Financial Analysis – Part 1 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Methods of Financial Analysis Trend Analysis Horizontal Analysis Vertical Analysis Common Size Statements Comparison to Budget Comparison to Industry Data Ratio Analysis Liquidity Measures Profitability Measures Asset Utilization Measures Solvency Measures Market Prospects Measures

Trend Analysis Year 1 Year 2 Year 3 Sales $836,000 $890,000 $970,000 COGS 585,000 570,000 582,000 Gross Margin 251,000 320,000 388,000 Op. Expenses 190,000 210,000 230,000 Op. Income 61,000 110,000 158,000

Trend Analysis - Continued Year 1 Year 2 change Year 3 Sales 836,000 890,000 54,000 970,000 80,000 COGS 586,000 570,000 (16,000) 582,000 12,000 Gross Margin 250,000 320,000 70,000 388,000 68,000 Op. Expenses 190,000 210,000 20,000 230,000 Op. Income 60,000 110,000 50,000 158,000 48,000

Trend Analysis - Continued Year 1 Year 2 change % change Year 3 Sales 836,000 890,000 54,000 6.5% 970,000 80,000 9.0% COGS 586,000 570,000 (16,000) -2.7% 582,000 12,000 2.1% Gross Margin 250,000 320,000 70,000 28.0% 388,000 68,000 21.3% Op. Expenses 190,000 210,000 20,000 10.5% 230,000 9.5% Op. Income 60,000 110,000 50,000 83.3% 158,000 48,000 43.6%

Vertical Analysis – Income Statement Year 1 % of Sales Year 2 Year 3 Sales $ 836,000 100.0% $ 890,000 $ 970,000 COGS 585,000 70.0% 570,000 64.0% 582,000 60.0% Gross Margin 251,000 30.0% 320,000 36.0% 388,000 40.0% Op. Expenses 190,000 22.7% 210,000 23.6% 230,000 23.7% Op. Income 61,000 7.3% 110,000 12.4% 158,000 16.3%

Common Size Income Statement Small Company Really Big Company Sales $ 836,000 $ 23,687,500 COGS 585,000 16,107,500 Gross Margin 251,000 7,580,000 Op. Expenses 190,000 5,448,100 Op. Income 61,000 2,131,900

Common Size Income Statement – Continued Small Company % of Sales Really Big Company Sales $ 836,000 100.0% $ 23,687,500 COGS 585,000 70.0% 16,107,500 68.0% Gross Margin 251,000 30.0% 7,580,000 32.0% Op. Expenses 190,000 22.7% 5,448,100 23.0% Op. Income 61,000 7.3% 2,131,900 9.0%

Vertical Analysis – Balance Sheet Assets Year 1 % of Assets Year 2 Liabilities Cash $ 20,000 2.9% $ 40,000 4.9% A/P $ 140,000 20.6% $ 120,000 14.8% A/R 110,000 16.2% 130,000 16.0% Unearned Revenue 20,000 30,000 3.7% Inventory 190,000 27.9% 170,000 21.0% Total Current Liabilities 160,000 23.5% 150,000 18.5% Prepaids 10,000 1.2% Total Current Assets 340,000 50.0% 350,000 43.2% Long Term Note Payable 0.0% Long Term Investments 4.4% Total Liabilities 320,000 47.1% 300,000 37.0% Property, Plant & Equipment 420,000 61.8% 550,000 67.9% Equity Accum. Depreciation (110,000) -16.2% (120,000) -14.8% Common Stock 250,000 36.8% Net Property, Plant & Equip 310,000 45.6% 430,000 53.1% Retained Earnings 19.8% Total Owners' Equity 360,000 52.9% 510,000 63.0% Total Assets $ 680,000 100.0% $ 810,000 Total Liabilities & Equity

Financial Analysis Part 1 - Concluded This time we focused on trend analysis and vertical analysis of income statement and balance sheet amounts / totals. In Financial Analysis Part 2, we will look at the Ratio Analysis measures mentioned earlier in this presentation.