FSA-F-18-Week-2 chapter 5 analysis fin

finance

1. .

2. What is Financial Statement Analysis:
Financial Statements Analysis is an Analysis of
the Following Statements:
Income Statement
Balance Sheet
Statement of Owners Equity and
Statement of Cash Flow

3. Financial statement analysis helps users make
better decisions.
Managers
Officers
Internal Users External Users
Shareholders
Lenders
Customers

4. Results
in standardized,
meaningful
subtotals.
Items w ith certain
characteristics are
grouped together.
Classified
Financial
Statem ents
Helps identify
significant
changes and
trends.
Amounts from
several years
appear side by side.
Com parative
Financial
Statem ents
Presented as if
the two companies
are a single
business unit.
Information for the
parent and subsidiary
are presented.
Consolidated
Financial
Statem ents

5. Dollar &
Percentage
Changes
Trend
Percentages
Component
Percentages Ratios
Tools of Analysis:

6. Dollar Change:
Analysis Period
Amount
Base Period
Amount
Dollar
Change
= –
Percentage Change:
Dollar Change
Base Period
Amount
Percent
Change
= ÷%%
Dollar and Percentage Changes or
Horizontal Analysis

7. ABC, Inc.
Comparative Balance Sheets
December 31,
2005 2004
Dollar
Change
Percent
Change*
Assets
Current assets:
Cash and equivalents 12,000$ 23,500$ ? ?
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$
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment160,000$ 125,000$
Total assets 315,000$ 289,700$
* Percent rounded to one decimal point.
Dollar and Percentage Changes or
Horizontal Analysis

8. ABC, Inc.
Comparative Balance Sheets
December 31,
2005 2004
Dollar
Change
Percent
Change*
Assets
Current assets:
Cash and equivalents 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$
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment160,000$ 125,000$
Total assets 315,000$ 289,700$
* Percent rounded to one decimal point.
($11,500 ÷ $23,500) × 100% = 48.94%
$12,000 – $23,500 = $(11,500)
Dollar and Percentage Changes or
Horizontal Analysis

9. ABC, Inc.
Comparative Balance Sheets
December 31,
2005 2004
Dollar
Change
Percent
Change*
Assets
Current assets:
Cash and equivalents 12,000$ 23,500$ (11,500)$ -48.9%
Accounts receivable, net 60,000 40,000 20,000 50.0%
Inventory 80,000 100,000 (20,000) -20.0%
Prepaid expenses 3,000 1,200 1,800 150.0%
Total current assets 155,000$ 164,700$ (9,700) -5.9%
Property and equipment:
Land 40,000 40,000 - 0.0%
Buildings and equipment, net 120,000 85,000 35,000 41.2%
Total property and equipment160,000$ 125,000$ 35,000 28.0%
Total assets 315,000$ 289,700$ 25,300$ 8.7%
* Percent rounded to one decimal point.
Dollar and Percentage Changes or
Horizontal Analysis

10. Trend analysis is used to reveal patterns in
data covering successive periods.
Trend
Percent
Analysis Period Amount
Base Period Amount
100%= ×
Trend Analysis

11. 2001 is the base
period so its
amounts will equal
100%.
ABC Inc.
Income Information
For the Years Ended December 31,
Item 2005 2004 2003 2002 2001
Revenues 400,000$ 355,000$ 320,000$ 290,000$ 275,000$
Cost of sales285,000 250,000 225,000 198,000 190,000
Gross profit 115,000 105,000 95,000 92,000 85,000
Item 2005 2004 2003 2002 2001
Revenues 145% 129% 116% 105% 100%
Cost of sales 150% 132% 118% 104% 100%
Gross profit 135% 124% 112% 108% 100%
(290,000275,000)100%=105%
(198,000190,000)100%=104%
(92,00085,000)100%=108%
Trend Analysis

12. Examine the relative size of each item in the financial
statements by computing component
(or common-sized) percentages.
Component
Percent
100%
Analysis Amount
Base Amount
= ×
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
Component or Common Size Percentages or
Vertical Analysis

13. ABC, inc.
Comparative Balance Sheets
December 31,
Common-size
Percents*
2005 2004 2005 2004
Assets
Current assets:
Cash and equivalents 12,000$ 23,500$ 3.8% 8.1%
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$
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net 120,000 85,000
Total property and equipment160,000$ 125,000$
Total assets 315,000$ 289,700$ 100.0%100.0%
* Percent rounded to first decimal point.
Complete the common-size analysis for the other
assets.
($12,000 ÷ $315,000) × 100% = 3.8%
($23,500 ÷ $289,700) × 100% = 8.1%
Component or Common Size Balance Sheet

14. ABC, Inc.
Comparative Balance Sheets
December 31,

Common-size
Percents*
2005 2004 2005 2004
Assets
Current assets:
Cash and equivalents 12,000$ 23,500$ 3.8% 8.1%
Accounts receivable, net 60,000 40,000 19.0% 13.8%
Inventory 80,000 100,000 25.4% 34.6%
Prepaid expenses 3,000 1,200 1.0% 0.4%
Total current assets 155,000$ 164,700$ 49.2% 56.9%
Property and equipment:
Land 40,000 40,000 12.7% 13.8%
Buildings and equipment, net 120,000 85,000 38.1% 29.3%
Total property and equipment160,000$ 125,000$ 50.8% 43.1%
Total assets 315,000$ 289,700$ 100.0%100.0%
* Percent rounded to first decimal point.
Component or Common Size Balance Sheet

15. ABC, Inc.
Comparative Balance Sheets
December 31,

Common-size
Percents*
2005 2004 2005 2004
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable 67,000$ 44,000$ 21.3% 15.2%
Notes payable 3,000 6,000 1.0% 2.1%
Total current liabilities 70,000$ 50,000$ 22.3% 17.3%
Long-term liabilities:
Bonds payable, 8% 75,000 80,000 23.8% 27.6%
Total liabilities 145,000$ 130,000$ 46.1% 44.9%
Shareholders' equity:
Preferred stock 20,000 20,000 6.3% 6.9%
Common stock 60,000 60,000 19.0% 20.7%
Additional paid-in capital 10,000 10,000 3.2% 3.5%
Total paid-in capital 90,000$ 90,000$ 28.5% 31.1%
Retained earnings 80,000 69,700 25.4% 24.0%
Total shareholders' equity 170,000$ 159,700$ 53.9% 55.1%
Total liabilities and shareholders' equity315,000$ 289,700$ 100.0%100.0%
* Percent rounded to first decimal point.
Component or Common Size Balance Sheet

16. ABC, Inc.
Comparative Income Statements
For the Years Ended December 31,
Common-size
Percents*
2005 2004 2005 2004
Revenues 520,000$ 480,000$ 100.0%100.0%
Costs and expenses:
Cost of sales 360,000 315,000 69.2% 65.6%
Selling and admin. 128,600 126,000 24.7% 26.3%
Interest expense 6,400 7,000 1.2% 1.5%
Income before taxes 25,000$ 32,000$ 4.8% 6.7%
Income taxes (30%) 7,500 9,600 1.4% 2.0%
Net income 17,500$ 22,400$ 3.4% 4.7%
Net income per share 0.79$ 1.01$
Avg. # common shares 22,200 22,200
* Rounded to first decimal point.
Component or Common Size Income Statement

17. Past performance to
present performance.
Other companies to
your company.
Along with dollar and percentage changes,
trend percentages, and component percentages,
ratios can be used to compare:
A ratio is a simple mathematical expression
of the relationship between one item and another.
Ratios

18. Income
Profitability
Liquidity
Coverage
Leverage
Investment valuation Ratio

19. Gross Margin on Net Sales
Operating Income to Net Sales
Ratio

20. Net Profit Ratios
ROA
ROE

21. Working Capital
Current Ratio
Quick Ratio
Inventory Turnover-
COGS / average inventory
Receivables Turnover-
Sales / accounts receivable

22. Debt Ratio
Debt Equity Ratio
Capitalization Ratio
=LTD/(LTD+SE)

23. Time Interest Earned Ratio
Investment Valuation Ratio:
EPS
Price Earning Ratio

24. 20042005
Assets
Cash $    90$  300
Accounts receivable
800 500
Inventory 1,400 900
Prepaid expenses
      60      60
Plant and equipment, net
 2,650 2,240
Total assets $5,00
0$4,000
Liabilities and Stockholders’
Equity
Liabilities:
Current liabilities $1,40
0$  750
Bonds payable, 10%
    600   600
Preferred stock, $25 par,
7.5% 400 400
Common stock, $10 par
500 500
Retained earnings
 2,100 1,750
Total liabilities and
stockholders’ equity $5,00
0$4,000
2004 2005
Sales $9,000$8,000
Cost of goods sold
 5,930 5,100
Gross margin
3,0702,900
Less operating expenses
 2,160 2,040
Net operating income
910 860
Less interest expense
      60      60
Net income before taxes
850 800
Less income taxes (40%)
    340    320
Net income
$  510$  480
Comparative Income Statements
Comparative Statements of Financial Position
Prepare Ratios we have done so far from the statements Below