1. © 2014 Cengage Learning. All Rights Reserved.
Learning Objectives
LO4 Perform horizontal analysis on an income statement.
LO5 Perform horizontal analysis on a balance sheet.
© 2014 Cengage Learning. All Rights Reserved.

2. Analyzing Trends with Horizontal Analysis
Lesson 17-3
Analyzing Trends with Horizontal Analysis
LO4
A comparison of one item on a financial statement with the same item on a previous period’s financial statement is called horizontal analysis.
Current Period −
Prior Period =
Increase (Decrease)
$242,584.00 −
$221,489.00 =
$21,095.00
Increase
(Decrease) ÷
Prior Period =
Horizontal Analysis Ratio
$21,095.00 ÷
$221,489.00 =
9.5%

3. Horizontal Analysis of an Income Statement
Lesson 17-3
Horizontal Analysis of an Income Statement
LO4
Current Year Less Prior Year 1
Difference Amount Divided by Prior Year 2

4. Horizontal Analysis of a Balance Sheet
Lesson 17-3
Horizontal Analysis of a Balance Sheet
LO5

5. © 2014 Cengage Learning. All Rights Reserved.
Learning Objectives
LO6 Calculate earnings per share.
LO7 Calculate and interpret market ratios.
LO8 Calculate and interpret liquidity ratios.
© 2014 Cengage Learning. All Rights Reserved.

6. Earnings per Share (EPS)
Lesson 17-4
Earnings per Share (EPS)
LO6
Net income after federal income tax divided by the number of outstanding shares of stock is called earnings per share.
Net Income after Federal Income Tax
$ 79,896.57
Number of Shares Outstanding
÷ 7,500
÷ 75,000
Earnings per Share
$ 10.65
$ 1.07

7. Lesson 17-4
Market Ratios
LO7
A ratio that measures a corporation’s financial performance in relation to the market value of its stock is called a market ratio.

8. Lesson 17-4
Dividend Yield
LO7
The relationship between dividends per share and market price per share is called the dividend yield.
Dividends per Share ÷
Market Price per Share =
Dividend Yield
$2.00 ÷
$228.75 =
0.87%

9. Price-Earnings Ratio (P/E Ratio)
Lesson 17-4
Price-Earnings Ratio (P/E Ratio)
LO7
The relationship between the market value per share and earnings per share of a stock is called the price-earnings ratio.
Market Price per Share ÷
Earnings per Share =
Price-Earnings Ratio
$228.75 ÷
$10.65 =
21.5

10. Lesson 17-4
Liquidity Ratios
LO8
A ratio that measures the ability of a business to pay its current financial obligations is called a liquidity ratio.

11. Lesson 17-4
Working Capital
LO8
The amount of current assets less current liabilities is called working capital.
Current Assets −
Current Liabilities =
Working Capital
$185,322.90 −
$32,251.78 =
$153,071.12

12. Lesson 17-4
Current Ratio
A ratio that measures the relationship of current assets to current liabilities is called the current ratio.
The current ratio measures a company’s ability to pay its current liabilities when due.
Current Assets ÷
Current Liabilities =
Current Ratio
$185,322.90 ÷
$32,251.78 =
5.75

13. Lesson 17-4
Quick Ratio
Cash and other current assets that can be quickly converted into cash are called quick assets (liquid assets).
A ratio that measures the relationship of quick assets to current liabilities is called the quick ratio.
Cash +
Accounts Receivable =
Quick Assets
$54,444.34 +
$17,872.56 =
$72,316.90
Quick Assets ÷
Current Liabilities =
Quick Ratio
$72,316.90 ÷
$32,251.78 =
2.24

14. Lesson 17-4 Audit Your Understanding
1. What group is the primary user of market ratios?
ANSWER
Investors

15. Lesson 17-4 Audit Your Understanding
2. What is the primary source of data to calculate liquidity ratios?
ANSWER
Balance sheet