Financial Statement Analysis

1
Financial Statement Analysis

• Performed by investors and creditors to
• evaluate a corporations financial status and
• performance
• Review 4 basic financial statements
• Compare current years and prior years financial
  statements
• Examine relationships within the current
  financial statements
• Evaluate industry trends/general economic
  conditions

2
Basic Analytical Procedures (1)

• Horizontal Analysis an analysis of the
  percentage increases and decreases in related
  items in comparative financial statements (for a
  single corporation)

3
Lincoln CompanyComparative Balance
SheetDecember 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Assets Current assets 550,000
533,000 17,000 3.2 Long-term
investments 95,000 177,500 (82,500) (46.5) Fixed
assets (net) 444,500 470,000 (25,500) (5.4) Intan
gible assets 50,000 50,000 Total assets
1,139,500 1,230,500 (91,000) (7.4)
Liabilities Current liabilities 210,000
243,000 (33,000) (13.6) Long-term
liabilities 100,000 200,000 (100,000) (50.0)
Total liabilities 310,000
443,000 (133,000) (30.0) Stockholders
Equity Preferred 6 stock, 100 par 150,000
150,000 Common stock, 10
par 500,000 500,000 Retained
earnings 179,500 137,500 42,000 30.5 Total
stockholders equity 829,500
787,500 42,000 5.3 Total liab. SE
1,139,500 1230,500 (91,000) (7.4)
4
Basic Analytical Procedures (2)

• Vertical Analysis a percentage analysis that
  shows the relationship of each component to the
  total within a single statement (for a single
  corporation)

5
Lincoln CompanyComparative Balance Sheet
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Assets Current assets
550,000 48.3 533,000 43.3 Long-term
investments 95,000 8.3 177,500 14.4 Property,
plant, equip. (net) 444,500 39.0 470,000 38.2 In
tangible assets 50,000 4.4 50,000 4.1 Total
assets 1,139,500 100.0 1,230,500 100.0
Liabilities Current liabilities
210,000 18.4 243,000 19.7 Long-term
liabilities 100,000 8.8 200,000 16.3 Total
liabilities 310,000 27.2 443,000 36.0
Stockholders Equity Preferred 6 stock, 100
par 150,000 13.2 150,000 12.2 Common
stock, 10 par 500,000 43.9 500,000 40.6 Retained
earnings 179,500 15.7 137,500 11.2 Total
stockholders equity 829,500 72.8
787,500 64.0 Total liab. SE 1,139,500 100.0
1,230,500 100.0
6
Lincoln CompanyComparative Income StatementFor
the Years Ended December 31, 2006 and 2005
2006
2005
Amount Percent Amount Percent
Sales 1,530,500 102.2 1,234,000 102.8 Sales
returns 32,500 2.2 34,000 2.8 Net
sales 1,498,000 100.0 1,200,000 100.0 Cost
of goods sold 1,043,000 69.6 820,000 68.3 Gross
profit 455,000 30.4 380,000 31.7 Selling
expenses 191,000 12.8 147,000 12.3 Administ
rative expenses 104,000 6.9 97,400 8.1 Total
operating expenses 295,000 19.7
244,400 20.4 Income from operations
160,000 10.7 135,600 11.3 Other
income 8,500 0.6 11,000 0.9 168,500 11.3
146,600 12.2 Other expense 6,000 0.4 12,000 1.0 I
ncome before income tax 162,500 10.9
134,600 11.2 Income tax expense 71,500 4.8 58,100
4.8 Net income 91,000 6.1 76,500 6.4
7
Basic Analytical Procedures (3)

• Common-Size Statements vertical analysis with
  all items expressed in percentages (comparisons
  between corporations or between a corporation and
  industry averages)

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Common-Size Income Statement
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Analytical Calculations

• Solvency Analysis - ability of a corporation
• to meet its financial obligations (debts)
• Profitability Analysis ability of a corporation
• to earn income

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Sarbanes-Oxley Act

• Provides reforms in three main areas
• Accounting Profession
• Limits on services provided
• Creation of PAOB
• Corporate Governance
• Audit committee
• CEO CFO must certify fairness of F/S and
  effectiveness of internal controls
• Financial Disclosure
• Related parties
• Material off-balance-sheet arrangements

11
Corporate Annual Reports

• Key items
• Financial Statements and notes
• Independent Auditors report
• Audit opinion required for all public
  corporations
• Attest opinion on accuracy of managements
  internal control assertions