1. Different Comparisons Financial performance analysis allows us to make several comparisons Year-to-Year. – Use Horizontal Analysis vs. a Competing Company. – Use Vertical Analysis with the industry or other companies in the industry. – Use Ratio Analysis ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-1

2. Horizontal Analysis Defined: The study of percentage changes in comparative financial statements. Defined: The study of percentage changes in comparative financial statements. Requires two steps: Requires two steps: 1.Compute the $-amount of the change from the earlier period to the later period. 2.Divide the $-amount of change by the earlier period amount (base period). ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-2

3. Horizontal Analysis Assume Smart Touch Learning has net sales in 2016 of $858,000 and $803,000 in 2015. Prepare the horizontal analysis: ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-3 Step  Step 

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5. Trend Analysis Defined: A special form of horizontal analysis that looks at how ratios change over time. Defined: A special form of horizontal analysis that looks at how ratios change over time. Requires two steps: Requires two steps: 1.Identify a base period amount. 2.All subsequent amounts are stated as a % of the base period amount. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-5

6. Trend Analysis Smart Touch Learning’s Net Sales were $750,000 for 2012 and rose to $858,000 in 2016. An assessment of the increase in sales, as a percentage of 2012 sales can show whether sales are moving in the desire direction. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-6

7. Vertical Analysis Defined: shows the percentage relationship of each item in the financial statement to its base amount. Defined: shows the percentage relationship of each item in the financial statement to its base amount. Requires two steps: Requires two steps: 1.Identify the base amount on the statement. 2.Divide all other amounts in the statement by the base amount. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-7

8. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-8 Use Net Sales as the base amount.

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10. Common-Size Statements Defined: Compares companies by looking only at the vertical analysis percentages for each company. Defined: Compares companies by looking only at the vertical analysis percentages for each company. Requires two steps: Requires two steps: 1.Identify two companies for comparison. 2.Compute the vertical analysis percentages for each company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-10

11. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-11 Common- size statements allow comparison of different sized companies.

12. Ratios Analysis Ratios you can use to compare your company to other companies. Standards are created within industries and by independent analysts. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-12

13. Working Capital Measures the ability to meet short-term obligations with current assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-13

14. Current Ratio Measures a company’s ability to pay its current liabilities with its current assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-14 current ratio

15. Acid-test or Quick Ratio Measures whether a company can pay all its current liabilities if they came due immediately. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-15 NO INVENTORY OR PREPAIDS!

16. Inventory Turnover Measures the number of times a company sells its average level of merchandise inventory during a year. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-16 (Beginning Inventory + Ending Inventory) ÷ 2 Inventory Turnover

17. Days’ Sales in Inventory Measures the average number of days merchandise inventory is held by the company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-17

18. Gross Profit Percentage Measures the profitability of each net sales dollar above the cost of goods sold. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-18

19. Accounts Receivable Turnover Ratio Measures the number of times the company collects the average receivables balance in a year. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-19 (Beginning A/R + Ending A/R) ÷ 2

20. Days’ Sales in Receivables Indicates how many days it takes to collect the average level of receivables. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-20

21. Debt Ratio Shows the proportion of assets financed with debt and is calculated by dividing total liabilities by total assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-21

22. Rate of Return on Common Stockholders’ Equity Shows the relationship between net income available to common stockholders and their average common equity invested in the company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-22 ROE