Accounting 21th waren reeve fess chapter 17

Chapter 17 Financial Statement Analysis Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives List the basic financial statement analytical procedures After After studying studying this this Apply financial statement chapter, you should chapter, youanalysis shouldto assess the solvency of a business be be able able to: to: Apply financial statement analysis to assess the profitability of a business Summarize the uses and limitations of analytical measures Describe the contents of corporate annual reports Horizontal Horizontal Analysis Analysis What What isis horizontal horizontal analysis? analysis? Horizontal Horizontal Analysis Analysis It’s It’s an an analysis analysis of of the the percentage percentage increases increases and and decreases decreases of of related related items items in in comparative comparative financial financial statements statements Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Balance Balance Sheet Sheet Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%) 2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab & SE $1,139,500 $1230,500 $(91,000) (13.6%) (50.0%) (30.0%) 30.5% 5.3% (7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Increase (Decrease) 2006 2005 Amount Percent $ 550,000 $ 533,000 $ 17,000 3.2% 95,000 177,500 (82,500) (46.5%) 444,500 Analysis: 470,000 (25,500) (5.4%) Horizontal 50,000 50,000 — Difference $1,139,500 $1,230,500$17,000 $ (91,000) (7.4%) Assets Current assets Long-term investments Fixed assets (net) Intangible assets Total assets = Liabilities Base year (2005) $533,000 Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab & SE $1,139,500 $1230,500 $(91,000) 3.2% (13.6%) (50.0%) (30.0%) 30.5% 5.3% (7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%) 2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Horizontal Analysis: Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%) Difference $(82,500) Long-term liabilities 100,000 200,000 (100,000) (50.0%) = (46.5%) Base year (2005) $177,500 Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ Equity Preferred stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5% Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3% Total liab & SE $1,139,500 $1230,500 $(91,000) (7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Okay, Okay, go go to to the the next next slide slideIncrease (Decrease) 2006 2005 and the Assets and calculate calculate the Amount Percent Current assets $ 550,000 $ 533,000 $ 17,000 3.2% percentage change for percentage for (82,500) (46.5%) Long-term investments 95,000change 177,500 Fixed assets (net) 444,500 470,000 (25,500) (5.4%) fixed assets fixed assets Intangible assets 50,000 50,000 — Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%) Liabilities Horizontal Current liabilities $ 210,000 Analysis: $ 243,000 $ (33,000) (13.6%) Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ Difference 310,000 $ 443,000 ?$(133,000) (30.0%) = ? Stockholders’ Equity Base year (2005) ? Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5% Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3% Total liab & SE $1,139,500 $1230,500 $(91,000) (7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%) 2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab & SE $1,139,500 $1230,500 $(91,000) (5.4%) (5.4%) (13.6%) (50.0%) (30.0%) 30.5% 5.3% (7.4%) Long-Term Creditors Number Number of of Times Times Interest Interest Charges ChargesEarned Earned Income before income tax Add interest expense Amount available for interest Number of Times Interest = Charges Earned 2006 2005 $ 900,000 $ 800,000 300,000 250,000 $1,200,000 $1,050,000 Income Income before before income income tax tax ++ interest interest expense expense Interest Interest expense expense Long-Term Creditors Number Number of of Times Times Interest Interest Charges ChargesEarned Earned Income before income tax Add interest expense Amount available for interest Number of times earned 2006 2005 $ 900,000 $ 800,000 300,000 250,000 $1,200,000 $1,050,000 4.0 Use: Use: To To assess assess the the risk risk to to debtholders debtholders in in terms terms of of number number of of times times interest interest charges charges were were earned earned 4.2 Profitability Profitability Analysis Analysis  Profitability is the ability of an entity to earn profits  This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available  Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet The Common Stockholder Ratio Ratio of of Net Net Sales Salesto toAssets Assets Net sales Total assets: Beginning of year End of year Total Average (Total ÷ 2) 2006 $1,498,000 2005 $1,200,000 $1,053,000 1,044,500 $2,097,500 $1,048,750 $1,010,000 1,053,000 $2,063,000 $1,031,500 Excludes Excludes long-term long-term investments investments The Common Stockholder Ratio Ratio of of Net Net Sales Salesto toAssets Assets Net sales Total assets: Beginning of year End of year Total Average (Total ÷ 2) Ratio of net sales to assets 2006 $1,498,000 2005 $1,200,000 $1,053,000 1,044,500 $2,097,500 $1,048,750 $1,010,000 1,053,000 $2,063,000 $1,031,500 1.4 Use: Use: To To assess assess the the effectiveness effectiveness of of the the use use of of assets assets 1.2 The Common Stockholder Rate Rate Earned Earned on on Total Total Assets Assets Net income Plus interest expense Total Total assets: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on total assets 2006 $ 91,000 6,000 $ 97,000 2005 $ 76,500 12,000 $ 88,500 $1,230,500 1,139,500 $2,370,000 $1,185,000 8.2% $1,187,500 1,230,500 $2,418,000 $1,209,000 7.3% Use: Use: To To assess assess the the profitability profitability of of the the assets assets The Common Stockholder Rate Rate Earned Earned on on Stockholders’ Stockholders’ Equity Equity Net income Stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on stockholders’ equity 2006 $ 91,000 2005 $ 76,500 $ 787,500 829,500 $1,617,000 $ 808,500 $ 750,000 787,500 $1,537,500 $ 768,750 11.3% 10.0% Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by stockholders stockholders The Common Stockholder Rate Rate Earned Earned on on Common Common Stockholders’ Stockholders’ Equity Equity Net income Less preferred dividends Remainder—common stock Common stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2) $ $ 2006 91,000 9,000 82,000 $ 637,500 679,500 $1,317,000 $ 658,500 $ $ 2005 76,500 9,000 67,500 $ 600,000 637,500 $1,237,500 $ 618,750 The Common Stockholder Rate Rate Earned Earned on on Common Common Stockholders’ Stockholders’ Equity Equity Net income Less preferred dividends Remainder—common stock Common stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on common stockholders’ equity $ $ 2006 91,000 9,000 82,000 $ $ 2005 76,500 9,000 67,500 $ 637,500 $ 600,000 679,500 637,500 $1,317,000 $1,237,500 $ 658,500 $ 618,750 12.5% 10.9% Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by common common stockholders stockholders The Common Stockholder Earnings EarningsPer Per Share Share on on Common Common Stock Stock Net income Less preferred dividends Remainder—common stock Shares of common stock 2006 $ 91,000 9,000 $ 82,000 50,000 Earnings per share on common stock $1.64 2005 $ 76,500 9,000 $ 67,500 50,000 $1.35 Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by common common stockholders stockholders The Common Stockholder Price-Earnings Price-EarningsRatio Ratio 2006 Market price per share of common $41.00 Earnings per share on common ÷ 1.64 Price-earnings ratio on common stock 25 2005 $27.00 ÷ 1.35 20 Use: Use: To To indicate indicate future future earnings earnings prospects, prospects, based based on on the the relationship relationship between between market market value value of of common common stock stock and and earnings earnings The Common Stockholder Dividend DividendYield Yield on on Common Common Stock Stock Dividends per share of common Market price per share of common Dividend yield on common stock 2006 $ 0.80 ÷ 41.00 1.95% 2005 $ 0.60 ÷ 27.00 2.22% Use: Use: To To indicate indicate the the rate rate of of return return to to common common stockholders stockholders in in terms terms of of dividends dividends Corporate Corporate Annual Annual Reports Reports In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report The MDA includes an analysis of the results of operations and discusses management’s opinion about future performance It compares the prior year’s income statement with the current year’s It also contains an analysis of the firm’s financial condition Corporate Corporate Annual Annual Reports Reports In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report Before issuing annual statements, all publicly held corporations are required to have an independent audit of their financial statements The CPAs who conduct the audit render an opinion as to the fairness of the statements Chapter 17 The The End End ... $ 550,000 $ 533,000 $ 17, 000 3.2% 95,000 177 ,500 (82,500) (46.5%) 444,500 Analysis: 470,000 (25,500) (5.4%) Horizontal 50,000 50,000 — Difference $1,139,500 $1,230,500 $17, 000 $ (91,000) (7.4%)... (Decrease) Amount Percent $ 17, 000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%) 2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177 ,500 Fixed assets (net)... analytical procedures After After studying studying this this Apply financial statement chapter, you should chapter, youanalysis shouldto assess the solvency of a business be be able able to: to: