Financial Statement Analysis

Chapter 14

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial Statements Are
Designed for Analysis
C la s s ifie d C o m p a ra tiv e C o n s o lid a te d
F in a n c ia l F in a n c ia l F in a n c ia l
S ta te m e n ts S ta te m e n ts S ta te m e n ts

I t e m s w i t h c e r t a in A m o u n ts fro m In fo r m a tio n fo r th e
c h a r a c te r is tic s a r e s e v e ra l y e a rs p a r e n t a n d s u b s id ia ry
g r o u p e d to g e th e r. a p p e a r s id e b y s id e . a re p re s e n te d .

R e s u lts H e lp s id e n t ify P r e s e n t e d a s if
in s ta n d a r d iz e d , s i g n if i c a n t th e tw o c o m p a n ie s
m e a n in g fu l changes and a r e a s in g le
s u b to ta ls . tre n d s . b u s in e s s u n it.

14-2
Tools of Analysis

Dollar &
Trend
Percentage
Percentages
Changes

Component
Percentages
Ratios

14-3
Dollar and Percentage Changes

Dollar Change:
Dollar Analysis Period Base Period
Change = Amount – Amount

Percentage Change:
Percent Base Period
Change = Dollar Change
÷ Amount

14-4
 Trend Percentages

Trend analysis is used to reveal patterns in

data covering successive periods.

Trend Analysis Period Amount

= × 100%
Percentages Base Period Amount

14-5
Component Percentages
Examine the relative size of each item in the financial
statements by computing component
(or common-sized) percentages.

Component Analysis Amount

Percentage
=
Base Amount
× 100%

Financial Statement Base Amount

Balance Sheet Total Assets
Income Statement Revenues

14-6
Ratios
A r a tio is a s im p le m a t h e m a t ic a l e x p r e s s io n
o f th e r e la tio n s h ip b e tw e e n o n e ite m a n d a n o th e r.

A lo n g w ith d o lla r a n d p e r c e n ta g e c h a n g e s ,
tre n d p e rc e n ta g e s , a n d c o m p o n e n t p e r c e n ta g e s ,
r a tio s c a n b e u s e d to c o m p a r e :

P a s t p e r fo r m a n c e to O th e r c o m p a n ie s to
p re s e n t p e rfo rm a n c e . yo u r c o m p a n y.

14-7
Current Ratio
This
This ratio
ratio measures
measures the
the
short-term
short-term debt-paying
debt-paying
ability
ability of
of the
the company.
company.

Current Current Assets

=
Ratio Current Liabilities

Current $65,000
= = 1.55 : 1
Ratio
$42,000
14-8
Quick Ratio

Quick Quick Assets

=
Ratio Current Liabilities

Quick assets are cash, marketable

securities, and receivables.
This ratio is like the current
ratio but excludes current assets
such as inventories that may be
difficult to quickly convert into cash.

14-9
Uses and Limitations of Financial
Ratios
U ses L im ita tio n s

R a tio s h e lp u s e rs M a n a g e m e n t m a y e n te r
u n d e rs ta n d in t o t r a n s a c t io n s m e r e ly
f in a n c ia l r e la tio n s h ip s . to im p ro v e th e r a tio s .

R a tio s p ro v id e fo r R a tio s d o n o t h e lp w ith

q u ic k c o m p a r is o n a n a l y s i s o f t h e c o m p a n y 's
o f c o m p a n ie s . p r o g r e s s to w a rd
n o n f in a n c i a l g o a l s .

14-10
Measures of Profitability

An income statement can be prepared in either a

multiple-step or single-step format.

The single-step format

is simpler. The multiple-step
format provides more detailed
information.

14-11
Earning Per Share

Net Income
= EPS
Average Shares of Capital Stock Outstanding

Look
Look back
back at
at the
the information
information from
from Babson
Babson and
and get
get the
the
values
values we
we need
need toto calculate
calculate earning
earning per
per share.
share.

$53,690
= $1.96
27,400

14-12
Price-Earnings Ratio
Current Market Price of one Share of Stock
= P/E
Earnings Per Share

$15.25
= 7.78
$1.96

The measure shows us the relationship between earning

of the company
company and the market price of its stock.

14-13
Return On Investment (ROI)
This ratio is a good measure of
the efficiency of utilization of
assets by the business.

Annual return (profit) from and investment

ROI =
Average amount invested

14-14
 Operating Cycle
1.

e
bl
Pu

r e of
iva
r ch
t s on
ce
a se
un cti
Cash of
co lle

M
ac Co

er
ch
3.

an
di s
Accounts e
Inventory
Receivable

2. Sale of merchandise on account

14-15
End of Chapter 14

14-16