), sometimes called the fixed charge coverage ratio.

LO 2

Слайд 52LO 2
Number of Times Interest Charges Earned
It is computed as follows:



Слайд 53LO 2
Number of Times Interest Charges Earned
The number of times interest

charges are earned for Lincoln Company is computed below.





Number of times interest
charges earned 28.1 12.2

2012 2011

Income before income tax $162,500 $134,600
Add interest expense 6,000 12,000
Amount available to meet
interest charges $168,500 $146,600

Слайд 54LO 2
Number of Times Interest Charges Earned
The number of times interest

charges are earned can be adapted for use with dividends on preferred stock.
The number of times preferred dividends are earned is computed as follows:

Слайд 55EE 17-7

Слайд 56Learning Objective 3
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.

Слайд 57Profitability Analysis
Profitability analysis focuses primarily on the relationship between operating results

and the resources available to a business.

LO 3

Слайд 58Ratio of Net Sales to Assets
The ratio of net sales to

assets is a profitability measure that shows how effectively a company utilizes its assets.
The ratio is computed as follows:

LO 3

Слайд 59LO 3
Ratio of Net Sales to Assets




2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500

The ratio of net sales to assets for Lincoln Company is computed below.

(continued)

Слайд 60LO 3
Ratio of Net Sales to Assets




2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500

The ratio of net sales to assets for Lincoln Company is computed below.

Ratio of net sales to assets 1.4 1.2

Слайд 61



EE 17-8

Слайд 62Rate Earned on Total Assets
The rate earned on total assets measures

the profitability of total assets, without considering how the assets are financed.
It is computed as follows:

LO 3

Слайд 63LO 3
Rate Earned on Total Assets
Rate earned on total assets

8.2% 7.3%

This ratio for Lincoln Company is computed below. Total assets are $1,187,500 at the beginning of 2011.

Слайд 64EE 17-9

Слайд 65Rate Earned on Stockholders’ Equity
The rate earned on stockholders’ equity measures

the rate of income earned on the amount invested by the stockholders.
It is computed as follows:

LO 3

Слайд 66LO 3
Rate Earned on Stockholders’ Equity




Rate earned on stockholders’
equity

11.3% 10.0%

The rate for Lincoln Company is computed below. Total stockholders’ equity is $750,000 at the beginning of 2011.

Слайд 67Rate Earned on Stockholders’ Equity
The difference between the rate earned on

stockholders’ equity and the rate earned on total assets is called leverage.

LO 3

Слайд 68LO 3
Rate Earned on Stockholders’ Equity
For Lincoln Company, the effect of

leverage is computed as follows:

Слайд 69LO 3
Rate Earned on Stockholders’ Equity

Слайд 70Rate Earned on Common Stockholders’ Equity
The rate earned on common stockholders’

equity measures the rate of profits earned on the amount invested by the common stockholders.
It is computed as follows:

LO 3

Слайд 71Rate Earned on Common Stockholders’ Equity
LO 3
Lincoln Company had $150,000 of

6% preferred stock outstanding on December 31, 2012 and 2011. Thus, preferred dividends of $9,000 ($150,000 x 6%) are deducted from net income. Lincoln’s common stockholders’ equity is determined as follows:

(continued)

Слайд 72

LO 3




Rate earned on common
stockholders’ equity

12.5% 10.9%

Rate Earned on Common Stockholders’ Equity

Слайд 73EE 17-10

Слайд 74Earnings per Share on Common Stock
Earnings per share (EPS) on common

stock measures the share of profits that are earned by a share of common stock. GAAP requires the reporting of earnings per share in the income statement.
It is computed as follows:

LO 3

Слайд 75LO 3
Earnings per Share on Common Stock
Earnings per share on

common stock $1.64 $1.35

2012 2011

Net income $91,000 $76,500
Less preferred dividends 9,000 9,000
Total $82,000 $67,500
Shares of common stock 50,000 50,000

EPS for Lincoln Company is computed below.

Слайд 76Price-Earnings Ratio
Another profitability measure quoted by the financial press is the

price-earnings (P/E) ratio on common stock. The price-earnings ratio on common stock measures a company’s future earnings prospects.
The price-earnings ratio is computed as follows:

LO 3

Слайд 77LO 3
Price-earnings ratio on
common stock

25 20

Price-Earnings Ratio

The P/E ratio for Lincoln Company is computed below.

Слайд 78EE 17-11

Слайд 79Dividends per Share
Dividends per share can be reported with earnings per

share to indicate the relationship between dividends and earnings.
Comparing these two per-share amounts measures the extent to which earnings are being distributed to common shareholders. The ratio for dividends per share is at the top of the next slide.

LO 3

(continued)

Слайд 80Dividends per Share
LO 3


Dividends per share of common stock

$0.80 $0.60

Слайд 81Dividends and Earnings per Share
LO 3

Слайд 82Dividend Yield
The dividend yield on common stock measures the rate of

return to common stockholders from cash dividends.
It is of special interest to investors whose objective is to earn dividends from their investment. It is computed as follows:

LO 3

Слайд 83LO 3
Dividend Yield
Dividend yield on common stock

2.0% 2.2%

The dividend yield for Lincoln Company is computed below.

Слайд 84LO 3
Summary of Analytical Measures
(continued)

Слайд 85(continued)
LO 3
Summary of Analytical Measures

Слайд 86LO 3
Summary of Analytical Measures
(concluded)

Слайд 87Learning Objective 4
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.
Describe the contents of corporate annual reports.

Слайд 88
Corporate Annual Reports
In addition to the financial statements and the accompanying

notes, corporate annual reports usually include the following sections:
Management discussion and analysis
Report on internal control
Report on fairness of the financial statements

LO 4

Слайд 89

LO 4
Management Discussion and Analysis
Management’s Discussion and Analysis (MD&A) is required

in annual reports filed with the SEC.
It contains management’s analysis of current operations and its plans for the future.
Typical items included in the MD&A are:
Management’s analysis and explanations of any significant changes between the current and prior year’s financial statements.

(continued)

Слайд 90

LO 4
Management Discussion and Analysis

Important accounting principles or policies that could

affect interpretation of the financial statements.
Management’s assessment of the company’s liquidity and the availability of capital to the company.
Significant risk exposures that might affect the company.
Any “off-balance-sheet” arrangements such as leases not included directly in the financial statements.

Слайд 91
Report on Internal Control
The Sarbanes-Oxley Act of 2002 requires a report

stating management’s responsibility for establishing and maintaining internal control. In addition, management’s assessment of the effectiveness of internal controls over financial reporting is included in the report.
It also requires a public accounting firm to verify management’s conclusions on internal control.

LO 4

Слайд 92Report on Fairness of Financial Statements
All publicly held corporations are required

by the Sarbanes-Oxley Act of 2002 to have an independent audit (examination) of their financial statements. The CPA firm that conducts the audit renders an opinion on the fairness of the statements.

LO 4

Слайд 93
Appendix
Unusual Items on the Income Statement

Слайд 94Unusual Items on the Income Statement
Unusual items affecting the current period’s

income statement include the following:
Discontinued operations
Extraordinary items

Appendix

Слайд 95Discontinued Operations
A company may discontinue a segment of its operations by

selling or abandoning the segment’s operations.
A note accompanying the income statement should describe the operations sold, including such details as the date operations were discontinued, the assets sold, and the effect (if any) on current and future operations.

Appendix

Слайд 96Discontinued Operations
Jones Corporation produces and sells electrical products, hardware supplies, and

lawn equipment. Because of lack of profits, Jones discontinues its electrical products operation and sells the remaining inventory and other assets at a loss of $100,000. Exhibit 11 (next slide) illustrates the reporting of the loss on the discontinued operations.

Appendix

Слайд 97Discontinued Operations

Appendix

Слайд 98Extraordinary Items
An extraordinary item is defined as an event or transaction

with both of the following characteristics:
Unusual in nature
Infrequent in occurrence

Appendix

Слайд 99Extraordinary Items

Appendix

Слайд 100Reporting Earnings per Share
Appendix

Слайд 101Financial Statement Analysis
The End

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