17-1 Who analyzes financial statements? u Internal users (i.e., management) u External users Examples? Investors, creditors, regulatory agencies & … stock market analysts and auditors Financial Statement Analysis 625

17-2 l What do internal users use it for? Planning, evaluating and controlling company operations l What do external users use it for? Assessing past performance and current financial position and making predictions about the future profitability and solvency of the company as well as evaluating the effectiveness of management l First sentence in chapter says... Financial Statement Analysis

17-3 l Horizontal Analysis l Vertical Analysis l Common-Size Statements l Trend Percentages l Ratio Analysis Methods of Financial Statement Analysis

17-4 Chapter 3 Horizontal and Vertical A NALYSIS O F F INANCIAL S TATEMENTS

17-5 Horizontal Analysis Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next

17-6 Vertical Analysis For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales

17-7 Common-Size Statements Financial statements that show only percentages and no absolute dollar amounts

17-8 Trend Percentages Show changes over time in given financial statement items (can help evaluate financial information of several years)

17-9 Ratio Analysis Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)

17-10 Horizontal Analysis Example horizontal analysis The management of Clover Company provides you with comparative balance sheets of the years ended December 31, 1999 and Management asks you to prepare a horizontal analysis on the information.

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17-12 Calculating Change in Dollar Amounts Dollar Change Current Year Figure Base Year Figure =– Horizontal Analysis Example

17-13 Calculating Change in Dollar Amounts Since we are measuring the amount of the change between 1998 and 1999, the dollar amounts for 1998 become the “base” year figures. Dollar Change Current Year Figure Base Year Figure =– Horizontal Analysis Example

17-14 Calculating Change as a Percentage Percentage Change Dollar Change Base Year Figure 100% = × Horizontal Analysis Example

17-15 $12,000 – $23,500 = $(11,500) Horizontal Analysis Example

17-16 ($11,500 ÷ $23,500) × 100% = 48.9% Horizontal Analysis Example

17-17 Horizontal Analysis Example

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17-20 There were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income.

17-21 Vertical Analysis Example

17-22 Vertical Analysis Example $82,000 ÷ $483,000 = 17% rounded $30,000 ÷ $387,000 = 8% rounded

17-23 Trend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis.

17-24 Trend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis. $1,991 - $1,820 = $171

17-25 Trend Percentages Example Using 1995 as the base year, we develop the following percentage relationships. $1,991 - $1,820 = $171 $171 ÷ $1,820 = 9% rounded

17-26 Trend line for Sales