How Well Am I Doing Financial Statement Analysis

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How Well Am I Doing?Financial Statement
Analysis
Chapter18
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Limitations of Financial Statement Analysis

• Differences in accounting methods between
  companies sometimes make comparisons difficult.

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Limitations of Financial Statement Analysis
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Statements in Comparative and Common-Size Form

• Dollar and percentage
• changes on statements

Analytical techniques used to examine
relationships among financial statement items

• Common-size
• statements

• Ratios

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Dollar and Percentage Changes on Statements
Comparing statements underscores movements and
trends and may provide valuable clues about what
to expect in the future.
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Horizontal Analysis

• Horizontal analysis shows the changes between
  years in the financial data in both dollar and
  percentage form.

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Horizontal Analysis
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Horizontal Analysis
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Horizontal Analysis

• Calculating Change in Dollar Amounts

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Horizontal Analysis

• Calculating Change as a Percentage

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Horizontal Analysis
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Horizontal Analysis
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Horizontal Analysis
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Horizontal Analysis
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Horizontal Analysis
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Horizontal Analysis
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Trend Percentages
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Trend Analysis
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Trend Analysis
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Trend Analysis

• Berry Products
• Income Information
• For the Years Ended December 31,

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Trend Analysis

• Berry Products
• Income Information
• For the Years Ended December 31,

1999 Amount 1998 Amount 100 ( 290,000
275,000 ) 100 105 ( 198,000 190,000
) 100 104 ( 92,000 85,000 )
100 108
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Trend Analysis

• Berry Products
• Income Information
• For the Years Ended December 31,

By analyzing the trends for Berry Products, we
can see that cost of goods sold is increasing
faster than sales, which is slowing the increase
in gross margin.
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Trend Analysis
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Common-Size Statements
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Common-Size Statements
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Common-Size Statements
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Common-Size Statements
2000 COGS 2000 Net Sales 100 ( 360,000
520,000 ) 100 69.2
1999 COGS 1999 Net Sales 100 ( 315,000
480,000 ) 100 65.6
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Gross Margin Percentage
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Common-Size Statements
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Ratio Analysis The Common Stockholder

• Use this information to calculate ratios to
  measure the well-being of the common stockholders
  of Norton Corporation.

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Earnings Per Share
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Price-Earnings Ratio
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Dividend Payout Ratio
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Dividend Yield Ratio
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Return on Total Assets
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Return on Total Assets
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Return on Common Stockholders Equity
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Financial Leverage

• Financial leverage involves acquiring assets
  with funds at a fixed rate of interest.

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Book Value Per Share
This ratio measures the amount that would be
distributed to holders of each share of common
stock if all assets were sold at their balance
sheet carrying amounts and if all creditors were
paid off.
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Ratio Analysis The Short Term Creditor

• Use this information to calculate ratios to
  measure the well-being of the short-term
  creditors for Norton Corporation.

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Working Capital
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Current Ratio
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Acid-Test (Quick) Ratio
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Acid-Test (Quick) Ratio
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Accounts Receivable Turnover
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Average Collection Period
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Inventory Turnover
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Average Sale Period
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Ratio Analysis The Long Term Creditor

• Use this information to calculate ratios to
  measure the well-being of the long-term creditors
  for Norton Corporation.

This is also referred to as net operating income.
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Times Interest Earned Ratio
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Debt-to-Equity Ratio
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Published Sources of Financial Ratios
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End of Chapter 18