Analysis of Financial Statements

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Analysis of Financial Statements www.assignmentpoint.com

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 www.assignmentpoint.com

Financial statement analysis helps users make better decisions. Purpose of Analysis Internal Users External Users Shareholders Lenders Customers Managers Officers www.assignmentpoint.com

Financial Statements Are Designed for Analysis www.assignmentpoint.com

Dollar & Percentage Changes Component Percentages Tools of Analysis: Dollar & Percentage Changes Trend Percentages Component Percentages Ratios www.assignmentpoint.com

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

Dollar and Percentage Changes or Horizontal Analysis www.assignmentpoint.com

Dollar and Percentage Changes or Horizontal Analysis $12,000 – $23,500 = $(11,500) ($11,500 ÷ $23,500) × 100% = 48.94% www.assignmentpoint.com

Dollar and Percentage Changes or Horizontal Analysis www.assignmentpoint.com

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

Trend Analysis ABC Inc. Income Information For the Years Ended December 31, 2001 is the base period so its amounts will equal 100%. www.assignmentpoint.com

Component or Common Size Percentages or Vertical Analysis 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 www.assignmentpoint.com

Component or Common Size Balance Sheet ($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1% www.assignmentpoint.com

Component or Common Size Balance Sheet www.assignmentpoint.com

Component or Common Size Balance Sheet www.assignmentpoint.com

Component or Common Size Income Statement www.assignmentpoint.com

Ratios www.assignmentpoint.com

Investment valuation Ratio Types of Ratio: Income Profitability Liquidity Coverage Leverage Investment valuation Ratio www.assignmentpoint.com

Income Ratio: Gross Margin on Net Sales Operating Income to Net Sales Ratio www.assignmentpoint.com

Profitability Ratio: Net Profit Ratios ROA ROE www.assignmentpoint.com

Receivables Turnover- Sales / accounts receivable Liquidity Ratios: Working Capital Current Ratio Quick Ratio Inventory Turnover- COGS / average inventory Receivables Turnover- Sales / accounts receivable www.assignmentpoint.com

Leverage (Capitalization) Ratios: Debt Ratio Debt Equity Ratio =LTD/(LTD+SE) www.assignmentpoint.com

Coverage Ratio: Time Interest Earned Ratio www.assignmentpoint.com

Investment Valuation Ratio EPS Price Earning Ratio Investment Valuation Ratio www.assignmentpoint.com

The Du Pont system Also can be expressed as: ROE = (NI/Sales) x (Sales/TA) x (TA/Equity) Focuses on: Expense control (PM) Asset utilization (TATO) Debt utilization (Eq. Mult.) Shows how these factors combine to determine ROE. www.assignmentpoint.com

Thanks End Of Presentation: www.assignmentpoint.com