C15- 1 Learning Objectives Power Notes 1.Basic Analytical Procedures 2.Solvency Analysis 3.Profitability Analysis 4.Summary of Analytical Measures 5.Corporate Annual Reports C15 Financial Statement Analysis Financial Statement Analysis Chapter F15

C15- 2 Lincoln Company Comparative Balance Sheet December 31, 2003 and 2002 Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % $ 829,500$ 787,500$42, % $1,139,500$1230,500$(91,000)(7.4%) Increase (Decrease) AmountPercent Horizontal Analysis: Horizontal Analysis: Current year (2003)$550,000 Base year (2002)$533,000 = 103.2% Increase amount$17,000 Base year (2002)$533,000 = 3.2%

C15- 3 Lincoln Company Comparative Income Statement December 31, 2003 and 2002 Sales$1,530,500$1,234,000$296, % Sales returns32,50034,000(1,500)(4.4%) Net sales$1,498,000$1,200,000$298,000)24.8% Cost of goods sold1,043,000820,000223, % Gross profit $ 455,000$ 380,000$ 75, % Selling expenses$ 191,000$ 147,000$ 44, % Administrative expenses104,00097,4006, % Total operating expenses$ 295,000$ 244,400$ 50, % Operating income$ 160,000$ 135,600$ 24, % Other income8,50011,000(2,500)(22.7%) $ 168,500$ 146,600$ 21, % Other expense6,000 12,000(6,000)(50.0%) Income before income tax$ 162,500$ 134,600$ 27, % Income tax71,50058,10013, % Net income$ 91,000$ 76,500$ 14, % Increase (Decrease) AmountPercent Horizontal Analysis: Horizontal Analysis: Current year (2003)$1,498,000 Base year (2002)$1,200,000 = 124.8% Increase amount$298,000 Base year (2002)$1,200,000 = 24.8%

C15- 4 Lincoln Company Comparative Balance Sheets Assets Current assets$ 550, %$ 533, % Long-term investments95, , Fixed assets (net)444, , Intangible assets50, , $1,139, %$1,230, % Liabilities Current liabilities$ 210, %$ 243, % Long-term liabilities100, , $310, %$ 443, % Stockholders’ Equity Preferred stock, $100 par$ 150, %$ 150, % Common stock, $10 par500, , Retained earnings179, , $829, %$787, % $1,139, %$1230, % December 31, 2003 December 31, 2002 AmountPercentAmountPercent Vertical Analysis: Vertical Analysis: Current liabilities$210,000 Total assets$1,139,500 = 18.4%

C15- 5 Lincoln Company Comparative Balance Sheets Assets Current assets$ 550, %$ 533, % Long-term investments95, , Fixed assets (net)444, , Intangible assets50, , $1,139, %$1,230, % Liabilities Current liabilities$ 210, %$ 243, % Long-term liabilities100, , $310, %$ 443, % Stockholders’ Equity Preferred stock, $100 par$ 150, %$ 150, % Common stock, $10 par500, , Retained earnings179, , $829, %$787, % $1,139, %$1230, % December 31, 2003 December 31, 2002 AmountPercentAmountPercent Common-Size Statements

C15- 6 Solvency Measures — The Short-Term Creditor Current assets $550,000$533,000 Current liabilities 210, ,000 Working capital$340,000$290,000 Current ratio Working Capital and Current Ratio Use:To indicate the ability to meet currently maturing obligations. Divide current assets by current liabilities

C15- 7 Solvency Measures — The Short-Term Creditor Acid-Test Ratio Use:To indicate instant debt-paying ability Quick assets: Cash$ 90,500$ 64,700 Marketable securities 75,00060,000 Accounts receivable (net)115,000120,000 Total$280,500$244,700 Current liabilities$210,000$243,000 Acid-test ratio

C15- 8 Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover Use:To assess the efficiency in collecting receivables and in the management of credit. Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000 Accts. receivable turnover

C15- 9 Solvency Measures — The Short-Term Creditor Inventory Turnover Use:To assess the efficiency in the management of inventory Cost of goods sold$1,043,000$ 820,000 Inventories: Beginning of year$ 283,000$ 311,000 End of year 264,000283,000 Total$ 547,000$ 594,000 Average$ 273,500$ 297,000 Inventory turnover

C Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Inventory Use:To assess the efficiency in the management of inventory Inventories, end of year$ 264,000$283,000 Cost of goods sold$1,043,000$820,000 Average daily cost of goods sold (COGS  365)$ 2,858$ 2,247 Number of days’ sales in inventory

C Solvency Measures — The Long-Term Creditor Use:To indicate the margin of safety to long-term creditors Fixed assets (net)$444,500$470,000 Long-term liabilities$100,000$200,000 Ratio of fixed assets to long-term liabilities Ratio of Fixed Assets to Long-Term Liabilities

C Solvency Measures — The Long-Term Creditor Ratio of Liabilities to Stockholders’ Equity Use:To indicate the margin of safety to creditors Total liabilities$310,000$443,000 Total stockholders’ equity$829,500$787,500 Ratio of liabilities to stockholders’ equity

C Solvency Measures — The Long-Term Creditor Number of Times Interest Charges Earned Use:To assess the risk to debtholders in terms of number of times interest charges were earned Income before income tax$ 900,000$ 800,000 Add interest expense 300, ,000 Amount available for interest$1,200,000$1,050,000 Number of times earned

C Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables Use:To assess the efficiency in collecting receivables and in the management of credit Accounts receivable (net) end of year$ 115,000$ 120,000 Net sales on account$1,498,000$1,200,000 Average daily sales on on account (sales  365)$ 4,104$ 3,288 Number of days’ sales in receivables

C Profitability Measures — The Common Stockholder Ratio of Net Sales to Assets Use:To assess the effectiveness of the use of assets Net sales on account$1,498,000$1,200,000 Total assets: Beginning of year$1,053,000$1,010,000 End of year 1,044,5001,053,000 Total$2,097,500$2,063,000 Average$1,048,750$1,031,500 Ratio of net sales to assets

C Profitability Measures — The Common Stockholder Rate Earned on Total Assets Use:To assess the profitability of the assets Net income$ 91,000$ 76,500 Plus interest expense6,00012,000 Total$ 97,000$ 88,500 Total assets: Beginning of year$1,230,500$1,187,500 End of year 1,139,5001,230,500 Total$2,370,000$2,418,000 Average$1,185,000$1,209,000 Rate earned on total assets8.2% 7.3%

C Profitability Measures — The Common Stockholder Rate Earned on Stockholders’ Equity Use:To assess the profitability of the investment by stockholders. Net income$ 91,000$ 76,500 Stockholders’ equity: Beginning of year$ 787,500$ 750,000 End of year 829,500787,500 Total$1,617,000$1,537,500 Average$ 808,500$ 768,750 Rate earned on equity11.3% 10.0%

C Profitability Measures — The Common Stockholder Rate Earned on Common Stockholders’ Equity Use:To assess the profitability of the investment by common stockholders Net income$ 91,000$ 76,500 Less preferred dividends9,0009,000 $ 82,000$ 67,500 Remainder—common stock$ 82,000$ 67,500 Common stockholders’ equity: Beginning of year$ 637,500$ 600,000 End of year 679,500637,500 Total$1,317,000$1,237,500 $ 658,500$ 618,750 Average$ 658,500$ 618,750 Rate earned on common equity12.5% 10.9%

C Profitability Measures — The Common Stockholder Earnings Per Share on Common Stock Net income$ 91,000$ 76,500 Less preferred dividends9,0009,000 Remainder—common stock$ 82,000$ 67,500 Shares of common stock50,00050,000 Earnings per share on common$1.64 $1.35 Use:To assess the profitability of the investment by common stockholders.

C Profitability Measures — The Common Stockholder Price-Earnings Ratio Use:To indicate future earnings prospects, based on the relationship between market value of common stock and earnings Market price per share of common$20.50$13.50 Earnings per share on common$ 1.64$ 1.35 Price-earnings ratio on common

C Profitability Measures — The Common Stockholder Dividend Yield Use:To indicate the rate of return to common stockholders in terms of dividends Dividends per share of common$ 0.80$ 0.60 Market price per share of common$20.50$13.50 Dividend yield on common stock3.9%4.4%