FS Analysis
FS Analysis
Analysis
Chapter 13
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Limitations of Financial Statement
Analysis
Differences in accounting methods
between companies sometimes make
comparisons difficult.
Technological Economic
changes factors
13-3
Learning Objective 1
13-4
Statements in Comparative and
Common-Size Form
An item on a financial
statement has little Common-size
meaning by itself. The statements
meaning of the numbers
can be enhanced by
drawing comparisons.
Ratios
13-5
Dollar and Percentage Changes on
Statements
Horizontal analysis (or trend analysis) shows the
changes between years in the financial data in
both dollar and percentage form.
13-6
Horizontal Analysis
13-7
Horizontal Analysis
CLOVER CORPORATION
Comparative Balance Sheets
December 31
Increase (Decrease)
This Year Last Year Amount %
Assets
Current assets:
Cash $ 12,000 $ 23,500
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 $ 289,700
13-8
Horizontal Analysis
Calculating Change in Dollar Amounts
The dollar
amounts for
last year
become the
“base” year
figures.
13-9
Horizontal Analysis
Calculating Change as a Percentage
13-10
Horizontal Analysis
CLOVER CORPORATION
Comparative Balance Sheets
December 31
Increase (Decrease)
This Year Last Year Amount %
Assets
Current assets:
Cash $ 12,000 $ 23,500 $ (11,500) (48.9)
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
($11,500
Total property and equipment ÷ $23,500)
160,000 × 100% = (48.9%)
125,000
Total assets $ 315,000 $ 289,700
13-11
Horizontal Analysis
We could do this
for the liabilities
and stockholders’
equity, but now
let’s look at the
income statement
accounts.
13-12
Horizontal Analysis
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Increase
(Decrease)
This Year Last Year Amount %
Sales $ 520,000 $ 480,000
Cost of goods sold 360,000 315,000
Gross margin 160,000 165,000
Operating expenses 128,600 126,000
Net operating income 31,400 39,000
Interest expense 6,400 7,000
Net income before taxes 25,000 32,000
Less income taxes (30%) 7,500 9,600
Net income $ 17,500 $ 22,400
13-13
Horizontal Analysis
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Increase
(Decrease)
This Year Last Year Amount %
Sales $ 520,000 $ 480,000 $ 40,000 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
OperatingSales
expenses
increased128,600 126,000
by 8.3%, yet 2,600 2.1
Net operating income decreased
net income 31,400 by 39,000
21.9%. (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 $ 22,400 $ (4,900) (21.9)
13-14
Horizontal Analysis
CLOVER CORPORATION
There were increases in both cost of goods
Comparative Income Statements
sold (14.3%) and operating expenses (2.1%).
For the Years Ended December 31
These increased costs more than offset theIncrease
increase in sales, yielding an overall (Decrease)
decrease inThis
net Year
income.
Last Year Amount %
Sales $ 520,000 $ 480,000 $ 40,000 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 $ 22,400 $ (4,900) (21.9)
13-15
Trend Percentages
Trend percentages
state several years’
financial data in terms
of a base year, which
equals 100 percent.
13-16
Trend Analysis
13-17
Trend Analysis
13-18
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31
Year
Item 2011 2010 2009 2008 2007
Sales $ 400,000 $ 355,000 $ 320,000 $ 290,000 $ 275,000
Cost of goods sold 285,000 250,000 225,000 198,000 190,000
Gross margin 115,000 105,000 95,000 92,000 85,000
The base
year is 2007, and its amounts
will equal 100%.
13-19
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31
Year
Item 2011 2010 2009 2008 2007
Sales 105% 100%
Cost of goods sold 104% 100%
Gross margin 108% 100%
Berry Products
Income Information
For the Years Ended December 31
Year
Item 2011 2010 2009 2008 2007
Sales 145% 129% 116% 105% 100%
Cost of goods sold 150% 132% 118% 104% 100%
Gross margin 135% 124% 112% 108% 100%
130
Sales
COGS
120
GM
110
100
2007 2008 2009 2010 2011
Year
13-22
Common-Size Statements
Vertical analysis focuses
on the relationships
among financial
statement items at a
given point in time. A
common-size financial
statement is a vertical
analysis in which each
financial statement item
is expressed as a
percentage.
13-23
Common-Size Statements
In income
statements, all
items usually
are expressed
as a percentage
of sales.
13-24
Gross Margin Percentage
Gross Margin = Gross Margin
Percentage Sales
13-25
Common-Size Statements
In balance
sheets, all items
usually are
expressed as a
percentage of
total assets.
13-26
Common-Size Statements
13-27
Common-Size Statements
13-28
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
Percentages
This Year Last Year This Year Last Year
Sales $ 520,000 $ 480,000 100.0 100.0
Cost of goods sold 360,000 315,000
Gross margin 160,000 165,000 Sales is
Operating expenses 128,600 126,000
usually the
Net operating income 31,400 39,000
base and is
Interest expense 6,400 7,000
Net income before taxes 25,000 32,000
expressed
Less income taxes (30%) 7,500 9,600 as 100%.
Net income $ 17,500 $ 22,400
13-29
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
Percentages
This Year Last Year This Year Last Year
Sales $ 520,000 $ 480,000 100.0 100.0
Cost of goods sold 360,000 315,000 69.2 65.6
Gross margin 160,000 165,000
Operating expenses 128,600 126,000
NetThis Year’s
operating Cost ÷ This
income 31,400Year’s Sales × 100%
39,000
Interest expense ÷ $520,000
( $360,000 ) × 100%
6,400 7,000 = 69.2%
Net income before taxes 25,000 32,000
Last Year’s
Less income taxes (30%)
Cost ÷ Last
7,500
Year’s
9,600
Sales × 100%
( $315,000 ÷ $$480,000
Net income
) × 100% = 65.6%
17,500 $ 22,400
13-30
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
What conclusions can we draw? Percentages
This Year Last Year This Year Last Year
Sales $ 520,000 $ 480,000 100.0 100.0
Cost of goods sold 360,000 315,000 69.2 65.6
Gross margin 160,000 165,000 30.8 34.4
Operating expenses 128,600 126,000 24.8 26.2
Net operating income 31,400 39,000 6.0 8.2
Interest expense 6,400 7,000 1.2 1.5
Net income before taxes 25,000 32,000 4.8 6.7
Less income taxes (30%) 7,500 9,600 1.4 2.0
Net income $ 17,500 $ 22,400 3.4 4.7
13-31
Quick Check ✓
Which of the following statements describes
horizontal analysis?
a. A statement that shows items appearing
on it in percentage and dollar form.
b. A side-by-side comparison of two or
more years’ financial statements.
c. A comparison of the account balances on
the current year’s financial statements.
d. None of the above.
13-32
Quick Check ✓
Which of the following statements describes
horizontal analysis?
a. A statement that shows items appearing
on it in percentage and dollar form.
b. A side-by-side comparison of two or
more years’ financial statements.
c. A comparison of the account balances on
Horizontal
the current analysis shows the
year’s financial changes
statements.
between years in the financial data in both
d. None of the above.
dollar and percentage form.
13-33
Now, let’s look at
Norton
Corporation’s
financial statements
for this year and
last year.
13-34
NORTON CORPORATION
Balance Sheets
December 31
13-37
Learning Objective 2
13-38
Ratio Analysis – The Common
Stockholder NORTON CORPORATION
This Year
The ratios that Number of common shares
outstanding
are of the most Beginning of year 17,000
End of year 27,400
interest to
Net income $ 53,690
stockholders Stockholders' equity
include those Beginning of year 180,000
13-39
Earnings Per Share
Net Income – Preferred Dividends
Earnings per Share =
Average Number of Common
Shares Outstanding
13-40
Earnings Per Share
Net Income – Preferred Dividends
Earnings per Share =
Average Number of Common
Shares Outstanding
13-41
Price-Earnings Ratio
Price-Earnings Market Price per Share
=
Ratio Earnings per Share
Price-Earnings $20.00
= = 8.26 times
Ratio $2.42
13-42
Dividend Payout Ratio
Dividend Dividends per Share
=
Payout Ratio Earnings per Share
Dividend $2.00
= = 82.6%
Payout Ratio $2.42
13-43
Dividend Yield Ratio
Dividend Dividends per Share
=
Yield Ratio Market Price per Share
Dividend $2.00
= = 10.00%
Yield Ratio $20.00
13-44
Return on Total Assets
Return on Net Income + [Interest Expense × (1 – Tax Rate)]
=
Total Assets Average Total Assets
13-45
Return on Common Stockholders’ Equity
13-46
Financial Leverage
Financial leverage results from the difference between
the rate of return the company earns on investments
in its own assets and the rate of return that the
company must pay its creditors.
Fixed rate of
Return on return on Positive
investment in > borrowed = financial
assets funds leverage
13-50
Book Value Per Share
Book Value Common Stockholders’ Equity
=
per Share Number of Common Shares Outstanding
13-52
Ratio Analysis – The Short–Term
Creditor
NORTON CORPORATION
Short-term This Year
13-53
Working Capital
The excess of current assets over
current liabilities is known as
working capital.
13-54
Working Capital
December 31
This Year
Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000
13-55
Current Ratio
Current Current Assets
=
Ratio Current Liabilities
13-56
Current Ratio
Current Current Assets
=
Ratio Current Liabilities
Current $65,000
= = 1.55
Ratio $42,000
13-57
Acid-Test (Quick) Ratio
Acid-Test Quick Assets
=
Ratio Current Liabilities
Acid-Test $50,000
= = 1.19
Ratio $42,000
13-58
Accounts Receivable Turnover
Accounts
Sales on Account
Receivable =
Average Accounts Receivable
Turnover
Accounts
$494,000
Receivable = = 26.7 times
($17,000 + $20,000) ÷ 2
Turnover
13-59
Average Collection Period
Average 365 Days
Collection = Accounts Receivable Turnover
Period
Average
365 Days
Collection = = 13.67 days
26.7 Times
Period
13-60
Inventory Turnover
Inventory Cost of Goods Sold
Turnover = Average Inventory
This ratio measures how many times a
company’s inventory has been sold and
replaced during the year.
If a company’s inventory
turnover Is less than its
industry average, it either
has excessive inventory or
the wrong types of inventory.
13-61
Inventory Turnover
Inventory Cost of Goods Sold
=
Turnover Average Inventory
Inventory $140,000
= = 12.73 times
Turnover ($10,000 + $12,000) ÷ 2
13-62
Average Sale Period
Average 365 Days
=
Sale Period Inventory Turnover
13-63
Learning Objective 4
13-64
Ratio Analysis – The Long–Term
Creditor
Long-term creditors are concerned with a
company’s ability to repay its loans over the
long-run.
NORTON CORPORATION
This Year
Earnings before interest
expense and income taxes $ 84,000
Interest expense 7,300
income.
13-65
Times Interest Earned Ratio
Earnings Before Interest Expense
Times and Income Taxes
Interest = Interest Expense
Earned
Times
$84,000
Interest = = 11.51 times
$7,300
Earned
This is the most common
measure of a company’s ability
to provide protection for its long-
term creditors. A ratio of less
than 1.0 is inadequate.
13-66
Debt-to-Equity Ratio
Debt–to–
Total Liabilities
Equity =
Stockholders’ Equity
Ratio
13-67
Debt-to-Equity Ratio
Debt–to–
Total Liabilities
Equity =
Stockholders’ Equity
Ratio
Debt–to–
$112,000
Equity = = 0.48
$234,390
Ratio
13-68
Published Sources That Provide Comparative Ratio Data
13-69
End of Chapter 13
13-70