copyright © 2012 the mcgraw-hill companies, inc. powerpoint authors: susan coomer galbreath, ph.d.,...
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Copyright © 2012 The McGraw-Hill Companies, Inc.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Financial Statement Financial Statement AnalysisAnalysis
Chapter 14
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14-2
Resultsin standardized,
m eaningfulsubtotals.
Item s w ith certaincharacteristics aregrouped together.
C lass ifiedF in an c ial
S ta tem en ts
Helps identifysignificant
changes andtrends.
Am ounts fromseveral years
appear side by side.
C o m p ara tiveF in an c ial
S ta tem en ts
Presented as ifthe two companies
are a singlebusiness unit.
Inform ation for theparent and subsidiary
are presented.
C o nso lida tedF in an c ial
S ta tem en ts
Financial Statements Are Financial Statements Are Designed for AnalysisDesigned for Analysis
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14-3
Dollar & Percentage
Changes
Trend Percentages
Component Percentages Ratios
Tools of AnalysisTools of Analysis
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14-4
Dollar and Percentage Dollar and Percentage ChangesChanges
Dollar Change:
Analysis Period Amount
Base PeriodAmount
DollarChange = –
Percentage Change:
Dollar Change Base PeriodAmount
PercentChange = ÷
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14-5
Dollar and Percentage Dollar and Percentage ChangesChanges
Sales and earningsshould increase at
more than the rateof inflation.
In measuring quarterlychanges, compare tothe same quarter inthe previous year.
Percentages may bemisleading when the
base amount is small.
Evaluating Percentage Changes in Sales and Earnings
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14-6
Trend PercentagesTrend Percentages
Trend analysis is used to reveal patterns in data covering successive periods.
Trend analysis is used to reveal patterns in data covering successive periods.
TrendPercentages
Analysis Period Amount Base Period Amount
100%= ×
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14-7
Component PercentagesComponent PercentagesExamine the relative size of each item in the financial statements by computing component
(or common-sized) percentages.
Component Percentage
100%Analysis Amount
Base Amount= ×
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
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14-8
Quality of EarningsQuality of Earnings
Investors are interest in companies that demonstrate an ability to earn income at a
growing rate each year. Stability of earnings growth helps investors predict future prospects
for the company.
Investors are interest in companies that demonstrate an ability to earn income at a
growing rate each year. Stability of earnings growth helps investors predict future prospects
for the company.
Financial analyst often speak of the “quality of earnings” at one company being higher than
another company in the same industry.
Financial analyst often speak of the “quality of earnings” at one company being higher than
another company in the same industry.
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14-9
Quality of Assets and the Quality of Assets and the Relative Amount of DebtRelative Amount of Debt
While satisfactory earnings may be a good indicator of a company’s ability to
pay its debts and dividends, we must also consider the composition of assets, their
condition and liquidity, the timing of repayment of liabilities, and the total
amount of debt outstanding
While satisfactory earnings may be a good indicator of a company’s ability to
pay its debts and dividends, we must also consider the composition of assets, their
condition and liquidity, the timing of repayment of liabilities, and the total
amount of debt outstanding
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14-10
Past performance topresent perform ance.
O ther com panies toyour com pany.
Along w ith dollar and percentage changes,trend percentages, and com ponent percentages,
ratios can be used to compare:
A ratio is a sim ple m athematical expressionof the relationship betw een one item and another.
RatiosRatios
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14-11
Operating CycleOperating Cycle
Cash
InventoryAccounts
Receivable
1. Purchase of Merchandise
2. Sale of merchandise on account
3. C
olle
ctio
n of
acco
unts
rece
ivabl
e
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14-12
End of Chapter 14End of Chapter 14