Survey of accounting 6e chapter 9

Financial Statement Analysis Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives After studying this chapter, you should be able to: •Describe basic financial statement analytical methods •Use financial statement analysis to assess the liquidity and solvency of a business •Use financial statement analysis to assess the profitability of a business •Describe the contents of corporate annual reports ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe basic financial statement analytical procedures ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Horizontal Analysis • The analysis of _ and _ in related items in _ financial statements Exhibit 1: Comparative Balance Sheet— Horizontal Analysis ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Vertical Analysis • A analysis used to show the relationship of each to the within statement Exhibit 5: Comparative Balance Sheet— Vertical Analysis ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Benefits of Analysis • and analysis are useful in assessing relationships and trends in financial conditions and operations of a business • analysis is useful for comparing one company with another or with industry averages • is made easier with commonsized financial statements ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Common-Sized Statements Exhibit 7: Common- Sized Income Statement ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Use financial statement analysis to assess the liquidity and solvency of a business ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Liquidity and Solvency • _ – the ability of a business to pay its debts • _ – the ability of a business to convert assets into cash _, _, and are interrelated! ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Solvency Analysis • Normally assessed by examining _ relationships, using the following major analyses: • • • • • • Current position analysis Accounts receivable analysis Inventory analysis Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders’ equity Number of times interest charges are earned ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Profitability Analysis • Normally assessed by examining the income statement and balance sheet resources, using the following major analyses: • • • • • • • • _ _ _ _ _ _ _ _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Ratio of Net Sales to Assets • Shows how effectively a firm utilizes its assets Net Sales Avg Total Assets (excluding LT Investments) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Rate Earned on Total Assets • Measures the profitability of total assets without considering how the assets are financed Interest Expense + Net Income Avg Total Assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Rate Earned on Stockholders’ Equity • Emphasizes the rate of income earned on the amount invested by the stockholders Net Income Avg Stockholders’ Equity ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Leverage Exhibit 8: Effect of leverage The effect of leverage for 2012 is 3.1% which compares favorably with the 2.7% leverage for 2011 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Rate Earned on Common Stockholders’ Equity • Focuses on the rate of profits earned on the amounts invested by the common stockholders Net Income – Preferred Dividends Avg Common Stockholders’ Equity ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Earnings Per Share on Common Stock • The income earned for each share of common stock Net Income – Preferred Dividends Common Shares Outstanding ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Price-Earnings Ratio • Indicator of the firm’s future earnings prospects Market Price Per Share of Common Stock Annual Earnings Per Share ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Dividends per Share and Earnings per Share Exhibit 9: Dividends and Earnings per Share of Common Stock Dividends per Share = Common Dividends Total Common Shares Outstanding ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Dividends Per Share and Dividend Yield • Dividend yield shows the rate of return to common stockholders in terms of cash dividends Dividend Yield = Dividends per Share of Common Stock Market Price per Share of Common Stock ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the contents of corporate annual reports ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Corporate Annual Reports • Summarize operating activities for the past year and plans for the future • Many variations in the order and form, but all include: • _ • _ • _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Management Discussion and Analysis (MD&A) • Provides critical information in interpreting the financial statements and assessing the future of the company • Includes an analysis about past performance and financial condition • Discusses management’s opinion about future performance • Discusses significant risk exposure ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Independent Auditors’ Report • Publicly traded companies must get an independent opinion on the fairness of the financial statements • This opinion must be included in the annual report along with an opinion on the accuracy of management’s internal control assertion ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... solvency of a business •Use financial statement analysis to assess the profitability of a business •Describe the contents of corporate annual reports ©2013 Cengage Learning All Rights Reserved... Accounts receivable analysis Inventory analysis Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders’ equity Number of times interest charges are earned ©2013 Cengage... website, in whole or in part Number of Times Interest Charges Earned The number of times interest charges are earned improved from 12.2 to 28.1, a significant measure of safety for creditors ©2013