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8/13/2019 Horizental and Vertical Analysis
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17-1
CHAPTER 17
ANALYSISAND
INTERPRETATION OF
FINANCIALSTATEMENTS
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17-2
Horizontal Analysis
Vertical Analysis
Trend Percentages
Methods ofFinancial Statement Analysis
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Horizontal Analysis
Using comparative financialstatements to calculate dollar
or percentage changes in afinancial statement item from
one period to the next
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17-4
Vertical Analysis
For a single financialstatement, each item
is expressed as apercentage of asignificant total,e.g., all income
statement items areexpressed as a
percentage of sales
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Common-Size Statements
Financial statements that showonly percentages and no
absolute dollar amounts
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Trend Percentages
Show changes over time ingiven financial statement items
(can help evaluate financialinformation of several years)
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Horizontal Analysis Example
The management of Clover Companyprovides you with comparative balancesheets of the years ended December 31,
1999 and 1998. Management asks you toprepare a horizontal analysis on the
information.
http://vrpacioli.loyola.edu/ac102/chapter17/14.ram8/13/2019 Horizental and Vertical Analysis
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17-8CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999 1998Assets
Current assets:
Cash 12,000$ 23,500$
Accounts receivable, net 60,000 40,000Inventory 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$
http://vrpacioli.loyola.edu/ac102/chapter17/14.ram8/13/2019 Horizental and Vertical Analysis
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Calculating Change in Dollar Amounts
Dollar
Change
Current Year
Figure
Base Year
Figure=
Horizontal Analysis Example
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Calculating Change in Dollar Amounts
Since we are measuring the amount ofthe change between 1998 and 1999, the
dollar amounts for 1998 become thebase year figures.
Dollar
Change
Current Year
Figure
Base Year
Figure=
Horizontal Analysis Example
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Calculating Change as a Percentage
Percentage
Change
Dollar Change
Base Year Figure 100%=
Horizontal Analysis Example
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CLOVER CORPORATIONComparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets: Cash 12,000$ 23,500$ (11,500)$
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$
$12,000$23,500 = $(11,500)
Horizontal Analysis Example
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CLOVER CORPORATIONComparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets: Cash 12,000$ 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: 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$
($11,500 $23,500) 100% = 48.9%
Horizontal Analysis Example
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Lets apply the sameprocedures to the
liability and stockholdersequity sections of the
balance sheet.
Horizontal Analysis Example
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CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)1999 1998 Amount %
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 67,000$ 44,000$ 23,000$ 52.3
Notes payable 3,000 6,000 (3,000) (50.0)
Total current liabilities 70,000 50,000 20,000 40.0Long-term liabilities:
Bonds payable, 8% 75,000 80,000 (5,000) (6.3)
Total liabilities 145,000 130,000 15,000 11.5
Stockholders' equity:
Preferred stock 20,000 20,000 - 0.0
Common stock 60,000 60,000 - 0.0 Additional paid-in capital 10,000 10,000 - 0.0
Total paid-in capital 90,000 90,000 - 0.0
Retained earnings 80,000 69,700 10,300 14.8
Total stockholders' equity 170,000 159,700 10,300 6.4
Total liabilities and stockholders' equity 315,000$ 289,700$ 25,300$ 8.7
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Now, lets apply the
procedures to theincome statement.
Horizontal Analysis Example
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CLOVER CORPORATION
Comparative Income StatementsFor the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net 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)
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CLOVER CORPORATION
Comparative Income StatementsFor the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net 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)
Sales increased by 8.3% while net
income decreased by 21.9%.
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CLOVER CORPORATION
Comparative Income StatementsFor the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Net 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)
There were increases in both cost of goodssold (14.3%) and operating expenses (2.1%).These increased costs more than offset the
increase in sales, yielding an overalldecrease in net income.
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Sample CompanyBalance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998Cash 82,000$ 30,000$ 17% 8%
Accts. Rec. 120,000 100,000 25% 26%
Inventory 87,000 82,000 18% 21%
Land 101,000 90,000 21% 23%Equipment 110,000 100,000 23% 26%
Accum. Depr. (17,000) (15,000) -4% -4%
Total 483,000$ 387,000$ 100% 100%
Vertical Analysis Example
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Vertical Analysis ExampleSample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998Cash 82,000$ 30,000$ 17% 8%
Accts. Rec. 120,000 100,000 25% 26%
Inventory 87,000 82,000 18% 21%
Land 101,000 90,000 21% 23%Equipment 110,000 100,000 23% 26%
Accum. Depr. (17,000) (15,000) -4% -4%
Total 483,000$ 387,000$ 100% 100%
$82,000 $483,000 = 17% rounded
$30,000 $387,000 = 8% rounded
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Sample Company
Balance Sheet (Liabilities & Stockholders' Equity)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998Acts. Payable 76,000$ 60,000$ 16% 16%
Wages Payable 33,000 17,000 7% 4%
Notes Payable 50,000 50,000 10% 13%
Common Stock 170,000 160,000 35% 41%Retained Earnings 154,000 100,000 32% 26%
Total 483,000$ 387,000$ 100% 100%
Vertical Analysis Example
$76,000 $483,000 = 16% rounded
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5
Trend Percentages Example
Wheeler, Inc. provides you with thefollowing operating data and asks that
you prepare a trend analysis.
Wheeler, Inc.
Operating Data
1999 1998 1997 1996 1995
Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$
Expenses 2,033 1,966 1,870 1,803 1,701Net income 372$ 278$ 242$ 188$ 119$
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Trend Percentages Example
Wheeler, Inc. provides you with thefollowing operating data and asks that
you prepare a trend analysis.
Wheeler, Inc.
Operating Data
1999 1998 1997 1996 1995
Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$
Expenses 2,033 1,966 1,870 1,803 1,701Net income 372$ 278$ 242$ 188$ 119$
$1,991 - $1,820 = $171
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Trend Percentages Example
Using 1995 as the base year, we developthe following percentage relationships.
Wheeler, Inc.
Operating Data1999 1998 1997 1996 1995
Revenues 132% 123% 116% 109% 100%
Expenses 120% 116% 110% 106% 100%
Net income 313% 234% 203% 158% 100%
$1,991 - $1,820 = $171
$171 $1,820 = 9% rounded
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90
100
110
120
130
140
1995 1996 1997 1998 1999
Years
%
of100Base
Sales
Expenses
Trend line
for Sales