Professional Documents
Culture Documents
CHAPTER 17
ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
Methods of
Financial Statement Analysis
Horizontal
Vertical
Analysis
Analysis
Common-Size
Trend
Ratio
Statements
Percentages
Analysis
17-2
17-3
Horizontal Analysis
Using comparative financial
statements to calculate dollar
or percentage changes in a
financial statement item from
one period to the next
17-4
Vertical Analysis
For a single financial
statement, each item
is expressed as a
percentage of a
significant total,
e.g., all income
statement items are
expressed as a
percentage of sales
17-5
Common-Size Statements
Financial statements that show
only percentages and no
absolute dollar amounts
17-6
Trend Percentages
Show changes over time in
given financial statement items
(can help evaluate financial
information of several years)
17-7
Ratio Analysis
Expression of logical relationships
between items in a financial
statement of a single period
(e.g., percentage relationship
between revenue and net income)
17-8
17-9
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Assets
Current assets:
Cash
12,000
23,500
60,000
40,000
Inventory
80,000
100,000
3,000
1,200
155,000
164,700
40,000
40,000
120,000
85,000
160,000
125,000
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
315,000
289,700
Incre
Amo
17-10
Current Year
Figure
Base Year
Figure
17-11
Current Year
Figure
Base Year
Figure
17-12
Dollar Change
Base Year Figure
100%
17-13
1998
Increase (Decrease)
Amount
%
Assets
Current assets:
Cash
$
12,000 $
23,500 $ (11,500)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
Total current assets
155,000
164,700
$12,000
$23,500
= $(11,500)
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment
160,000
125,000
Total assets
$ 315,000 $ 289,700
17-14
1998
Increase (Decrease)
Amount
%
Assets
Current assets:
Cash
$
12,000 $
23,500 $ (11,500)
(48.9)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
Total current assets
155,000
164,700
($11,500
$23,500)
100% = 48.9%
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment
160,000
125,000
Total assets
$ 315,000 $ 289,700
17-15
1999
1998
12,000 $
60,000
80,000
3,000
155,000
23,500 $ (11,500)
40,000
20,000
100,000
(20,000)
1,200
1,800
164,700
(9,700)
40,000
120,000
160,000
315,000 $
40,000
85,000
125,000
289,700 $
Assets
Current assets:
Cash
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
35,000
35,000
25,300
(48.9)
50.0
(20.0)
150.0
(5.9)
0.0
41.2
28.0
8.7
17-16
17-17
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Notes payable
Total current liabilities
Long-term liabilities:
Bonds payable, 8%
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
67,000 $
3,000
70,000
1998
Increase (Decrease)
Amount
%
44,000 $
6,000
50,000
23,000
(3,000)
20,000
52.3
(50.0)
40.0
75,000
145,000
80,000
130,000
(5,000)
15,000
(6.3)
11.5
20,000
60,000
10,000
90,000
80,000
170,000
315,000 $
20,000
60,000
10,000
90,000
69,700
159,700
289,700 $
10,300
10,300
25,300
0.0
0.0
0.0
0.0
14.8
6.4
8.7
17-18
17-19
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Net income before taxes
25,000
32,000
(7,000)
(21.9)
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
17-20
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Sales increased by
8.3% while
net
Net income before taxes
25,000
32,000
(7,000)
(21.9)
income
decreased
by
21.9%.
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
17-21
1999
$ 520,000
360,000
160,000
128,600
31,400
6,400
25,000
7,500
$ 17,500
1998
$ 480,000
315,000
165,000
126,000
39,000
7,000
32,000
9,600
$ 22,400
Increase (Decrease)
Amount
%
$ 40,000
8.3
45,000
14.3
(5,000)
(3.0)
2,600
2.1
(7,600)
(19.5)
(600)
(8.6)
(7,000)
(21.9)
(2,100)
(21.9)
$
(4,900)
(21.9)
17-22
17-23
17-24
17-25
17-26
Wheeler, Inc.
Operating Data
1998
1997
$ 2,244
$ 2,112
1,966
1,870
$
278
$
242
1996
$ 1,991
1,803
$
188
1995
$ 1,820
1,701
$
119
17-27
Wheeler, Inc.
Operating Data
1998
1997
$ 2,244
$ 2,112
1,966
1,870
$
278
$
242
1996
$ 1,991
1,803
$
188
1995
$ 1,820
1,701
$
119
17-28
Revenues
Expenses
Net income
1999
132%
120%
313%
Wheeler, Inc.
Operating Data
1998
1997
123%
116%
116%
110%
234%
203%
1996
109%
106%
158%
1995
100%
100%
100%
17-29
140
Trend line
for Sales
% of 100 Base
130
120
110
100
90
Sales
Expenses
1995
1996
1997
Years
1998
1999
17-30
Ratios
Ratios can be expressed in three
different ways:
1. Ratio (e.g., current ratio of 2:1)
2. % (e.g., profit margin of 2%)
3. $
(e.g., EPS of $2.25)
CAUTION!
Using ratios and percentages without
considering the underlying causes may
be hazardous to your health!
lead to incorrect conclusions.
17-31
Categories of Ratios
Liquidity Ratios
Indicate a companys short-term
debt-paying ability
Profitability Tests
Relate income to other variables
Market Tests
Help assess relative merits of stocks in
the marketplace
17-32
651
17-33
17-34
17-35
17-36
17-37
NORTON CORPORATION
Balance Sheets
December 31, 1999 and 1998
1999
1998
Assets
Current assets:
Cash
30,000
20,000
20,000
17,000
Inventory
12,000
10,000
3,000
2,000
65,000
49,000
Land
165,000
123,000
116,390
128,000
281,390
251,000
Prepaid expenses
Total current assets
Property and equipment:
346,390
300,000
17-38
NORTON CORPORATION
Balance Sheets
December 31, 1999 and 1998
1999
1998
39,000
40,000
3,000
2,000
42,000
42,000
70,000
78,000
112,000
120,000
27,400
17,000
158,100
113,000
185,500
130,000
48,890
50,000
234,390
180,000
$ 346,390
$ 300,000
Long-term liabilities:
Notes payable, long-term
Total liabilities
Stockholders' equity:
Common stock, $1 par value
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
17-39
NORTON CORPORATION
Income Statements
For the Years Ended December 31, 1999 and 1998
Net sales
Cost of goods sold
Gross margin
Operating expenses
Net operating income
Interest expense
Net income before taxes
Less income taxes (30%)
Net income
1999
$ 494,000
140,000
354,000
270,000
84,000
7,300
76,700
23,010
$ 53,690
1998
$ 450,000
127,000
323,000
249,000
74,000
8,000
66,000
19,800
$ 46,200
17-40
17-41
NORTON CORPORATION
1999
Cash
$ 30,000
We will
use this
information
to calculate
the liquidity
ratios for
Norton.
Beginning of year
17,000
End of year
20,000
Inventory
Beginning of year
10,000
End of year
12,000
65,000
42,000
Sales on account
494,000
140,000
17-42
Working Capital*
The excess of current assets over
current liabilities.
12/31/99
Current assets
Current liabilities
Working capital
65,000
(42,000)
23,000
17-43
Current Assets
Current Liabilities
Current
Ratio
$65,000
$42,000
1.55 : 1
17-44
Quick Assets
Current Liabilities
Quick assets are Cash,
Marketable Securities,
Accounts Receivable (net) and
current Notes Receivable.
17-45
Quick Assets
Current Liabilities
Norton Corporations quick
assets consist of cash of
$30,000 and accounts
receivable of $20,000.
17-46
Quick Assets
Current Liabilities
$50,000
$42,000
= 1.19 : 1
17-47
Accounts
Receivable =
Turnover
#3
Sales on Account
Average Accounts Receivable
Accounts
$494,000
= 26.70 times
Receivable =
($17,000 + $20,000) 2
Turnover
This ratio measures how many
times a company converts its
receivables into cash each year.
365 Days
Accounts Receivable Turnover
365 Days
26.70 Times
= 13.67 days
17-48
365 Days
Accounts Receivable Turnover
365 Days
26.70 Times
= 13.67 days
17-49
17-50
Inventory Turnover
#5
Inventory
Turnover
Inventory
Turnover
$140,000
=
= 12.73 times
($10,000 + $12,000) 2
17-51
Inventory Turnover
#5
Inventory
Turnover
Inventory
Turnover
$140,000
=
= 12.73 times
($10,000 + $12,000) 2
Would 5 be a
desirable number of times
for inventory to turnover?
Equity, or LongTerm
Solvency Ratios
This is part of the information to
calculate the equity, or long-term
solvency ratios of Norton Corporation.
NORTON CORPORATION
1999
Net operating income
Net sales
Interest expense
Total stockholders' equity
$ 84,000
494,000
7,300
234,390
17-52
17-53
NORTON CORPORATION
1999
Common shares outstanding
Beginning of year
End of year
Net income
Here is the
rest of the
information
we will
use.
17,000
27,400
$ 53,690
Stockholders' equity
Beginning of year
180,000
End of year
234,390
2
20
7,300
Total assets
Beginning of year
300,000
End of year
346,390
17-54
Equity Ratio
#6
Equity
=
Ratio
Equity
=
Ratio
Stockholders Equity
Total Assets
$234,390
$346,390
= 67.7%
17-55
Net Income
Net Sales
Net Income
=
to
Net Sales
$53,690
$494,000
= 10.9%
17-56
Net Income
Net Sales
Net Income
=
to
Net Sales
$53,690
$494,000
= 10.9%
17-57
#8
Return on
Stockholders =
Equity
Return on
Stockholders =
Equity
Net Income
Average Common
Stockholders Equity
$53,690
($180,000 + $234,390) 2
Important measure of the
income-producing ability
of a company.
= 25.9%
17-58
= $2.42
17-59
Price-Earnings Ratio
A/K/A P/E Multiple
#10
Price-Earnings
=
Ratio
Price-Earnings
=
Ratio
$20.00
$ 2.42
= 8.3 : 1