Principles of Accounting/ Financial and Managerial Accounting Chapter 14

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Chapter 1

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

FINANCIAL STATEMENT ANALYSISChapter 14

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Purpose of AnalysisInternal UsersExternal UsersFinancial statement analysis helps users make better decisions.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Purpose of Analysis

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Financial Statements Are Designed for Analysis

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Tools of AnalysisDollar & Percentage ChangesTrend PercentagesComponent PercentagesRatios

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Dollar and Percentage ChangesDollar Change:Percentage Change:Dollar ChangeBase PeriodAmountPercentChange=%

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Dollar and Percentage Changes

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Dollar and Percentage ChangesExample Lets look at the asset section of Clover Corporations comparative balance sheet and income statement for 2003 and 2002.Compute the dollar change and the percentage for cash.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

$12,000 $23,500 = $(11,500)

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

($11,500 $23,500) 100% = 48.94%Complete the analysis for the other assets.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Trend Analysis

Trend analysis is used to reveal patterns in data covering successive periods.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Trend Analysis - Example1999 is the base period so its amounts will equal 100%.Berry ProductsIncome InformationFor the Years Ended December 31,

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Component PercentagesExamine the relative size of each item in the financial statements by computing component (or common-sized) percentages.Financial StatementBase AmountBalance SheetTotal AssetsIncome StatementRevenues

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

($12,000 $315,000) 100% = 3.8%($23,500 $289,700) 100% = 8.1%13-*

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

13-*

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

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The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

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The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Ratios

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Use this information to calculate the liquidity ratios for Norton Corporation.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Working CapitalWorking capital is the excess of current assets over current liabilities.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Current Ratio=1.55 : 1This ratio measures the short-term debt-paying ability of the company.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Quick RatioQuick assets are cash, marketable securities, and receivables.This ratio is like the currentratio but excludes current assets such as inventories that may be difficult to quickly convert into cash.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Quick RatioThis ratio is like the currentratio but excludes current assets such as inventories that may be difficult to quickly convert into cash.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Debt RatioA measure of creditors long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Uses and Limitations of Financial Ratios

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Measures of ProfitabilityAn income statement can be prepared in either a multiple-step or single-step format.The single-step format is simpler.The multiple-step format provides more detailed information.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Proper Heading{Gross Margin{Operating Expenses{{Non- operating ItemsIncome Statement (Multiple-Step) ExampleRemember to compute EPS.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

{Income Statement (Single-Step) Example{{Remember to compute EPS.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Use this information to calculate the profitability ratios for Norton Corporation.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Return On Assets (ROA)This ratio is generally consideredthe best overall measure of acompanys profitability.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Return On Equity (ROE)This measure indicates how well the company employed the owners investments to earn income.

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

Sources of Financial Information

The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinSlide 14-*

End of Chapter 14No more ratios, please!

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