Accounting II: Tools for

Analysis

Strictly Financials

Jan. 3, 2012

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Donald W. Reynolds National Center

For Business Journalism

At Arizona State University

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James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu

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Common Size Analysis A technique that turns all financial

statement entries into percentage of revenue

Then can look at percentage change and percentage point change

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Why Common Size Identify trends Identify what causes changes in totals

on financial statements Easier to compare percentages than

raw numbers Easier to compare companies Easier to compare company with

industry averages

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Doing Common Size For IS, divide Revenue into all entries. For BS, divide each total category into

its category items. For example, divide Total Assets into each category of assets.

For CF, divide each total category into its category items.

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Comparable Statements Often have to restructure Income

Statement to the In-the-Box format we have studied

Typical problems come from items we would consider Other Income/Expenses

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Trends in Margins How have Cost of Goods Sold (CGS)

and Sales, General and Administrative (SGA) changed?

What does that mean for Gross Profit Margin and Operating Profit Margin?

How does Net Profit Margin move? Importance of using Basis Points

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Common Size, Ratios These techniques let you drill below the

surface and start developing a more complete picture of the company’s performance Strengths Weaknesses Strategic effectiveness of the firm