1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Chapter 13 Measuring and Evaluating Financial Performance PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, CA

3. Horizontal, Vertical, and Ratio Analyses Horizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time. Gross Profit in 2009 Δ in Gross Profit $ and/or % from 2009 12/31/0912/31/10 Gross Profit in 2010 Trend Analysis Vertical analyses focus on important relationships between items on the same financial statement. Sales Cost of Goods Sold Gross Profit $200,000 100% 150,000 75% $ 50,000 25% AmountPercent 2010 13-3

4. Horizontal (Trend) Computations Year-to-Year Change (%) = Change This Year Prior Year’s Total × 100 Trend analyses are usually calculated in terms of year-to-year dollar and percentage changes. (Current Year’s Total – Prior Year’s Total) Let’s look at an example 13-4

5. Now let’s look at the remainder of the trend analysis of the Income Statement. Can you calculate the dollar and percentage change for Cost of Sales? Now let’s calculate the percentage change in Net Sales Revenue between 2009 and 2008. Horizontal (Trend) Computations Calculate the change in dollars for Net Sales Revenue between 2009 and 2008. $48,230 – $48,283 $48,283 × 100 13-5

6. Vertical (Common Size) Computations Vertical, or common size, analysis focuses on important relationships within financial statements. Income Statement Balance Sheet Sales = 100% Total Assets = 100% Cost of Sales Net Sales Revenue × 100 13-6

7. Ratio Computations Ratio analysis compares the amounts for one or more line items to the amounts for other line items in the same year. Ratios are classified into three categories... Profitability ratios examine a company’s ability to generate income. Profitability ratios examine a company’s ability to generate income. Liquidity ratios help us determine if a company has sufficient current assets to repay liabilities when due. Liquidity ratios help us determine if a company has sufficient current assets to repay liabilities when due. Solvency ratios examine a company’s ability to pay interest and repay debt when due. Solvency ratios examine a company’s ability to pay interest and repay debt when due. 13-7

8. Common Profitability Ratios 13-8

9. Common Liquidity Ratios 13-9

10. Common Solvency Ratios 13-10

11. Interpreting Horizontal and Vertical Analyses Lowe’s grew by 5.9% in fiscal 2009. With 60 new stores opened, Lowe’s had a 7.9% increase in inventory, and a 6.4% increase in Property and Equipment. 13-11

12. Interpreting Horizontal and Vertical Analyses The Company’s cash position weakened significantly between fiscal 2007 and 2008. There was a large increase in the inventory carried by the company. The accumulation of inventory is a sign of a weakening business outlook. 13-12

13. Interpreting Horizontal and Vertical Analyses Cost of sales and operating expenses are the most important determinant of the company’s profitability. Much of the decline in fiscal 2008 Net Income is explained by the increase in Cost of Sales and Operating Expenses. 13-13

14. Interpreting Horizontal and Vertical Analyses Lowe’s has experienced a 0.4% increase in its cost of goods sold from fiscal 2007 to 2008. Increasing cost of sales means lower gross profit. Lowe’s did not do a good job of controlling its operating expenses between 2007 and 2008. The company is faced with lower gross profit and poor operating expense control. 13-14

15. End of Chapter 13