WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 17 Financial Statement Analysis.

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WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 17 Financial Statement Analysis Prepared by: Debbie Musil Kwantlen Polytechnic University 1

Copyright John Wiley & Sons Canada, Ltd.2 Basics of financial statement analysis – Comparative analysis – Tools of analysis Horizontal analysis – Balance sheet – Income statement Vertical analysis – Balance sheet – Income statement Ratio analysis – Liquidity, solvency and profitability ratios Limitations of financial statement analysis Financial Statement Analysis

Copyright John Wiley & Sons Canada, Ltd.3 Chapter 17: Financial Statement Analysis Study Objectives 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis.

Copyright John Wiley & Sons Canada, Ltd.4 Comparing financial statement information of a company can be done: – On an intracompany basis: compare current year with prior years – On an intercompany basis: with other competing companies – Based on industry averages Important to also review other financial and non-financial information Basics of Financial Statement Analysis

Copyright John Wiley & Sons Canada, Ltd.5 Commonly used tools to evaluate financial data: – Horizontal analysis: evaluate a series of data over a period of time – Vertical analysis: evaluate data as a percentage of a total amount – Ratio analysis: expresses the relationship among selected financial data within the same period Tools of Analysis

Copyright John Wiley & Sons Canada, Ltd.6 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

Copyright John Wiley & Sons Canada, Ltd. 7 Compares a series of financial data – To determine the increase or decrease over time Horizontal percentage of base-period amount – Expresses specified amount as a percent of a base year Horizontal percentage change for period – Measures change in any one specific period Horizontal Analysis (Trend Analysis)

Copyright John Wiley & Sons Canada, Ltd. 8 Horizontal Analysis Balance Sheet

Copyright John Wiley & Sons Canada, Ltd.9 Horizontal Analysis Income Statement

Copyright John Wiley & Sons Canada, Ltd.10 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

Copyright John Wiley & Sons Canada, Ltd.11 Expresses financial statement data as a percentage of a base amount (always equal to 100%) Commonly used base amounts are: – Balance sheet: total assets; total liabilities and shareholders’ equity – Income statement: net sales Useful for intracompany and intercompany comparisons Vertical Analysis (Common Size Analysis)

Copyright John Wiley & Sons Canada, Ltd.12 Vertical Analysis Balance Sheet

Copyright John Wiley & Sons Canada, Ltd.13 Vertical Analysis Income Statement

Copyright John Wiley & Sons Canada, Ltd.14 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

Copyright John Wiley & Sons Canada, Ltd.15 Expresses the relationship between selected financial statement items Classified into: – Liquidity ratios: measure short-term ability to meet obligations and unexpected cash needs – Solvency ratios: measure ability to survive over long periods of time – Profitability ratios: measure operating success for a specific time period Ratio Analysis

Copyright John Wiley & Sons Canada, Ltd.16 Ratio Analysis Liquidity Ratios

Copyright John Wiley & Sons Canada, Ltd.17 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

Copyright John Wiley & Sons Canada, Ltd.18 Ratio Analysis Solvency Ratios

Copyright John Wiley & Sons Canada, Ltd.19 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

Copyright John Wiley & Sons Canada, Ltd.20 Ratio Analysis Profitability Ratios

Copyright John Wiley & Sons Canada, Ltd.21 1.Identify the need for, and tools of, financial statement analysis. 2.Explain and apply horizontal analysis. 3.Explain and apply vertical analysis. 4.Identify and use ratios to analyze liquidity. 5.Identify and use ratios to analyze solvency. 6.Identify and use ratios to analyze profitability. 7.Recognize the limitations of financial statement analysis. Chapter 17: Financial Statement Analysis Study Objectives

v Copyright John Wiley & Sons Canada, Ltd.22 Alternative accounting principles: reduces intercompany comparability – IFRS versus ASPE Other Comprehensive income: generally excluded from analysis, should be assessed if significant Quality of information: full and transparent reporting aids in accurate financial analysis Economic factors: – Irregular items (e.g. – discontinued operations) must be excluded – Losses make it difficult to calculate and interpret ratios Limitations of Financial Analysis

Copyright John Wiley & Sons Canada, Ltd.23 Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.