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Analysis of Financial Statements
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What is Financial Statement Analysis:
Financial Statements Analysis is an Analysis of the Following Statements: Income Statement Balance Sheet Statement of Owners Equity and Statement of Cash Flow
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Financial statement analysis helps users make better decisions.
Purpose of Analysis Internal Users External Users Shareholders Lenders Customers Managers Officers
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Financial Statements Are Designed for Analysis
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Dollar & Percentage Changes Component Percentages
Tools of Analysis: Dollar & Percentage Changes Trend Percentages Component Percentages Ratios
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Dollar and Percentage Changes or Horizontal Analysis
Dollar Change: Analysis Period Amount Base Period Dollar Change = – Percentage Change: % ÷ Base Period Amount Percent Change = Dollar Change
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Dollar and Percentage Changes or Horizontal Analysis
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Dollar and Percentage Changes or Horizontal Analysis
$12,000 – $23,500 = $(11,500) ($11,500 ÷ $23,500) × 100% = 48.94%
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Dollar and Percentage Changes or
Horizontal Analysis
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Analysis Period Amount
Trend Analysis Trend analysis is used to reveal patterns in data covering successive periods. Trend Percent Analysis Period Amount Base Period Amount 100% = ×
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Trend Analysis ABC Inc. Income Information
For the Years Ended December 31, 2001 is the base period so its amounts will equal 100%.
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Component or Common Size Percentages or Vertical Analysis
Examine the relative size of each item in the financial statements by computing component (or common-sized) percentages. Component Percent 100% Analysis Amount Base Amount = × Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues
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Component or Common Size Balance Sheet
($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%
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Component or Common Size Balance Sheet
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Component or Common Size Balance Sheet
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Component or Common Size Income Statement
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Ratios
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Investment valuation Ratio
Types of Ratio: Income Profitability Liquidity Coverage Leverage Investment valuation Ratio
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Income Ratio: Gross Margin on Net Sales
Operating Income to Net Sales Ratio
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Profitability Ratio: Net Profit Ratios ROA ROE
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Receivables Turnover- Sales / accounts receivable
Liquidity Ratios: Working Capital Current Ratio Quick Ratio Inventory Turnover- COGS / average inventory Receivables Turnover- Sales / accounts receivable
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Leverage (Capitalization) Ratios: Debt Ratio Debt Equity Ratio
=LTD/(LTD+SE)
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Coverage Ratio: Time Interest Earned Ratio
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Investment Valuation Ratio
EPS Price Earning Ratio Investment Valuation Ratio
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The Du Pont system Also can be expressed as:
ROE = (NI/Sales) x (Sales/TA) x (TA/Equity) Focuses on: Expense control (PM) Asset utilization (TATO) Debt utilization (Eq. Mult.) Shows how these factors combine to determine ROE.
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