Financial Statements Analysis - Larson

17-1
Chapter
17
McGraw-Hill/Irwin
Analysis of Financial Statements
The McGraw-Hill Companies, Inc., 2005
17-2
Basics of Analysis
Application of analytical tools
Reduces uncertainty
Involves transforming data
McGraw-Hill/Irwin
17-3
Purpose of Analysis
Financial statement analysis helps users make better decisions.
Internal Users Managers Employees Internal Auditors

McGraw-Hill/Irwin
External Users Investors Lenders Tax Authorities

17-4
Building Blocks of Analysis

Ability to meet short-term obligations and to efficiently generate revenues Ability to generate future revenues and meet long-term obligations
Liquidity and Efficiency
Solvency
Ability to provide financial rewards sufficient to attract and retain financing

McGraw-Hill/Irwin
Market Profitability Prospects
Ability to generate positive market expectations
17-5
Information for Analysis

Income Statement Statement of Financial Position
Statement of Changes in Equity Notes
Statement of Cash Flows
McGraw-Hill/Irwin
17-6
Standards for Comparison

To help me interpret our financial statements, I use several standards of comparison.
Intracompany Competitor
Industry
Guidelines
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2005
17-7
Tools of Analysis
Horizontal Analysis
Comparing a companys financial condition and performance across time
Time
17-8
Tools of Analysis
Comparing a companys financial condition and performance to a base amount
V e r t i c a l A n a l y s i s
McGraw-Hill/Irwin
17-9
Tools of Analysis
Using key relations among financial statement items
McGraw-Hill/Irwin
17-10
Horizontal Analysis Now, lets look at some ways to use horizontal analysis.
Time
McGraw-Hill/Irwin
17-11
CLOVER CORPORATION Comparative Balance Sheets December 31, 2004 Assets Current assets: Cash and equivalents Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets 2003 Dollar Change Percent Change
12,000 60,000 80,000 3,000 $ 155,000 40,000 120,000 $ 160,000 $ 315,000
23,500 40,000 100,000 1,200 $ 164,700 40,000 85,000 $ 125,000 $ 289,700
McGraw-Hill/Irwin
17-12
Comparative Statements
Calculate Change in Dollar Amount
Dollar Change
Analysis Period Amount
Base Period Amount
Since we are measuring the amount of the change between 2003 and 2004, the dollar amounts for 2003 become the base period amounts.
17-13
Comparative Statements
Calculate Change as a Percent
Percent Change = Dollar Change Base Period Amount
100%
McGraw-Hill/Irwin
17-14
CLOVER CORPORATION Comparative Balance Sheets December 31, 2004 2003 Dollar Change Percent Change*
Assets Current assets: Cash and equivalents $ 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 $12,000 $23,500 = $(11,500) Total current assets $ 155,000 $ 164,700 Property and equipment: ($11,500 $23,500) 100% = 48.9% 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 * Percent rounded to first decimal point.
17-15
CLOVER CORPORATION Comparative Balance Sheets December 31, 2004 Assets Current assets: Cash and equivalents $ 12,000 Accounts receivable, net 60,000 Inventory 80,000 Prepaid expenses 3,000 Total current assets $ 155,000 Property and equipment: Land 40,000 Buildings and equipment, net 120,000 Total property and equipment $ 160,000 Total assets $ 315,000 * Percent rounded to first decimal point.
McGraw-Hill/Irwin
2003
Dollar Change
Percent Change*
$ 23,500 $ (11,500) 40,000 20,000 100,000 (20,000) 1,200 1,800 $ 164,700 $ (9,700) 40,000 85,000 35,000 $ 125,000 $ 35,000 $ 289,700 $ 25,300
(48.9) 50.0 (20.0) 150.0 (5.9) 0.0 41.2 28.0 8.7
17-16
Now, lets review the dollar and percent changes for the liabilities and shareholders equity accounts.
McGraw-Hill/Irwin
CLOVER CORPORATION Comparative Balance Sheets December 31, 2004 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Total current liabilities Long-term liabilities: Bonds payable, 8% Total liabilities Shareholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity * Percent rounded to first decimal point.
McGraw-Hill/Irwin
17-17
2003
Dollar Change
Percent Change*
$ 67,000 $ 44,000 $ 23,000 3,000 6,000 (3,000) $ 70,000 $ 50,000 $ 20,000 75,000 $ 145,000 80,000 (5,000) $ 130,000 $ 15,000
52.3 (50.0) 40.0 (6.3) 11.5 0.0 0.0 0.0 0.0 14.8 6.4 8.7
20,000 20,000 60,000 60,000 10,000 10,000 $ 90,000 $ 90,000 80,000 69,700 10,300 $ 170,000 $ 159,700 $ 10,300 $ 315,000 $ 289,700 $ 25,300
17-18
Now, lets look at trend analysis!
McGraw-Hill/Irwin
17-19
Trend Analysis
Trend analysis is used to reveal patterns in data covering successive periods.
Trend Analysis Period Amount = Percent Base Period Amount

McGraw-Hill/Irwin
100%
17-20
Trend Analysis
Berry Products Income Information For the Years Ended December 31,
Item Revenues Cost of sales Gross profit 2004 $ 400,000 285,000 115,000 2003 $ 355,000 250,000 105,000 2002 $ 320,000 225,000 95,000 2001 $ 290,000 198,000 92,000 2000 $ 275,000 190,000 85,000
2000 is the base period so its amounts will equal 100%.
McGraw-Hill/Irwin
17-21
Trend Analysis
Item Revenues Cost of sales Gross profit
2004
2003
2002
2001 105% 104% 108%
2000 100% 100% 100%
(290,000 275,000) (198,000 190,000) McGraw-Hill/Irwin (92,000 85,000)
100% = 105% 100% = 104% 100% = 108%
17-22
Trend Analysis
Item Revenues Cost of sales Gross profit
2004 145% 150% 135%
2003 129% 132% 124%
2002 116% 118% 112%
2001 105% 104% 108%
2000 100% 100% 100%
How would this trend analysis look on a line graph?

17-23
Trend Analysis
160 150
We can use the trend percentages to construct a graph so we can see the trend over time.
Percentage
140 130 120 110 100 2000 2001 2002 Year 2003 2004 Revenues Cost of Sales Gross Profit
McGraw-Hill/Irwin
17-24
V e r t i c a l A n a l y s i s
Now, lets look at some vertical analysis tools!
McGraw-Hill/Irwin
17-25
Common-Size Statements
Calculate Common-size Percent
Common-size Percent
Analysis Amount Base Amount
100%
Financial Statement Financial Position Income Statement

McGraw-Hill/Irwin
Base Amount Total Assets Revenues

CLOVER CORPORATION Comparative Balance Sheets December 31,
17-26
2004
2003
Common-size Percents* 2004 2003
Assets Current assets: Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1% Accounts receivable, net 60,000 40,000 Inventory 80,000 100,000 Prepaid expenses 3,000 1,200 ($12,000 $315,000) 100% = 3.8% Total current assets $ 155,000 $ 164,700 Property and equipment: ($23,50040,000 $289,700) 100% = 8.1% Land 40,000 Buildings and equipment, net 120,000 85,000 Total property and equipment $ 160,000 $ 125,000 Total assets $ 315,000 $ 289,700 100.0% 100.0% * Percent rounded to first decimal point. The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin
17-27
2004 Assets Current assets: Cash and equivalents $ 12,000 Accounts receivable, net 60,000 Inventory 80,000 Prepaid expenses 3,000 Total current assets $ 155,000 Property and equipment: Land 40,000 Buildings and equipment, net 120,000 Total property and equipment $ 160,000 Total assets $ 315,000 * Percent rounded to first decimal point. McGraw-Hill/Irwin
2003
$ 23,500 40,000 100,000 1,200 $ 164,700 40,000 85,000 $ 125,000 $ 289,700
3.8% 19.0% 25.4% 1.0% 49.2% 12.7% 38.1% 50.8% 100.0%
8.1% 13.8% 34.5% 0.4% 56.9% 13.8% 29.3% 43.1% 100.0%
17-28
2004 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable Total current liabilities Long-term liabilities: Bonds payable, 8% Total liabilities Shareholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Total shareholders' equity Total liabilities and shareholders' equity * Percent rounded McGraw-Hill/Irwin to first decimal point.
2003
$ 67,000 3,000 $ 70,000 75,000 $ 145,000 20,000 60,000 10,000 $ 90,000 80,000 $ 170,000 $ 315,000
$ 44,000 6,000 $ 50,000 80,000 $ 130,000 20,000 60,000 10,000 $ 90,000 69,700 $ 159,700 $ 289,700
21.3% 1.0% 22.2% 23.8% 46.0% 6.3% 19.0% 3.2% 28.6% 25.4% 54.0% 100.0%
15.2% 2.1% 17.3% 27.6% 44.9% 6.9% 20.7% 3.5% 31.1% 24.1% 55.1% 100.0%
17-29
CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2004 2003 2004 2003 Revenues $ 520,000 $ 480,000 100.0% 100.0% Costs and expenses: Cost of sales 360,000 315,000 69.2% 65.6% Selling and admin. 128,600 126,000 24.7% 26.3% Interest expense 6,400 7,000 1.2% 1.5% Income before taxes $ 25,000 $ 32,000 4.8% 6.7% Income taxes (30%) 7,500 9,600 1.4% 2.0% Net income $ 17,500 $ 22,400 3.4% 4.7% Net income per share $ 0.79 $ 1.01 Avg. # common shares 22,200 22,200 * Rounded to first decimal point. The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin
17-30
Common-Size Graphics
This is a graphical analysis of Clover Corporations common-size income statement for 2004.
Interest expense 1.2%
Selling and administrative 24.7%
Income taxes 1.4%
Net income 3.4%
Cost of sales 69.2%
McGraw-Hill/Irwin
17-31
Solvency
Profitability
Market
McGraw-Hill/Irwin
Lets use the following financial statements for Norton Corporation for our ratio analysis.
NORTON CORPORATION Balance Sheet December 31, 2004 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets
McGraw-Hill/Irwin
17-32
2003
$ 30,000 20,000 12,000 3,000 $ 65,000 165,000 116,390 $ 281,390 $ 346,390
$ 20,000 17,000 10,000 2,000 $ 49,000 123,000 128,000 $ 251,000 $ 300,000
NORTON CORPORATION Balance Sheet December 31, 2004 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Notes payable, short-term Total current liabilities Long-term liabilities: Notes payable, long-term Total liabilities Shareholders' equity: Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Total shareholders' equity 2003
17-33
$ $
39,000 3,000 42,000
$ $
40,000 2,000 42,000
70,000 $ 112,000 27,400 158,100 $ 185,500 48,890 $ 234,390
78,000 $ 120,000 17,000 113,000 $ 130,000 50,000 $ 180,000 $ 300,000
Total liabilities and shareholders' equity $ 346,390

McGraw-Hill/Irwin
NORTON CORPORATION Income Statement For the Years Ended December 31,
17-34
Revenues Cost of sales Gross margin Operating expenses Net operating income Interest expense Net income before taxes Less income taxes (30%) Net income
McGraw-Hill/Irwin
$ $ $ $ $
2004 494,000 140,000 354,000 270,000 84,000 7,300 76,700 23,010 53,690
$ $ $ $ $
2003 450,000 127,000 323,000 249,000 74,000 8,000 66,000 19,800 46,200
17-35

Current Ratio Inventory Turnover
Acid-test Ratio
Accounts Receivable Turnover Total Asset Turnover
McGraw-Hill/Irwin
Days Sales Uncollected

Days Sales in Inventory
NORTON CORPORATION 2004 Cash Accounts receivable, net Beginning of year $
17-36
30,000 17,000 20,000 10,000 12,000 65,000 42,000 300,000 346,390 494,000 140,000
Use this information to calculate the liquidity and efficiency ratios for Norton Corporation.
End of year Inventory Beginning of year End of year Total current assets Total current liabilities Total assets Beginning of year End of year Revenues Cost of sales
McGraw-Hill/Irwin
17-37
Working Capital
Working capital represents current assets financed from long-term capital sources that do not require near-term repayment.
Dec. 31, 2004 Current assets Current liabilities Working capital

McGraw-Hill/Irwin
$ $
65,000 (42,000) 23,000

17-38
Current Ratio
Current Current Assets = Ratio Current Liabilities Current = Ratio $65,000 = 1.55 : 1 $42,000
This ratio measures the short-term debt-paying ability of the company.

17-39
Acid-Test Ratio
Quick Assets Acid-Test = Current Liabilities Ratio
Quick assets are Cash, Short-Term Investments, and Current Receivables.
Acid-Test = $50,000 = 1.19 : 1 $42,000 Ratio

This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash.
17-40
Accounts Receivable Turnover

Accounts Sales on Account Receivable = Average Accounts Receivable Turnover Accounts $494,000 Receivable = ($17,000 + $20,000) 2 = 26.7 times Turnover
This ratio measures how many times a company converts its receivables into cash each year.
17-41
Inventory Turnover
Inventory Turnover Inventory Turnover Cost of Goods Sold = Average Inventory
$140,000 = = 12.73 times ($10,000 + $12,000) 2
This ratio measures the number of times merchandise is sold and replaced during the year.
17-42
Days Sales Uncollected

Days Sales Accounts Receivable = 365 Uncollected Net Sales Days Sales $20,000 = 365 = 14.8 days Uncollected $494,000
This ratio measures the liquidity of receivables.

17-43
Days Sales in Inventory

Days Sales = in Inventory Ending Inventory Cost of Goods Sold
365
Days Sales $12,000 = 365 = 31.29 days in Inventory $140,000
This ratio measures the liquidity of inventory.

17-44
Total Asset Turnover

Total Asset Net Sales = Turnover Average Total Assets Total Asset $494,000 = = 1.53 times Turnover ($300,000 + $346,390) 2
This ratio measures the efficiency of assets in producing sales.

17-45
Solvency
Debt Ratio Equity Ratio Pledged Assets to Secured Liabilities Times Interest Earned
17-46
Use this information to calculate the solvency ratios for Norton Corporation.
NORTON CORPORATION 2004 Net income before interest expense and income taxes Interest expense Total shareholders' equity Total liabilities Total assets
McGraw-Hill/Irwin
84,000 7,300 234,390 112,000 346,390
17-47
Debt Ratio
Total Liabilities Debt = Ratio Total Assets Debt = Ratio $112,000 = 32.3% $346,390
This ratio measures what portion of a companys assets are contributed by creditors.
17-48
Equity Ratio
Total Equity Equity = Ratio Total Assets Equity = Ratio $234,390 = 67.7% $346,390
This ratio measures what portion of a companys assets are contributed by owners.
17-49
Pledged Assets to Secured Liabilities

Pledged Assets to = Book Value of Pledged Assets Secured Book Value of Secured Liabilities Liabilities
This ratio measures the protection to secured creditors.
McGraw-Hill/Irwin
17-50
Times Interest Earned

Times Interest = Earned
Net Income before Interest Expense and Income Taxes

Interest Expense
Times $84,000 Interest = = 11.51 $7,300 Earned

This is the most common measure of the ability of a firms operations to provide protection to the long-term creditor.
17-51
Profitability
Profit Margin Basic Earnings per Share Book Value per Common Share Return on Common Stockholders Equity
Gross Margin
Return on Total Assets
McGraw-Hill/Irwin
17-52
NORTON CORPORATION 2004
Use this information to Net income calculate the profitability Shareholders' equity Beginning of year ratios for Norton End of year Corporation.
Revenues Cost of sales Total assets Beginning of year End of year
McGraw-Hill/Irwin
Number of common shares outstanding all year $
27,400 53,690 180,000 234,390 494,000 140,000 300,000 346,390
17-53
Profit Margin
Profit = Margin Net Income Net Sales
$53,690 Profit = 10.87% = Margin $494,000
This ratio describes a companys ability to earn a net income from sales.
McGraw-Hill/Irwin
17-54
Gross Margin
Gross Net Sales - Cost of Sales = Margin Net Sales Gross $494,000 - $140,000 = 71.66% = Margin $494,000
This ratio measures the amount remaining from $1 in sales that is left to cover operating expenses and a profit after considering cost of sales.
17-55
Return on Total Assets

Return on = Net Income Total Assets Average Total Assets Return on $53,690 = = 16.61% Total Assets ($300,000 + $346,390) 2
This ratio is generally considered the best overall measure of a companys profitability.
17-56
Return on Common Stockholders Equity

Return on Common Net Income - Preferred Dividends = Stockholders Average Common Stockholders Equity Equity
Return on $53,690 - 0 Common = = 25.9% Stockholders ($180,000 + $234,390) 2 Equity

This measure indicates how well the company employed the owners investments to earn income.
17-57
Book Value per Common Share

Book Value Shareholders Equity Applicable to per Common Shares = Common Number of Common Shares Share Outstanding
This ratio measures liquidation at reported amounts.
McGraw-Hill/Irwin
17-58
Basic Earnings per Share

Basic Earnings Net Income - Preferred Dividends = per Weighted-Average Common Share Shares Outstanding
Basic Earnings $53,690 - 0 = = $1.96 per share per 27,400 Share

This measure indicates how much income was earned for each share of common stock outstanding.
17-59
Market Prospects
PriceEarnings Ratio
Dividend Yield
McGraw-Hill/Irwin
17-60
Market Prospects
Use this information to calculate the market ratios for Norton Corporation.
NORTON CORPORATION December 31, 2004
Earnings per Share Market Price Annual Dividend per Share $ 1.96 15.00 2.00
McGraw-Hill/Irwin
17-61
Price-Earnings Ratio
Price-Earnings Market Price Per Share = Ratio Earnings Per Share Price-Earnings $15.00 = = 7.65 times Ratio $1.96
This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth.
17-62
Dividend Yield
Dividend Annual Dividends Per Share = Yield Market Price Per Share Dividend $2.00 = = 13.3% Yield $15.00
This ratio identifies the return, in terms of cash dividends, on the current market price of the stock.
17-63
End of Chapter 17
McGraw-Hill/Irwin

Financial Statements Analysis - Larson

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Financial Statements Analysis - Larson

Enviado por

Direitos autorais:

Formatos disponíveis

17-1

Analysis of Financial Statements

The McGraw-Hill Companies, Inc., 2005

Involves transforming data

The McGraw-Hill Companies, Inc., 2005

Internal Users Managers Employees Internal Auditors

External Users Investors Lenders Tax Authorities

Building Blocks of Analysis

Liquidity and Efficiency

Ability to provide financial rewards sufficient to attract and retain financing

Market Profitability Prospects

Ability to generate positive market expectations

The McGraw-Hill Companies, Inc., 2005

Information for Analysis

Statement of Cash Flows

The McGraw-Hill Companies, Inc., 2005

Standards for Comparison

The McGraw-Hill Companies, Inc., 2005

The McGraw-Hill Companies, Inc., 2005

The McGraw-Hill Companies, Inc., 2005

12,000 60,000 80,000 3,000 $ 155,000 40,000 120,000 $ 160,000 $ 315,000

23,500 40,000 100,000 1,200 $ 164,700 40,000 85,000 $ 125,000 $ 289,700

The McGraw-Hill Companies, Inc., 2005

Analysis Period Amount

Base Period Amount

The McGraw-Hill Companies, Inc., 2005

(48.9) 50.0 (20.0) 150.0 (5.9) 0.0 41.2 28.0 8.7

The McGraw-Hill Companies, Inc., 2005

The McGraw-Hill Companies, Inc., 2005

The McGraw-Hill Companies, Inc., 2005

Now, lets look at trend analysis!

The McGraw-Hill Companies, Inc., 2005

Trend analysis is used to reveal patterns in data covering successive periods.

Trend Analysis Period Amount = Percent Base Period Amount

The McGraw-Hill Companies, Inc., 2005

2000 is the base period so its amounts will equal 100%.

The McGraw-Hill Companies, Inc., 2005

Item Revenues Cost of sales Gross profit

2001 105% 104% 108%

2000 100% 100% 100%

(290,000 275,000) (198,000 190,000) McGraw-Hill/Irwin (92,000 85,000)

100% = 105% 100% = 104% 100% = 108%

The McGraw-Hill Companies, Inc., 2005

Item Revenues Cost of sales Gross profit

2004 145% 150% 135%

2003 129% 132% 124%

2002 116% 118% 112%

2001 105% 104% 108%

2000 100% 100% 100%

How would this trend analysis look on a line graph?

The McGraw-Hill Companies, Inc., 2005

Now, lets look at some vertical analysis tools!

The McGraw-Hill Companies, Inc., 2005

Analysis Amount Base Amount

Financial Statement Financial Position Income Statement

Base Amount Total Assets Revenues

CLOVER CORPORATION Comparative Balance Sheets December 31,

Common-size Percents* 2004 2003

CLOVER CORPORATION Comparative Balance Sheets December 31,

Common-size Percents* 2004 2003

$ 23,500 40,000 100,000 1,200 $ 164,700 40,000 85,000 $ 125,000 $ 289,700

3.8% 19.0% 25.4% 1.0% 49.2% 12.7% 38.1% 50.8% 100.0%

8.1% 13.8% 34.5% 0.4% 56.9% 13.8% 29.3% 43.1% 100.0%

The McGraw-Hill Companies, Inc., 2005