Financial statement analysis

Июль 30, 2022

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Financial statement analysis

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2. Learning Objectives Describe basic financial statement analytical methods. Use financial statement analysis to assess the solvency
3. Learning Objective 1 Describe basic financial statement analytical methods.
4. Basic Analytical Methods Users analyze a company’s financial statements using a variety of analytical methods. Three
5. Horizontal Analysis The percentage analysis of increases and decreases in related items in comparative financial statements
6. Horizontal Analysis LO 1
7. LO 1 Horizontal Analysis
8. Horizontal Analysis LO 1
9. Horizontal Analysis LO 1
10. Horizontal Analysis LO 1
11. Horizontal Analysis LO 1 Horizontal Analysis: Difference $296,500 Base year (2011) $1,234,000 = 24.0%
12. LO 1 Horizontal Analysis
13. Horizontal Analysis: Difference $37,500 Base year (2011) $ 100,000 = 37.5% LO 1 Horizontal Analysis
14. EE 17-1
15. Vertical Analysis A percentage analysis used to show the relationship of each component to the total
16. Vertical Analysis In a vertical analysis of the balance sheet, each asset item is stated as
17. LO 1 Vertical Analysis
18. Vertical Analysis Vertical Analysis: Current Assets $550,000 Total Assets $ 1,139,500 = 48.3% LO 1
19. LO 1 Vertical Analysis In a vertical analysis of the income statement, each item is stated
20. LO 1 Vertical Analysis
21. Vertical Analysis LO 1 Vertical Analysis: Selling expenses $191,000 Net sales $1,498,000 = 12.8%
22. EE 17-2
23. LO 1 Common-Sized Statements In a common-sized statement, all items are expressed as percentages with no
24. LO 1 Common-Sized Statements
25. Learning Objective 2 Describe basic financial statement analytical methods. Use financial statement analysis to assess the
26. LO 2 Solvency Analysis All users of financial statements are interested in the ability of a
27. Solvency Analysis Solvency analysis focuses on the ability of a business to pay its current and
28. Current Position Analysis A company’s ability to pay its current liabilities is called current position analysis.
29. Working Capital The excess of current assets over current liabilities is called working capital. Working capital
30. Current Ratio The current ratio, sometimes called the working capital ratio or bankers’ ratio, also measures
31. LO 2 Current Ratio The current ratio for Lincoln Company is computed below. 2012 2011 Current
32. LO 2 Quick Ratio A ratio that measures the “instant” debt-paying ability of a company is
33. LO 2 Quick Assets The quick ratio for Lincoln Company is computed below. 2012 2011 Quick
34. EE 17-3
35. Accounts Receivable Turnover The relationship between sales and accounts receivable may be stated as accounts receivable
36. Accounts receivable turnover 12.7 9.2 Net sales $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $
37. Number of Days’ Sales in Receivables The number of days’ sales in receivables is an estimate
38. LO 2 Number of Days’ Sales in Receivables Number of days’ sales in receivables 28.6 39.5
39. EE 17-4
40. Inventory Turnover The relationship between the volume of goods (merchandise) sold and inventory may be stated
41. LO 2 Inventory Turnover Inventory turnover 3.8 2.8 2012 2011 Cost of goods sold $1,043,000 $820,000
42. LO 2 Number of Days’ Sales in Inventory The number of days’ sales in inventory is
43. Average Inventory $273,500 $297,000 LO 2 Number of Days’ Sales in Inventory The number of days’
44. Average Inventory $273,500 $297,000 Average daily cost of goods sold $2,858 $2,247 2012 2011 LO 2
45. EE 17-5
46. Ratio of Fixed Assets to Long-Term Liabilities The ratio of fixed assets to long-term liabilities is
47. LO 2 Ratio of Fixed Assets to Long-Term Liabilities Ratio of fixed assets to long-term liabilities
48. Ratio of Liabilities to Stockholders’ Equity The relationship between the total claims of the creditors and
49. LO 2 Ratio of Liabilities to Stockholders’ Equity Ratio of liabilities to stockholders’ equity 0.4 0.6
50. EE 17-6
51. Number of Times Interest Charges Earned Corporations in some industries normally have high ratios of debt
52. LO 2 Number of Times Interest Charges Earned It is computed as follows:
53. LO 2 Number of Times Interest Charges Earned The number of times interest charges are earned
54. LO 2 Number of Times Interest Charges Earned The number of times interest charges are earned
55. EE 17-7
56. Learning Objective 3 Describe basic financial statement analytical methods. Use financial statement analysis to assess the
57. Profitability Analysis Profitability analysis focuses primarily on the relationship between operating results and the resources available
58. Ratio of Net Sales to Assets The ratio of net sales to assets is a profitability
59. LO 3 Ratio of Net Sales to Assets 2012 2011 Net sales $1,498,000 $1,200,000 Total assets:
60. LO 3 Ratio of Net Sales to Assets 2012 2011 Net sales $1,498,000 $1,200,000 Total assets:
61. EE 17-8
62. Rate Earned on Total Assets The rate earned on total assets measures the profitability of total
63. LO 3 Rate Earned on Total Assets Rate earned on total assets 8.2% 7.3% This ratio
64. EE 17-9
65. Rate Earned on Stockholders’ Equity The rate earned on stockholders’ equity measures the rate of income
66. LO 3 Rate Earned on Stockholders’ Equity Rate earned on stockholders’ equity 11.3% 10.0% The rate
67. Rate Earned on Stockholders’ Equity The difference between the rate earned on stockholders’ equity and the
68. LO 3 Rate Earned on Stockholders’ Equity For Lincoln Company, the effect of leverage is computed
69. LO 3 Rate Earned on Stockholders’ Equity
70. Rate Earned on Common Stockholders’ Equity The rate earned on common stockholders’ equity measures the rate
71. Rate Earned on Common Stockholders’ Equity LO 3 Lincoln Company had $150,000 of 6% preferred stock
72. LO 3 Rate earned on common stockholders’ equity 12.5% 10.9% Rate Earned on Common Stockholders’ Equity
73. EE 17-10
74. Earnings per Share on Common Stock Earnings per share (EPS) on common stock measures the share
75. LO 3 Earnings per Share on Common Stock Earnings per share on common stock $1.64 $1.35
76. Price-Earnings Ratio Another profitability measure quoted by the financial press is the price-earnings (P/E) ratio on
77. LO 3 Price-earnings ratio on common stock 25 20 Price-Earnings Ratio The P/E ratio for Lincoln
78. EE 17-11
79. Dividends per Share Dividends per share can be reported with earnings per share to indicate the
80. Dividends per Share LO 3 Dividends per share of common stock $0.80 $0.60
81. Dividends and Earnings per Share LO 3
82. Dividend Yield The dividend yield on common stock measures the rate of return to common stockholders
83. LO 3 Dividend Yield Dividend yield on common stock 2.0% 2.2% The dividend yield for Lincoln
84. LO 3 Summary of Analytical Measures (continued)
85. (continued) LO 3 Summary of Analytical Measures
86. LO 3 Summary of Analytical Measures (concluded)
87. Learning Objective 4 Describe basic financial statement analytical methods. Use financial statement analysis to assess the
88. Corporate Annual Reports In addition to the financial statements and the accompanying notes, corporate annual reports
89. LO 4 Management Discussion and Analysis Management’s Discussion and Analysis (MD&A) is required in annual reports
90. LO 4 Management Discussion and Analysis Important accounting principles or policies that could affect interpretation of
91. Report on Internal Control The Sarbanes-Oxley Act of 2002 requires a report stating management’s responsibility for
92. Report on Fairness of Financial Statements All publicly held corporations are required by the Sarbanes-Oxley Act
93. Appendix Unusual Items on the Income Statement
94. Unusual Items on the Income Statement Unusual items affecting the current period’s income statement include the
95. Discontinued Operations A company may discontinue a segment of its operations by selling or abandoning the
96. Discontinued Operations Jones Corporation produces and sells electrical products, hardware supplies, and lawn equipment. Because of
97. Discontinued Operations Appendix
98. Extraordinary Items An extraordinary item is defined as an event or transaction with both of the
99. Extraordinary Items Appendix
100. Reporting Earnings per Share Appendix
102. Скачать презентацию

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Learning Objectives
Describe basic financial statement analytical methods.
Use financial statement analysis to

assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.
Describe the contents of corporate annual reports.

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Learning Objective 1
Describe basic financial statement analytical methods.

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Basic Analytical Methods
Users analyze a company’s financial statements using a variety

of analytical methods. Three such methods are as follows:
Horizontal analysis
Vertical analysis
Common-sized statements

LO 1

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Horizontal Analysis
The percentage analysis of increases and decreases in related items

in comparative financial statements is called horizontal analysis.

LO 1

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Horizontal Analysis
LO 1

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LO 1
Horizontal Analysis

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Horizontal Analysis
LO 1

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Horizontal Analysis
LO 1

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Horizontal Analysis
LO 1

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Horizontal Analysis
LO 1
Horizontal Analysis:
Difference $296,500
Base year (2011) $1,234,000
= 24.0%

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LO 1
Horizontal Analysis

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Horizontal Analysis:
Difference $37,500
Base year (2011) $ 100,000
= 37.5%
LO 1
Horizontal

Analysis

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EE 17-1

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Vertical Analysis
A percentage analysis used to show the relationship of each

component to the total within a single financial statement is called vertical analysis.

LO 1

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Vertical Analysis
In a vertical analysis of the balance sheet, each asset

item is stated as a percent of the total assets.
Each liability and stockholders’ equity item is stated as a percent of the total liabilities and stockholders’ equity.

LO 1

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LO 1
Vertical Analysis

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Vertical Analysis
Vertical Analysis:
Current Assets $550,000
Total Assets $ 1,139,500
=

48.3%

LO 1

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LO 1
Vertical Analysis
In a vertical analysis of the income statement, each

item is stated as a percent of net sales.

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LO 1
Vertical Analysis

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Vertical Analysis
LO 1
Vertical Analysis:
Selling expenses $191,000
Net sales $1,498,000
= 12.8%

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EE 17-2

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LO 1
Common-Sized Statements
In a common-sized statement, all items are expressed as

percentages with no dollar amounts shown.
Common-sized statements are useful for comparing the current period with prior periods, individual businesses with one another, or one business with industry averages.

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LO 1
Common-Sized Statements

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Learning Objective 2
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.

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LO 2
Solvency Analysis
All users of financial statements are interested in the

ability of a company to do the following:
Meet its financial obligations (debts), called solvency.
Earn income, called profitability.

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Solvency Analysis
Solvency analysis focuses on the ability of a business to

pay its current and noncurrent liabilities.
Solvency and profitability are interrelated. A company that cannot pay its debts will have difficulty obtaining credit, which can decrease its profitability.

LO 2

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Current Position Analysis
A company’s ability to pay its current liabilities is

called current position analysis. It is of special interest to short-term creditors.

LO 2

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Working Capital
The excess of current assets over current liabilities is called

working capital. Working capital is often used to evaluate a company’s ability to pay current liabilities.
Working capital is computed as follows:

LO 2

Working Capital = Current Assets – Current Liabilities

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Current Ratio
The current ratio, sometimes called the working capital ratio or

bankers’ ratio, also measures a company’s ability to pay its current liabilities.
The current ratio is computed as follows:

LO 2

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LO 2
Current Ratio
The current ratio for Lincoln Company is computed below.

2012 2011

Current assets $550,000 $533,000
Current liabilities $210,000 $243,000

Current ratio 2.6 2.2

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LO 2
Quick Ratio
A ratio that measures the “instant” debt-paying ability of

a company is called the quick ratio, or acid-test ratio. It is computed as follows:

Quick assets are cash and other assets that can be easily converted to cash.

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LO 2
Quick Assets
The quick ratio for Lincoln Company is computed below.

2012 2011

Quick ratio 1.3 1.0

Quick assets:
Cash $ 90,500 $ 64,700
Temporary Investments 75,000 60,000
Accounts receivable (net) 115,000 120,000
Total quick assets $280,500 $244,700
Current liabilities $210,000 $243,000

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EE 17-3

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Accounts Receivable Turnover
The relationship between sales and accounts receivable may be

stated as accounts receivable turnover. Collecting accounts receivable as quickly as possible improves a company’s solvency.
The accounts receivable turnover is computed as follows:

LO 2

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Accounts receivable turnover 12.7 9.2
Net sales $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of

year $ 120,000 $ 140,000
End of year 115,000 120,000
Total $ 235,000 $ 260,000
Average (Total ÷ 2) $ 117,500 $ 130,000

2012 2011

Accounts Receivable Turnover

LO 2

The accounts receivable turnover for Lincoln Company is computed below.

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Number of Days’ Sales in Receivables
The number of days’ sales in

receivables is an estimate of the length of time (in days) the accounts receivable have been outstanding. It is computed as follows:

LO 2

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LO 2
Number of Days’ Sales in Receivables
Number of days’ sales in

receivables 28.6 39.5

The number of days’ sales in receivables for Lincoln Company is computed below.

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EE 17-4

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Inventory Turnover
The relationship between the volume of goods (merchandise) sold and

inventory may be stated as the inventory turnover. The purpose of this ratio is to assess the efficiency of a firm in managing its inventory.
The inventory turnover is computed as follows:

LO 2

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LO 2
Inventory Turnover
Inventory turnover 3.8 2.8
2012 2011
Cost of goods sold $1,043,000 $820,000
Inventories:
Beginning

of year $ 283,000 $311,000
End of year 264,000 283,000
Total $ 547,000 $594,000
Average (Total ÷ 2) $ 273,500 $297,000

Lincoln’s inventory balance at the beginning of 2011 is $311,000.

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LO 2
Number of Days’ Sales in Inventory
The number of days’ sales

in inventory is a rough measure of the length of time it takes to purchase, sell, and replace the inventory.
The number of days’ sales in inventory is computed as follows:

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Average Inventory $273,500 $297,000
LO 2
Number of Days’ Sales in Inventory
The number of days’

sales in inventory for Lincoln Company is computed below.

$547,000 ÷ 2

$594,000 ÷ 2

2012 2011

(continued)

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Average Inventory $273,500 $297,000
Average daily cost of goods sold $2,858 $2,247
2012 2011
LO 2
Number of

Days’ Sales in Inventory

The number of days’ sales in inventory for Lincoln Company is computed below.

$1,043,000 ÷ 365

$820,000 ÷ 365

Number of days’ sales in inventory 95.7 132.2

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EE 17-5

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Ratio of Fixed Assets to Long-Term Liabilities
The ratio of fixed assets

to long-term liabilities is a solvency measure that indicates the margin of safety of the note-holders or bondholders. It also indicates the ability of the business to borrow additional funds on a long-term basis.
The ratio is computed as follows:

LO 2

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LO 2
Ratio of Fixed Assets to Long-Term Liabilities
Ratio of fixed

assets to
long-term liabilities 4.4 2.4

To illustrate, the ratio of fixed assets to long-term liabilities for Lincoln Company is computed below.

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Ratio of Liabilities to Stockholders’ Equity
The relationship between the total claims

of the creditors and the owners—the ratio of liabilities to stockholders’ equity—is a solvency measure that indicates the margin of safety for creditors.
The ratio is computed as follows:

LO 2

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LO 2
Ratio of Liabilities to Stockholders’ Equity
Ratio of liabilities to

stockholders’ equity 0.4 0.6

The ratio of liabilities to stockholders’ equity for Lincoln Company is computed below.

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EE 17-6

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Number of Times Interest Charges Earned
Corporations in some industries normally have

high ratios of debt to stockholders’ equity. For such corporations, the relative risk of the debt-holders is normally measured as the number of times interest charges are earned (during the year), sometimes called the fixed charge coverage ratio.

LO 2

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LO 2
Number of Times Interest Charges Earned
It is computed as follows:

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LO 2
Number of Times Interest Charges Earned
The number of times interest

charges are earned for Lincoln Company is computed below.

Number of times interest
charges earned 28.1 12.2

2012 2011

Income before income tax $162,500 $134,600
Add interest expense 6,000 12,000
Amount available to meet
interest charges $168,500 $146,600

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LO 2
Number of Times Interest Charges Earned
The number of times interest

charges are earned can be adapted for use with dividends on preferred stock.
The number of times preferred dividends are earned is computed as follows:

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EE 17-7

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Learning Objective 3
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.

Слайд 57

Profitability Analysis
Profitability analysis focuses primarily on the relationship between operating results

and the resources available to a business.

LO 3

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Ratio of Net Sales to Assets
The ratio of net sales to

assets is a profitability measure that shows how effectively a company utilizes its assets.
The ratio is computed as follows:

LO 3

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LO 3
Ratio of Net Sales to Assets
2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500

The ratio of net sales to assets for Lincoln Company is computed below.

(continued)

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LO 3
Ratio of Net Sales to Assets
2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500

The ratio of net sales to assets for Lincoln Company is computed below.

Ratio of net sales to assets 1.4 1.2

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EE 17-8

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Rate Earned on Total Assets
The rate earned on total assets measures

the profitability of total assets, without considering how the assets are financed.
It is computed as follows:

LO 3

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LO 3
Rate Earned on Total Assets
Rate earned on total assets

8.2% 7.3%

This ratio for Lincoln Company is computed below. Total assets are $1,187,500 at the beginning of 2011.

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EE 17-9

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Rate Earned on Stockholders’ Equity
The rate earned on stockholders’ equity measures

the rate of income earned on the amount invested by the stockholders.
It is computed as follows:

LO 3

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LO 3
Rate Earned on Stockholders’ Equity
Rate earned on stockholders’
equity 11.3% 10.0%

The rate for Lincoln Company is computed below. Total stockholders’ equity is $750,000 at the beginning of 2011.

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Rate Earned on Stockholders’ Equity
The difference between the rate earned on

stockholders’ equity and the rate earned on total assets is called leverage.

LO 3

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LO 3
Rate Earned on Stockholders’ Equity
For Lincoln Company, the effect of

leverage is computed as follows:

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LO 3
Rate Earned on Stockholders’ Equity

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Rate Earned on Common Stockholders’ Equity
The rate earned on common stockholders’

equity measures the rate of profits earned on the amount invested by the common stockholders.
It is computed as follows:

LO 3

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Rate Earned on Common Stockholders’ Equity
LO 3
Lincoln Company had $150,000 of

6% preferred stock outstanding on December 31, 2012 and 2011. Thus, preferred dividends of $9,000 ($150,000 x 6%) are deducted from net income. Lincoln’s common stockholders’ equity is determined as follows:

(continued)

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LO 3
Rate earned on common
stockholders’ equity 12.5% 10.9%
Rate Earned

on Common Stockholders’ Equity

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EE 17-10

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Earnings per Share on Common Stock
Earnings per share (EPS) on common

stock measures the share of profits that are earned by a share of common stock. GAAP requires the reporting of earnings per share in the income statement.
It is computed as follows:

LO 3

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LO 3
Earnings per Share on Common Stock
Earnings per share on

common stock $1.64 $1.35

2012 2011

Net income $91,000 $76,500
Less preferred dividends 9,000 9,000
Total $82,000 $67,500
Shares of common stock 50,000 50,000

EPS for Lincoln Company is computed below.

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Price-Earnings Ratio
Another profitability measure quoted by the financial press is the

price-earnings (P/E) ratio on common stock. The price-earnings ratio on common stock measures a company’s future earnings prospects.
The price-earnings ratio is computed as follows:

LO 3

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LO 3
Price-earnings ratio on
common stock 25 20
Price-Earnings Ratio
The P/E

ratio for Lincoln Company is computed below.

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EE 17-11

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Dividends per Share
Dividends per share can be reported with earnings per

share to indicate the relationship between dividends and earnings.
Comparing these two per-share amounts measures the extent to which earnings are being distributed to common shareholders. The ratio for dividends per share is at the top of the next slide.

LO 3

(continued)

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Dividends per Share
LO 3
Dividends per share of common stock $0.80

$0.60

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Dividends and Earnings per Share
LO 3

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Dividend Yield
The dividend yield on common stock measures the rate of

return to common stockholders from cash dividends.
It is of special interest to investors whose objective is to earn dividends from their investment. It is computed as follows:

LO 3

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LO 3
Dividend Yield
Dividend yield on common stock 2.0% 2.2%
The

dividend yield for Lincoln Company is computed below.

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LO 3
Summary of Analytical Measures
(continued)

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(continued)
LO 3
Summary of Analytical Measures

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LO 3
Summary of Analytical Measures
(concluded)

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Learning Objective 4
Describe basic financial statement analytical methods.
Use financial statement analysis

to assess the solvency of a business.
Use financial statement analysis to assess the profitability of a business.
Describe the contents of corporate annual reports.

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Corporate Annual Reports
In addition to the financial statements and the accompanying

notes, corporate annual reports usually include the following sections:
Management discussion and analysis
Report on internal control
Report on fairness of the financial statements

LO 4

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LO 4
Management Discussion and Analysis
Management’s Discussion and Analysis (MD&A) is required

in annual reports filed with the SEC.
It contains management’s analysis of current operations and its plans for the future.
Typical items included in the MD&A are:
Management’s analysis and explanations of any significant changes between the current and prior year’s financial statements.

(continued)

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LO 4
Management Discussion and Analysis
Important accounting principles or policies that could

affect interpretation of the financial statements.
Management’s assessment of the company’s liquidity and the availability of capital to the company.
Significant risk exposures that might affect the company.
Any “off-balance-sheet” arrangements such as leases not included directly in the financial statements.

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Report on Internal Control
The Sarbanes-Oxley Act of 2002 requires a report

stating management’s responsibility for establishing and maintaining internal control. In addition, management’s assessment of the effectiveness of internal controls over financial reporting is included in the report.
It also requires a public accounting firm to verify management’s conclusions on internal control.

LO 4

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Report on Fairness of Financial Statements
All publicly held corporations are required

by the Sarbanes-Oxley Act of 2002 to have an independent audit (examination) of their financial statements. The CPA firm that conducts the audit renders an opinion on the fairness of the statements.

LO 4

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Appendix
Unusual Items on the Income Statement

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Unusual Items on the Income Statement
Unusual items affecting the current period’s

income statement include the following:
Discontinued operations
Extraordinary items

Appendix

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Discontinued Operations
A company may discontinue a segment of its operations by

selling or abandoning the segment’s operations.
A note accompanying the income statement should describe the operations sold, including such details as the date operations were discontinued, the assets sold, and the effect (if any) on current and future operations.

Appendix

Слайд 96

Discontinued Operations
Jones Corporation produces and sells electrical products, hardware supplies, and

lawn equipment. Because of lack of profits, Jones discontinues its electrical products operation and sells the remaining inventory and other assets at a loss of $100,000. Exhibit 11 (next slide) illustrates the reporting of the loss on the discontinued operations.

Appendix

Слайд 97

Discontinued Operations
Appendix

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Extraordinary Items
An extraordinary item is defined as an event or transaction

with both of the following characteristics:
Unusual in nature
Infrequent in occurrence

Appendix

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Extraordinary Items
Appendix

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Financial statement analysis

Содержание

Learning ObjectivesDescribe basic financial statement analytical methods.Use financial statement analysis to

Learning Objective 1Describe basic financial statement analytical methods.

Basic Analytical MethodsUsers analyze a company’s financial statements using a variety

Horizontal AnalysisThe percentage analysis of increases and decreases in related items

Horizontal AnalysisLO 1

LO 1Horizontal Analysis

Horizontal AnalysisLO 1

Horizontal AnalysisLO 1

Horizontal AnalysisLO 1

Horizontal AnalysisLO 1Horizontal Analysis: Difference $296,500Base year (2011) $1,234,000= 24.0%

LO 1Horizontal Analysis

Horizontal Analysis: Difference $37,500Base year (2011) $ 100,000= 37.5%LO 1Horizontal

EE 17-1

Vertical AnalysisA percentage analysis used to show the relationship of each

Vertical AnalysisIn a vertical analysis of the balance sheet, each asset

LO 1Vertical Analysis

Vertical AnalysisVertical Analysis: Current Assets $550,000 Total Assets $ 1,139,500=

LO 1Vertical AnalysisIn a vertical analysis of the income statement, each

LO 1Vertical Analysis

Vertical AnalysisLO 1 Vertical Analysis: Selling expenses $191,000Net sales $1,498,000= 12.8%

EE 17-2

LO 1Common-Sized StatementsIn a common-sized statement, all items are expressed as

LO 1Common-Sized Statements

Learning Objective 2Describe basic financial statement analytical methods.Use financial statement analysis

LO 2Solvency AnalysisAll users of financial statements are interested in the

Solvency AnalysisSolvency analysis focuses on the ability of a business to

Current Position AnalysisA company’s ability to pay its current liabilities is

Working CapitalThe excess of current assets over current liabilities is called

Current RatioThe current ratio, sometimes called the working capital ratio or

LO 2Current RatioThe current ratio for Lincoln Company is computed below.

LO 2Quick RatioA ratio that measures the “instant” debt-paying ability of

LO 2Quick AssetsThe quick ratio for Lincoln Company is computed below.

EE 17-3

Accounts Receivable TurnoverThe relationship between sales and accounts receivable may be

Accounts receivable turnover 12.7 9.2Net sales $1,498,000 $1,200,000Accounts receivable (net): Beginning of

Number of Days’ Sales in ReceivablesThe number of days’ sales in

LO 2Number of Days’ Sales in ReceivablesNumber of days’ sales in

EE 17-4

Inventory TurnoverThe relationship between the volume of goods (merchandise) sold and

LO 2Inventory Turnover Inventory turnover 3.8 2.8 2012 2011Cost of goods sold $1,043,000 $820,000 Inventories: Beginning

LO 2Number of Days’ Sales in InventoryThe number of days’ sales

Average Inventory $273,500 $297,000LO 2Number of Days’ Sales in InventoryThe number of days’

Average Inventory $273,500 $297,000Average daily cost of goods sold $2,858 $2,247 2012 2011LO 2Number of

EE 17-5

Ratio of Fixed Assets to Long-Term LiabilitiesThe ratio of fixed assets

LO 2Ratio of Fixed Assets to Long-Term Liabilities Ratio of fixed

Ratio of Liabilities to Stockholders’ EquityThe relationship between the total claims

LO 2Ratio of Liabilities to Stockholders’ Equity Ratio of liabilities to

EE 17-6

Number of Times Interest Charges EarnedCorporations in some industries normally have

LO 2Number of Times Interest Charges EarnedIt is computed as follows:

LO 2Number of Times Interest Charges EarnedThe number of times interest

LO 2Number of Times Interest Charges EarnedThe number of times interest

EE 17-7

Learning Objective 3Describe basic financial statement analytical methods.Use financial statement analysis

Profitability AnalysisProfitability analysis focuses primarily on the relationship between operating results

Ratio of Net Sales to AssetsThe ratio of net sales to

LO 3Ratio of Net Sales to Assets 2012 2011Net sales $1,498,000 $1,200,000Total assets: Beginning of

LO 3Ratio of Net Sales to Assets 2012 2011Net sales $1,498,000 $1,200,000Total assets: Beginning of

EE 17-8

Rate Earned on Total AssetsThe rate earned on total assets measures

LO 3Rate Earned on Total Assets Rate earned on total assets

EE 17-9

Rate Earned on Stockholders’ EquityThe rate earned on stockholders’ equity measures

LO 3Rate Earned on Stockholders’ EquityRate earned on stockholders’equity 11.3% 10.0%

Rate Earned on Stockholders’ EquityThe difference between the rate earned on

LO 3Rate Earned on Stockholders’ EquityFor Lincoln Company, the effect of

LO 3Rate Earned on Stockholders’ Equity

Rate Earned on Common Stockholders’ EquityThe rate earned on common stockholders’

Rate Earned on Common Stockholders’ EquityLO 3Lincoln Company had $150,000 of

LO 3 Rate earned on common stockholders’ equity 12.5% 10.9%Rate Earned

EE 17-10

Earnings per Share on Common StockEarnings per share (EPS) on common

LO 3Earnings per Share on Common Stock Earnings per share on

Learning Objectives
Describe basic financial statement analytical methods.
Use financial statement analysis to

Learning Objective 1
Describe basic financial statement analytical methods.

Basic Analytical Methods
Users analyze a company’s financial statements using a variety

Horizontal Analysis
The percentage analysis of increases and decreases in related items

Horizontal Analysis
LO 1

LO 1
Horizontal Analysis

Horizontal Analysis
LO 1

Horizontal Analysis
LO 1

Horizontal Analysis
LO 1

Horizontal Analysis
LO 1
Horizontal Analysis:
Difference $296,500
Base year (2011) $1,234,000
= 24.0%

LO 1
Horizontal Analysis

Horizontal Analysis:
Difference $37,500
Base year (2011) $ 100,000
= 37.5%
LO 1
Horizontal

Vertical Analysis
A percentage analysis used to show the relationship of each

Vertical Analysis
In a vertical analysis of the balance sheet, each asset

LO 1
Vertical Analysis

Vertical Analysis
Vertical Analysis:
Current Assets $550,000
Total Assets $ 1,139,500
=

LO 1
Vertical Analysis
In a vertical analysis of the income statement, each

LO 1
Vertical Analysis

Vertical Analysis
LO 1
Vertical Analysis:
Selling expenses $191,000
Net sales $1,498,000
= 12.8%

LO 1
Common-Sized Statements
In a common-sized statement, all items are expressed as

LO 1
Common-Sized Statements

Learning Objective 2
Describe basic financial statement analytical methods.
Use financial statement analysis

LO 2
Solvency Analysis
All users of financial statements are interested in the

Solvency Analysis
Solvency analysis focuses on the ability of a business to

Current Position Analysis
A company’s ability to pay its current liabilities is

Working Capital
The excess of current assets over current liabilities is called

Current Ratio
The current ratio, sometimes called the working capital ratio or

LO 2
Current Ratio
The current ratio for Lincoln Company is computed below.

LO 2
Quick Ratio
A ratio that measures the “instant” debt-paying ability of

LO 2
Quick Assets
The quick ratio for Lincoln Company is computed below.

Accounts Receivable Turnover
The relationship between sales and accounts receivable may be

Accounts receivable turnover 12.7 9.2
Net sales $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of

Number of Days’ Sales in Receivables
The number of days’ sales in

LO 2
Number of Days’ Sales in Receivables
Number of days’ sales in

Inventory Turnover
The relationship between the volume of goods (merchandise) sold and

LO 2
Inventory Turnover
Inventory turnover 3.8 2.8
2012 2011
Cost of goods sold $1,043,000 $820,000
Inventories:
Beginning

LO 2
Number of Days’ Sales in Inventory
The number of days’ sales

Average Inventory $273,500 $297,000
LO 2
Number of Days’ Sales in Inventory
The number of days’

Average Inventory $273,500 $297,000
Average daily cost of goods sold $2,858 $2,247
2012 2011
LO 2
Number of

Ratio of Fixed Assets to Long-Term Liabilities
The ratio of fixed assets

LO 2
Ratio of Fixed Assets to Long-Term Liabilities
Ratio of fixed

Ratio of Liabilities to Stockholders’ Equity
The relationship between the total claims

LO 2
Ratio of Liabilities to Stockholders’ Equity
Ratio of liabilities to

Number of Times Interest Charges Earned
Corporations in some industries normally have

LO 2
Number of Times Interest Charges Earned
It is computed as follows:

LO 2
Number of Times Interest Charges Earned
The number of times interest

LO 2
Number of Times Interest Charges Earned
The number of times interest

Learning Objective 3
Describe basic financial statement analytical methods.
Use financial statement analysis

Profitability Analysis
Profitability analysis focuses primarily on the relationship between operating results

Ratio of Net Sales to Assets
The ratio of net sales to

LO 3
Ratio of Net Sales to Assets
2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

LO 3
Ratio of Net Sales to Assets
2012 2011
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of

Rate Earned on Total Assets
The rate earned on total assets measures

LO 3
Rate Earned on Total Assets
Rate earned on total assets

Rate Earned on Stockholders’ Equity
The rate earned on stockholders’ equity measures

LO 3
Rate Earned on Stockholders’ Equity
Rate earned on stockholders’
equity 11.3% 10.0%

Rate Earned on Stockholders’ Equity
The difference between the rate earned on

LO 3
Rate Earned on Stockholders’ Equity
For Lincoln Company, the effect of

LO 3
Rate Earned on Stockholders’ Equity

Rate Earned on Common Stockholders’ Equity
The rate earned on common stockholders’

Rate Earned on Common Stockholders’ Equity
LO 3
Lincoln Company had $150,000 of

LO 3
Rate earned on common
stockholders’ equity 12.5% 10.9%
Rate Earned

Earnings per Share on Common Stock
Earnings per share (EPS) on common

LO 3
Earnings per Share on Common Stock
Earnings per share on