1. Financial Analysis – Part 1
Professor Eric Carstensen
MiraCosta College

2. Methods of Financial Analysis
Trend Analysis
Horizontal Analysis
Vertical Analysis
Common Size Statements
Comparison to Budget
Comparison to Industry Data
Ratio Analysis
Liquidity Measures
Profitability Measures
Asset Utilization Measures
Solvency Measures
Market Prospects Measures

3. Trend Analysis Year 1 Year 2 Year 3 Sales $836,000 $890,000 $970,000
COGS
585,000
570,000
582,000
Gross Margin
251,000
320,000
388,000
Op. Expenses
190,000
210,000
230,000
Op. Income
61,000
110,000
158,000

4. Trend Analysis - Continued
Year 1
Year 2
change
Year 3
Sales
836,000
890,000
54,000
970,000
80,000
COGS
586,000
570,000
(16,000)
582,000
12,000
Gross Margin
250,000
320,000
70,000
388,000
68,000
Op. Expenses
190,000
210,000
20,000
230,000
Op. Income
60,000
110,000
50,000
158,000
48,000

5. Trend Analysis - Continued
Year 1
Year 2
change
% change
Year 3
Sales
836,000
890,000
54,000
6.5%
970,000
80,000
9.0%
COGS
586,000
570,000
(16,000)
-2.7%
582,000
12,000
2.1%
Gross Margin
250,000
320,000
70,000
28.0%
388,000
68,000
21.3%
Op. Expenses
190,000
210,000
20,000
10.5%
230,000
9.5%
Op. Income
60,000
110,000
50,000
83.3%
158,000
48,000
43.6%

6. Vertical Analysis – Income Statement
Year 1
% of Sales
Year 2
Year 3
Sales
$ 836,000
100.0%
$ 890,000
$ 970,000
COGS
585,000
70.0%
570,000
64.0%
582,000
60.0%
Gross Margin
251,000
30.0%
320,000
36.0%
388,000
40.0%
Op. Expenses
190,000
22.7%
210,000
23.6%
230,000
23.7%
Op. Income
61,000
7.3%
110,000
12.4%
158,000
16.3%

7. Common Size Income Statement
Small Company
Really Big Company
Sales
$ 836,000
$ 23,687,500
COGS
585,000
16,107,500
Gross Margin
251,000
7,580,000
Op. Expenses
190,000
5,448,100
Op. Income
61,000
2,131,900

8. Common Size Income Statement – Continued
Small Company
% of Sales
Really Big Company
Sales
$ 836,000
100.0%
$ 23,687,500
COGS
585,000
70.0%
16,107,500
68.0%
Gross Margin
251,000
30.0%
7,580,000
32.0%
Op. Expenses
190,000
22.7%
5,448,100
23.0%
Op. Income
61,000
7.3%
2,131,900
9.0%

9. Vertical Analysis – Balance Sheet
Assets
Year 1
% of Assets
Year 2
Liabilities
Cash
$ ,000
2.9%
$ ,000
4.9%
A/P
$ ,000
20.6%
$ ,000
14.8%
A/R
110,000
16.2%
130,000
16.0%
Unearned Revenue
20,000
30,000
3.7%
Inventory
190,000
27.9%
170,000
21.0%
Total Current Liabilities
160,000
23.5%
150,000
18.5%
Prepaids
10,000
1.2%
Total Current Assets
340,000
50.0%
350,000
43.2%
Long Term Note Payable
0.0%
Long Term Investments
4.4%
Total Liabilities
320,000
47.1%
300,000
37.0%
Property, Plant & Equipment
420,000
61.8%
550,000
67.9%
Equity
Accum. Depreciation
(110,000)
-16.2%
(120,000)
-14.8%
Common Stock
250,000
36.8%
Net Property, Plant & Equip
310,000
45.6%
430,000
53.1%
Retained Earnings
19.8%
Total Owners' Equity
360,000
52.9%
510,000
63.0%
Total Assets
$ ,000
100.0%
$ ,000
Total Liabilities & Equity

10. Financial Analysis Part 1 - Concluded
This time we focused on trend analysis and vertical analysis of income statement and balance sheet amounts / totals.
In Financial Analysis Part 2, we will look at the Ratio Analysis measures mentioned earlier in this presentation.