Financial Accounting, Tenth Edition Financial Reporting and Analysis Financial Accounting, Tenth Edition

Comparative Analysis Horizontal Analysis Also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Purpose - to determine increase or decrease that has taken place. Commonly applied to the balance sheet and income statement. SO 4 Describe and apply horizontal analysis.

changes and percentage changes. Comparative Analysis Illustration 13-11 Horizontal analysis of balance sheets Helpful Hint: When using horizontal analysis, be sure to examine both dollar amount changes and percentage changes. SO 4 Describe and apply horizontal analysis.

Comparative Analysis Illustration 13-12 Horizontal analysis of Income statements Helpful Hint: In horizontal analysis, while the amount column is additive (the total is $99 million), the percentage column is not additive (9.9% is not a total). SO 4 Describe and apply horizontal analysis.

Comparative Analysis Vertical Analysis Also called common-size analysis, is a technique that expresses each financial statement item as a percent of a base amount. Vertical analysis is commonly applied to the balance sheet and the income statement. SO 5 Describe and apply vertical analysis.

These results indicate the company shifted Comparative Analysis These results indicate the company shifted toward equity financing by relying less on debt and by increasing the amount of retained earnings. SO 5 Describe and apply vertical analysis.

Comparative Analysis Illustration 13-14 Vertical analysis of an income statements Kellogg’s increase in net income as a percentage of sales is due primarily to the decrease in interest expense and income tax expense as a percent of sales. SO 5 Describe and apply vertical analysis.

Comparative Analysis Illustration 13-15 Intercompany comparison by vertical analysis Vertical analysis also enables a comparison of companies of different sizes. Although Kellogg’s net sales are less than those of General Mills, vertical analysis eliminates the impact of this size difference for our analysis. SO 5 Describe and apply vertical analysis.

Comprehensive Illustration of Ratio Analysis Illustration 13A-1

Comprehensive Illustration of Ratio Analysis Illustration 13A-2 Illustration 13A-4

Comprehensive Illustration of Ratio Analysis Illustration 13A-3

Comprehensive Illustration of Ratio Analysis Liquidity Ratios Measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers are particularly interested in assessing liquidity.

Comprehensive Illustration of Ratio Analysis Current Ratio - Expresses the relationship of current assets to current liabilities. Calculate the current ratio for Kellogg for 2007 and 2006. Illustration 13A-5 .67 .60 What do the measures tell us? A current ratio of .67 means that for every dollar of current liabilities, Kellogg has $0.67 of current assets.

Comprehensive Illustration of Ratio Analysis Profitability Ratios Measure the income or operating success of a company for a given period of time. Illustration 13A-15 Relationships among profitability measures

Comprehensive Illustration of Ratio Analysis Return on Common Stockholders’ Equity Ratio - Shows how many dollars of net income the company earned for each dollar invested by the owners. Calculate the ratio for Kellogg. Illustration 13A-16 48% 46% Kellogg’s 2007 rate of return on common stockholders’ equity is unusually high at 48%, considering an industry average of 23% and General Mills’s return of 21%.

Comprehensive Illustration of Ratio Analysis Return on Assets Ratio - Measures the overall profitability of assets in terms of the income earned on each dollar invested in assets. Calculate the ratio. Illustration 13A-17 10% 9.4% Note that Kellogg’s rate of return on common stockholders’ equity (48%) is substantially higher than its rate of return on assets (10%). Kellogg has made effective use of leverage.

Comprehensive Illustration of Ratio Analysis Profit Margin Ratio - Or rate of return on sales, is a measure of the percentage of each dollar of sales that results in net income. Calculate the ratio for Kellogg. Illustration 13A-18 9.4% 9.2% High-volume (high inventory turnover) businesses such as grocery stores and pharmacy chains generally have low profit margins.

Comprehensive Illustration of Ratio Analysis Asset Turnover Ratio - Measures how efficiently a company uses its assets to generate sales. Calculate the ratio for Kellogg. Illustration 13A-19 1.07 1.02 The average asset turnover for utility companies is .45, for example, while the grocery store industry has an average asset turnover of 3.49.

Comprehensive Illustration of Ratio Analysis You can analyze the combined effects of profit margin and asset turnover on return on assets for Kellogg as shown Illustration 13A-20

Comprehensive Illustration of Ratio Analysis Gross Profit Rate - Indicates a company’s ability to maintain an adequate selling price above its cost of goods sold. Calculate the ratio for Kellogg. Illustration 13A-21 44% 44% As an industry becomes more competitive, this ratio declines.

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