1. Analysis of Financial Statements

2. 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

3. Financial statement analysis helps users make better decisions.
Purpose of Analysis
Internal Users
External Users
Shareholders
Lenders
Customers
Managers
Officers

4. Financial Statements Are Designed for Analysis

5. Dollar & Percentage Changes Component Percentages
Tools of Analysis:
Dollar & Percentage Changes
Trend Percentages
Component Percentages
Ratios

6. 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

7. Dollar and Percentage Changes or Horizontal Analysis

8. Dollar and Percentage Changes or Horizontal Analysis
$12,000 – $23,500 = $(11,500)
($11,500 ÷ $23,500) × 100% = 48.94%

9. Dollar and Percentage Changes or
Horizontal Analysis

10. 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% = ×

11. Trend Analysis ABC Inc. Income Information
For the Years Ended December 31,
2001 is the base period so its amounts will equal 100%.

12. 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

13. Component or Common Size Balance Sheet
($12,000 ÷ $315,000) × 100% = 3.8%
($23,500 ÷ $289,700) × 100% = 8.1%

14. Component or Common Size Balance Sheet

15. Component or Common Size Balance Sheet

16. Component or Common Size Income Statement

17. Ratios

18. Investment valuation Ratio
Types of Ratio:
Income
Profitability
Liquidity
Coverage
Leverage
Investment valuation Ratio

19. Income Ratio: Gross Margin on Net Sales
Operating Income to Net Sales Ratio

20. Profitability Ratio:
Net Profit Ratios
ROA
ROE

21. Receivables Turnover- Sales / accounts receivable
Liquidity Ratios:
Working Capital
Current Ratio
Quick Ratio
Inventory Turnover-
COGS / average inventory
Receivables Turnover-
Sales / accounts receivable

22. Leverage (Capitalization) Ratios: Debt Ratio Debt Equity Ratio
=LTD/(LTD+SE)

23. Coverage Ratio:
Time Interest Earned Ratio

24. Investment Valuation Ratio
EPS
Price Earning Ratio
Investment Valuation Ratio

25. 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.

26. Thanks
End Of Presentation: