1. Fundamental Managerial Accounting Concepts
Fifth Edition
Fundamental Managerial Accounting Concepts
Fundamental Managerial Accounting Concepts Fifth Edition
Thomas P. Edmonds, Bor-Yi Tsay, and Phillip R. Olds
Thomas P. Edmonds
Bor-Yi Tsay
Philip R. Olds
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Financial Statement Analysis
CHAPTER 13
Financial Statement Analysis
Chapter 13: Financial Statement Analysis
This chapter focuses upon financial statement analysis which is used to assess the financial health of a company. It includes examining trends in key financial data, comparing financial data across companies, and analyzing financial ratios.

3. Horizontal Analysis
Horizontal analysis (or trend analysis) refers to studying the behavior of individual financial statement items over several accounting periods.
Absolute Amounts
Percentage Analysis 3

4. Vertical Analysis
Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. A common-size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage. 4

5. Ratio Analysis
Ratio analysis involves studying various relationships between different items reported in a set of financial statements. 5

6. Liquidity Ratios: Working Capital
The excess of current assets over current liabilities is known as working capital.
Insert Exhibit showing calculation
of working capital. 6

7. Liquidity Ratios: Current Ratio
Current Assets
Current Liabilities =
The current ratio measures a company’s short-term debt paying ability.
A declining ratio may be a sign of deteriorating financial condition, or it might result from eliminating obsolete inventories. 7

8. Liquidity Ratios: Quick (Acid-Test) Ratio
Quick Assets
Current Liabilities =
Acid-Test
Ratio
Quick assets include Cash,
Current Marketable Securities, and Accounts Receivable. This ratio measures a company’s ability to meet obligations without having to liquidate inventory. 8

9. Liquidity Ratios: Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Accounts Receivable
Turnover =
This ratio measures how many times a company converts its receivables into cash each year. 9

10. Liquidity Ratios: Average Days to Collect Receivables
Average Collection Period =
365 Days
Accounts Receivable Turnover
= 21 days
Average Collection Period =
365 Days
16.98 Times
This ratio measures, on average, how many days it takes to collect an accounts receivable. 10

11. Liquidity Ratios: Inventory Turnover
Cost of Goods Sold
Average Inventory
Inventory
Turnover =
This ratio measures how many times a company’s inventory has been sold and replaced during the year. 11

12. Liquidity Ratios: Average Days to Sell Inventory
Average Sale Period =
365 Days
Inventory Turnover
= 34 days
Average Sale Period =
365 Days
10.80 Times
This ratio measures how many days, on average, it takes to sell the inventory. 12

13. Solvency Ratios: Debt to Assets Ratio
Total Liabilities
Total Assets
Debt to Assets Ratio =
This ratio measures the percentage of a company’s assets that are financed by debt. 13

14. Solvency Ratios: Debt to Equity Ratio
Total Liabilities
Stockholders’ Equity
Debt to Equity Ratio =
This ratio indicates the relative proportions of debt to equity on a company’s balance sheet.
Stockholders like a lot of debt if the company can take advantage of positive financial leverage.
Creditors prefer less debt and more equity because equity represents a buffer of protection. 14

15. Solvency Ratios: Number of Times Interest is Earned Ratio
Times Interest Earned
Earnings before Interest Expense
and Income Taxes
Interest Expense =
This is the most common measure of a company’s ability to provide protection for its long-term creditors. 15

16. Profitability Ratios: Net Margin
Net Income
Net Sales =
This measure describes the percent remaining of each sales dollar after subtracting other expenses as well as cost of goods sold. 16

17. Profitability Ratios: Asset Turnover Ratio
Net Sales
Average Total Assets
Asset
Turnover =
This ratio measures how many sales dollars were generated for each dollar of assets invested. 17

18. Profitability Ratios: Return on Investment (ROI)
Net Income
Average Total Assets =
This is the ratio of wealth generated (net income) to the amount invested (average total assets). 18

19. Profitability Ratios: Return on Equity
Net Income
Average Total Stockholders’ Equity =
This measure is often used to measure the profitability of the stockholders’ investment. 19

20. Stock Market Ratios: Earnings Per Share
Net Earnings Available for Common Stock
Average Number of Outstanding Common Shares =
This measure indicates how much
income was earned for each share of common stock outstanding. 20

21. Stock Market Ratios: Price-Earnings Ratio
Market Price Per Share
Earnings Per Share =
This ratio compares the earnings of a company to the market price for a share of the company’s stock. 21