1. CHAPTER 13 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 13-2 Factors in Communicating Useful Information The primary objective of accounting is to provide information useful for decision making. To provide information that supports this objective, accountants must consider the following: Users Types of Decisions Information Analysis

3. 13-3 Methods of Analysis Horizontal AnalysisPercentage Analysis Vertical Analysis Ratio Analysis

4. 13-4 Milavec Company Financial Statements 2015 2014

5. 13-5 Milavec Company Balance Sheets 2015 2014

6. 13-6 Horizontal and Percentage Analysis Horizontal analysis (or trend analysis) refers to studying the behavior of individual financial statement items over several accounting periods. Absolute Amounts Percentage Analysis

7. 13-7 Milavec Company Horizontal Analysis 2015 2014

8. 13-8 Vertical Analysis Vertical analysis common- size Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. A common- size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage.

9. 13-9 Vertical Analysis of Income Statement In income statements, all items are usually expressed as a percentage of sales.

10. 13-10 Milavec Company Vertical Analysis 2015 2014

11. 13-11 Vertical Analysis of Balance Sheet In balance sheets, all items are usually expressed as a percentage of total assets.

12. 13-12 2014 2015

13. 13-13 Liquidity Ratios Liquidity ratios indicate a company’s ability to pay short- term debts. They focus on current assets and current liabilities. 1.Working Capital 2.Current Ratio 3.Quick Ratio 4.Accounts Receivable Ratios 5.Inventory Ratios

14. 13-14 Solvency Ratios Solvency ratios are used to analyze a company’s long-term debt- paying ability and its financing structure. 1.Debt to Assets Ratio 2.Debt to Equity Ratio 3.Number of Times Interest Earned 4.Plant Assets to Long-Term Liabilities

15. 13-15 Profitability Ratios Profitability ratios measure a company’s ability to generate earnings. 1.Net Margin (or Return on Sales) 2.Asset Turnover Ratio 3.Return on Investment 4.Return on Equity

16. 13-16 Stock Market Ratios Stock market ratios analyze the earnings and dividends of a company. 1.Earnings Per Share 2.Book Value 3.Price-Earnings (PE) Ratio 4.Dividend Yield

17. 13-17 Limitations of Financial Statement Analysis Different Industries Changing Economic Environment Accounting Principles

18. 13-18 End of Chapter 13