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Chapter 15 Financial Statement Analysis. Introduction How can we determine:  The ability of an organization to pay loans?  Whether we are earning a.

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Copyright © 2012 The McGraw-Hill Companies, Inc. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Financial Statement Analysis Chapter 14

14-2 Financial Statements Are Designed for Analysis

14-3 Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of Analysis

14-4 Dollar and Percentage Changes Dollar Change: Analysis Period Amount Base Period Amount Dollar Change =– Percentage Change: Dollar Change Base Period Amount Percent Change = ÷

14-5 Dollar and Percentage Changes Sales and earnings should increase at more than the rate of inflation. In measuring quarterly changes, compare to the same quarter in the previous year. Percentages may be misleading when the base amount is small. Evaluating Percentage Changes in Sales and Earnings

14-6 Trend Percentages Trend analysis is used to reveal patterns in data covering successive periods. Trend Percentages Analysis Period Amount Base Period Amount 100%=×

14-7 Component Percentages Examine the relative size of each item in the financial statements by computing component (or common-sized) percentages. Component Percentage 100% Analysis Amount Base Amount = × Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues

14-8 Quality of Earnings Investors are interest in companies that demonstrate an ability to earn income at a growing rate each year. Stability of earnings growth helps investors predict future prospects for the company. Financial analyst often speak of the quality of earnings at one company being higher than another company in the same industry.

14-9 Quality of Assets and the Relative Amount of Debt While satisfactory earnings may be a good indicator of a companys ability to pay its debts and dividends, we must also consider the composition of assets, their condition and liquidity, the timing of repayment of liabilities, and the total amount of debt outstanding

14-10 Ratios

14-11 Operating Cycle Cash Inventory Accounts Receivable 1. Purchase of Merchandise 2. Sale of merchandise on account 3. Collection of accounts receivable

14-12 End of Chapter 14