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    Common-Size Financial Statements and Multiple Ratios

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    The document discusses common-size financial statements and multiple ratios used in financial statement analysis. It provides examples of horizontal and vertical common-size analysis and examines liquidity ratios, activity ratios, solvency ratios and leverage, and return on investments and profitability ratios. These analytical tools measure an entity's ability to pay current and noncurrent obligations, manage assets, control costs, and generate profits.

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    Common-Size Financial Statements and Multiple Ratios

    Uploaded by

    roxette
    27 views13 pages
    The document discusses common-size financial statements and multiple ratios used in financial statement analysis. It provides examples of horizontal and vertical common-size analysis and examines liquidity ratios, activity ratios, solvency ratios and leverage, and return on investments and profitability ratios. These analytical tools measure an entity's ability to pay current and noncurrent obligations, manage assets, control costs, and generate profits.

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    The document discusses common-size financial statements and multiple ratios used in financial statement analysis. It provides examples of horizontal and vertical common-size analysis and examines liquidity ratios, activity ratios, solvency ratios and leverage, and return on investments and profitability ratios. These analytical tools measure an entity's ability to pay current and noncurrent obligations, manage assets, control costs, and generate profits.

    Copyright:

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    Download as pptx, pdf, or txt
    27 views13 pages

    Common-Size Financial Statements and Multiple Ratios

    Uploaded by

    roxette
    The document discusses common-size financial statements and multiple ratios used in financial statement analysis. It provides examples of horizontal and vertical common-size analysis and examines liquidity ratios, activity ratios, solvency ratios and leverage, and return on investments and profitability ratios. These analytical tools measure an entity's ability to pay current and noncurrent obligations, manage assets, control costs, and generate profits.

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    of 13

    Financial Statement Analysis

    Common-Size Financial Statements


    and Multiple Ratios

    Financial Statement Analysis

    Horizontal Common-size Analysis

    focuses on changes in operating results and financial position


    during two or more accounting periods

    The changes are expressed in terms of percentages of


    corresponding amounts in a base period

    Vertical Common-size Analysis

    concerns the relationships among financial statement items of a


    single accounting period expressed in terms of a percentage
    relationship to a base item (the base is 100%)

    Financial Statement Analysis


    EXAMPLE -- Statement of Financial Position
    Current
    Prior
    Current
    Prior
    CURRENT ASSETS:
    Year End
    Year End
    CURRENT LIABILITIES:
    Year End
    Year End
    Cash and equivalents
    325,000
    275,000
    Accounts payable
    200,000
    125,000
    Available-for-sale securities 165,000
    145,000
    Accrued interest on note
    5,000
    5,000
    Accounts receivable (net)
    120,000
    115,000
    Current portion of L.T. debt
    100,000
    100,000
    Notes receivable
    55,000
    40,000
    Accrued salaries and wages
    15,000
    10,000
    Inventories
    85,000
    55,000
    Income
    taxes
    payable
    70,000
    35,000
    Prepaid
    expenses
    10,000
    5,000
    Total current assets
    275,000

    760,000

    635,000

    Total current liabilities

    NONCURRENT ASSETS:
    NONCURRENT LIABILITIES:
    Equity-method investments 120,000
    115,000
    Bonds payable
    600,000
    PPE
    1,000,000 900,000
    Long-term
    notes
    payable
    60,000
    Minus: Accum. Dep.
    (85,000)
    (55,000)
    Employee-related obligations
    10,000
    Goodwill
    5,000
    Deferred income taxes
    5,000
    5,000
    Total noncurrent assets 1,040,000 965,000
    Total noncurrent liabilities
    675,000
    Total
    liabilities

    950,000
    EQUITY:
    Ordinary shares, US $1 par

    390,000

    500,000
    90,000
    15,000
    5,000
    610,000
    1,000,000
    500,000

    Financial Statement Analysis


    EXAMPLE of an Income Statement
    Net

    sales

    Cost of goods sold


    Gross profit
    SG&A
    expenses

    Current Year
    Prior Year
    1,800,000

    1,400,000

    (1,450,000)
    (1,170,000)
    350,000
    230,000
    (200,000)
    (160,000)

    Operating income
    150,000
    Other income and expenses
    (65,000)
    Income before interest and taxes
    85,000
    Interest expense
    (15,000)
    Income before taxes
    70,000
    Income taxes (40%)
    (28,000)
    Net income
    42,000

    70,000
    (25,000)
    45,000
    (10,000)
    35,000
    (14,000)
    21,000

    Financial Statement Analysis

    Liquidity Ratios

    Liquidity Ratios

    Liquidity is an entitys ability to pay its current obligations as


    they come due and remain in business in the short run.

    Liquidity depends on the ease with which current assets can


    be converted to cash. Liquidity ratios measure this ability by
    relating an entitys liquid assets to its current liabilities at a
    moment in time.

    Financial Statement Analysis

    Activity Ratios

    Activity Ratios

    Reflect how quickly major noncash assets are converted to


    cash.

    Measure results for an accounting period

    Relate information from the statement of financial position to


    information from the income statement.

    Activity Ratios

    Financial Statement Analysis

    Solvency Ratios and Leverage

    Activity Ratios

    An entitys ability to pay its noncurrent obligations as they


    come due and remain in business in the long run

    The key ingredients of solvency are the entitys capital


    structure and degree of leverage

    Financial Statement Analysis


    Return on Investments and Profitability

    Return on Investments and Profitability

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