Plain Background Power Point Slides Chapter 13 Financial Statement Analysis 87

8/9/2019 Plain Background Power Point Slides Chapter 13 Financial Statement Analysis 87

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

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Financial StatementAnalysis

Chapter 13


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2

Learning Objective 1

Perform a horizontal analysis ofcomparative financial

statements.


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3

Horizontal Analysis

Study of percentage changes incomparative statements

1. Compute the dollar amount of the changefrom the base period to the later period.

2. Divide the dollar amount of change

by the base-period amount.


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4

Trend Percentages

Computed by selecting a baseyear whose amounts are set

equal to 100%.Trend % = Any year $ Base year $


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5


Perform a vertical analysis offinancial statements.


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6

Vertical Analysis

Reveals the relationship of eachstatement item to a specified

base, which is the 100% figure.Every other item on the

financial statement is thenreported as a percentage of thatbase.


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7


Prepare and use common-sizefinancial statements.


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8

Common-Size Statements

On a common-size incomestatement, each item is expressed

as a percentage of net sales.In the balance sheet, the common

size is total assets.

A common-size statement easesthe comparison of differentcompanies.


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9

Benchmarking

Practice of comparing acompany to other companies

Common-size statements arealso used to compare the

company to a specific company


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10


Use the statement of cash flowsfor decisions.


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11

Statement of Cash Flows

Cash-flow signs of a healthycompany:

Operations are a major source ofcash.

Investing activities include morepurchases than sales of long-term

assets.Financing activities are not

dominated by borrowing.


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12


Compute the standard financialratios.


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13

Ratio Classification

1. Measure ability to pay current liabilities

2. Measure ability to sell inventory and

collect receivables3. Measure ability to pay long-term debt

4. Measure profitability

5. Analyze stock as an investment


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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren14

Working Capital

Measures ability to pay currentliabilities with current assets

Current assets Current liabilities


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Current assets Current liabilities

Current Ratio

Measures companys ability topay current liabilities with

current assets


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(Cash + Short-term investments

+ Net current receivables) Current liabilities

Acid-Test Ratio

Shows the companys ability topay all current liabilities if they

come due immediately.


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Cost of goods sold Average inventory

Measuring Ability to Sell

InventoryInventory turnover measure of

the number of times the

average level of inventory issold during a year


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Net credit sales Average accounts receivable

Measuring Ability to

Collect ReceivablesAccounts receivable turnover

measures a companys ability to

collect cash from creditcustomers.


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One days sales = Net sales 365 days

Days sales in receivable =Avg net accounts receivable One days sales


Collect ReceivablesDays sales in receivables ratio

measures how many days

sales remain in AccountsReceivable.


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Total liabilities Total assets


Pay DebtThe debt ratio indicates the

proportion of assets financed

with debt.


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Income from operations Interest expense


Pay DebtTimes-interest-earned ratio

measures the number of times

operating income can coverinterest expense.


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Net income Net sales

Measuring Profitability

Rate of return on net salesshows the percentage of each

sales dollar earned as netincome.


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(Net income + Interest expense)

Average total assets


Rate of return on total assetsmeasures how profitably a

company uses its assets.


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Rate of Return on CommonStockholders Equity:

Net income Preferred dividends Average common stockholders

equity


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Earnings per share of commonstock

(Net income Preferred dividends) Number of shares of common

stock outstanding


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Objective 6

Use ratios in decision making


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Analyzing Stock Investments

Price/earning ratio - ratio of marketprice per share to earnings per share

Dividend yield - percentage of stocksmarket value returned as dividends tostockholders each period

Dividend per share of common stock Market price per share of common stock


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Analyzing Stock Investments

(Total stockholders equity Preferred equity) Number of shares of common

stock outstanding


Book value per share ofcommon stock


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Measure the economic valueadded by operations.


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Economic Value Added

Combines concepts ofaccounting income and corporate

finance to measure whether thecompanys operations haveincreased stockholder wealth.

EVA =Net income + Interest expense Capital charge


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Capital charge

Cost of capital

Notespayable

Loanspayable

Long-termdebt

Stockholdersequity

+ + +

=



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Capital charge - amount thatstockholders, lenders charge acompany for use of their money

Cost of capital weighted averageof the returns demanded bycompanys stockholders andlenders.

A positive EVA amount indicatesan increase in stockholder wealth


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End of Chapter 13

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Plain Background Power Point Slides Chapter 13 Financial Statement Analysis 87