Chapter 13 Financial Statement Analysis

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Chapter 13Financial Statement Analysis
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Learning Objectives

• Perform a horizontal analysis of comparative
  financial statements
• Perform a vertical analysis of financial
  statements
• Prepare and use common-size financial statements
• Use the statement of cash flows for decisions

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Types of Analysis

• Horizontal Analysis
• Study of percentage changes in comparative
  financial statements
• Considers changes over time.
• Compute the dollar amount of the change from the
  base period to the later period
• Divide the dollar amount of the change by the
  base period amount

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Horizontal Analysis
Compute the dollar amount of change from 2002 to
2003
8,380 - 7,757 623
Divide the dollar amount of the change by the
base period amount to get the percentage change.
623 / 7,757 8.0
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Horizontal Analysis
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Trend Percentages

• Horizontal analysis over a period of several
  years.
• Indicates the direction a business is taking.

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Vertical Analysis

• Shows the relationship of a financial statement
  item to its base.
• Income Statement base is usually Total Revenue
• Balance Sheet base is usually Total Assets

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Vertical Analysis
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Other Financial Analysis Tools

• Common-size statements
• similar to vertical analysis except no dollar
  amounts are shown
• allows one to compare companies of different
  sizes
• Benchmarking
• comparison of a company to a standard set by
  others

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Ratio Analysis

• A ratio expresses the relationship of one number
  to another
• Common types of ratios
• Ability to pay current liabilities
• Ability to sell inventory and collect receivables
• Ability to pay long-term debt
• Profitability
• Analyze stock as an investment

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Ability to Pay Current Liabilities
Working Capital Current assets Current
liabilities
Current Ratio Current assets / Current
liabilities
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Ability to Sell Inventory and Collect Receivables
One days sales Net sales / 365
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Ability to Pay Long-Term Debt
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Measure Profitability
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Measure Profitability
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Analyzing Stock Investments
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Analyzing Stock Investments
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Efficient Markets

• A capital market in which market prices fully
  reflect all information available to the public.