Financial Statement Analysis doc

Financial Statement Analysis Chapter 18 The Annual Report Usually Contains …financial statements. – notes to the financial statements. – a summary of accounting methods used. – management discussion and analysis of the financial statements. – an auditor’s report. – comparative financial data for 5 to 10 years. Objective 1 Perform a Horizontal Analysis of Financial Statements. Horizontal Analysis Increase/(Decrease) 2005 2004 Amount Percent Sales $41,500 $37,850 $3,650 9.6% Expenses 40,000 36,900 3,100 8.4% Net income 1,500 950 550 57.9% 2005 2004 Difference Sales $41,500 $37,850 $3,650 $3,650 ÷ $37,850 = .0964, or 9.6% Horizontal Analysis Trend Percentages …are computed by selecting a base year whose amounts are set equal to 100%. • The amounts of each following year are expressed as a percentage of the base amount. Trend % = Any year $ ÷ Base year $ Year 2005 2004 2003 Revenues $27,611 $24,215 $21,718 Cost of sales 15,318 14,709 13,049 Gross profit $12,293 $ 9,506 $ 8,669 2003 is the base year. What are the trend percentages? Trend Percentages Year 2005 2004 2003 Revenues 127% 111% 100% Cost of sales 117% 113% 100% Gross profit 142% 110% 100% Trend Percentages These percentages were calculated by dividing each item by the base year. Objective 2 Perform a Vertical Analysis of Financial Statements. Vertical Analysis …compares each item in a financial statement to a base number set to 100%. • Every item on the financial statement is then reported as a percentage of that base. [...]... 6,847 9,997 $38,775 4.7 26.9 15.9 9.1 56.6 17.7 25.7 100.0 Objective 3 Understand Benchmarking Common-size Statements • On the income statement, each item is expressed as a percentage of net sales • On the balance sheet, the common size is the total on each side of the accounting equation • Common-size statements are used to compare one company to other companies, and to the industry average Benchmarking...Vertical Analysis Revenues Cost of sales Gross profit Total operating expenses Operating income Other income Income before taxes Income taxes Net income 2005 $38,303 19,688 $18,615 13,209 $ 5,406 2,187 $ 7,593 2,827 $ 4,766 % 100.0 51.4 48.6 34.5 14.1 5.7 19.8 7.4 12.4 Vertical Analysis Assets Current assets: Cash Receivables net Inventories Prepaid . 2 Perform a Vertical Analysis of Financial Statements. Vertical Analysis …compares each item in a financial statement to a base number set to 100%. • Every item on the financial statement is then. discussion and analysis of the financial statements. – an auditor’s report. – comparative financial data for 5 to 10 years. Objective 1 Perform a Horizontal Analysis of Financial Statements. . Financial Statement Analysis Chapter 18 The Annual Report Usually Contains financial statements. – notes to the financial statements. – a summary of accounting