chapter 7 financial statement analysis. 7-1 horizontal analysis 201020092008 sales...
TRANSCRIPT
Chapter 7Financial Statement
Analysis
7-1 Horizontal Analysis
2010 2009 2008
Sales $150,000 $125,000 $100,00
Base Year
100%125%150%
50% increase
25% increase
Percentage increase or decrease from base year formula:
Current Year Amount – Base Year Amount
Base Year Amount
Example: Percent increase in sales in 2010 from 2008
$150,000 - $100,000
$100,000= 50%
HORIZONTAL ANALYSIS
7-2 Vertical Analysis
SMITH HOTEL COMPANY
2009 2008
Amount Percent Amount Percent
Sales $ 120,000 105.73% $ 80,000 106.67%
Sales returns $ 6,500 5.73% $ 5,000 6.67%
Net sales $ 113,500 100.00% $ 75,000 100.00%
Cost of goods sold $ 65,000 57.27% $ 40,000 53.33%
Gross profit $ 48,500 42.73% $ 35,000 46.67%
Selling expenses $ 18,000 15.86% $ 15,000 20.00%
Administrative expenses $ 10,000 8.81% $ 8,000 10.67%
Total operating expenses $ 28,000 24.67% $ 23,000 30.67%
Net income $ 20,500 18.06% $ 12,000 16.00%
Reflects the size of each item relative to a base amount (net sales)
VERTICAL
ANALYSIS
7-2 Vertical Analysis (cont.)
SMITH HOTEL COMPANY RODGERS HOTEL COMPANY
2009 2009
Amount Percent Amount Percent
Sales $ 120,000 105.73% $ 80,000 106.67%
Sales returns $ 6,500 5.73% $ 5,000 6.67%
Net sales $ 113,500 100.00% $ 75,000 100.00%
Cost of goods sold $ 65,000 57.27% $ 40,000 53.33%
Gross profit $ 48,500 42.73% $ 35,000 46.67%
Selling expenses $ 18,000 15.86% $ 15,000 20.00%
Administrative expenses $ 10,000 8.81% $ 8,000 10.67%
Total operating expenses $ 28,000 24.67% $ 23,000 30.67%
Net income $ 20,500 18.06% $ 12,000 16.00%
Restating each item on a financial statement in terms of a percentage of a base amount, enables the comparison of companies of different sizes
VERTICAL
ANALYSIS
COMMON SIZE ANALYSIS
7-3 Liquidity Ratios
Ratio Formula Purpose or Use
Liquidity Ratios
1. Current ratio Current Assets / Current Liabilities Measures short-term debt-paying ability.
2. Acid-test or Quick Ratio
[Cash + Short-term Investments + receivables (net)] / Current Liabilities
Measures immediate short-term liquidity.
3. Receivables Turnover
Net Credit Sales / Average Net Receivables
Measures liquidity of receivables.
4. Inventory Turnover
Cost of Goods Sold / Average Inventory
Measures liquidity of inventory.
7-4 Profitability Ratios
Ratio Formula Purpose or Use
Profitability Ratios
1. Profit Margin Net Income / Net Sales Measures net income generated by each dollar of sales.
2. Asset Turnover Net Sales / Average Assets Measures how efficiently assets are used to generate sales.
3. Return on Assets Net Income / Average Assets Measures overall profitability of assets.
4. Return on Common Stockholders’ Equity
Net Income / Average Common Stockholders’ Equity
Measures profitability of owners’ investment.
7-5 Solvency Ratios
Ratio Formula Purpose or Use
Solvency Ratios
1. Debt to Total Assets
Total Debt / Total Assets Measures the percentage of total assets provided by creditors.
2. Times Interest Earned
Income Before Income Taxes and Interest Expense / Interest Expense
Measures ability to meet interest payments as they come due.