ch14 Financial Statement Analysis Ke toan quan tri

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study objectives

liquidity, profitability, and solvency.

irregular items are presented.

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preview of chapter 14

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Analyzing financial statements involves:

Basics of Financial Statement

Analysis

Basics of Financial Statement

Analysis

Characteristics Comparison Bases Analysis Tools of

Liquidity Profitability Solvency

Intracompan

y Industry averages Intercompan

y

Horizontal Vertical Ratio

SO 1 Discuss the need for comparative analysis.

SO 2 Identify the tools of financial statement analysis.

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14-6 SO 3 Explain and apply horizontal analysis.

Horizontal Analysis

analysis, is a technique for evaluating a series of

financial statement data over a period of time

decrease that has taken place.

Horizontal analysis is commonly applied to the

balance sheet, income statement, and statement

of retained earnings.

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Overall, gross profit

and net income

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We saw in the horizontal analysis of the balance sheet that ending

retained earnings increased 38.6% As indicated earlier, the company retained a significant portion of net income to finance additional plant facilities.

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Horizontal Analysis

Compute the amount and percentage changes in 2011 using horizontal analysis, assuming 2010 is the base year.

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Vertical Analysis

analysis, is a technique that expresses each

financial statement item as a percent of a base

amount

selling expenses are 16% of net sales.

Vertical analysis is commonly applied to the

balance sheet and the income statement.

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SO 4 Describe and apply vertical analysis.

Vertical Analysis

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J.C Penney earned net income more than 4,208 times larger than

Quality’s, J.C Penney’s net income as a percent of each sales dollar (5.6%)

is only 44% of Quality’s (12.6%)

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14-15 SO 5 Identify and compute ratios used in

analyzing a firm’s liquidity, profitability, and solvency.

Ratio Analysis

selected items of financial statement data.

Liquidity Profitability Solvency

Financial Ratio Classifications

Measures the income or operating success of a company for a given period of

time.

Measures the ability of the company to survive over a long period of

time.

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analyzing a firm’s liquidity, profitability,

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Ratio Analysis

Liquidity Ratios

Measure the short-term ability of the company to

pay its maturing obligations and to meet

unexpected needs for cash

suppliers are particularly interested in assessing liquidity

ratio , receivables turnover , and inventory turnover

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Ratio Analysis

1 Current Ratio

The ratio of 2.96:1 means that for every dollar of current

liabilities, Quality has $2.96 of current assets.

Liquidity Ratios

Illustration 14-12

Solution on notes page

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Ratio Analysis

A variant of the receivables turnover ratio is to

terms of days.

This means that receivables are collected on

average every 36 days.

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Ratio Analysis

Profitability Ratios

Measure the income or operating success of a

company for a given period of time

 Income, or the lack of it, affects the company’s

ability to obtain debt and equity financing, liquidity position, and the ability to grow.

 Ratios include the profit margin , asset turnover ,

return on assets , return on common stockholders’ equity , earnings per share ,

price-earnings , and payout ratio.

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Ratio Analysis

9 Earnings per Share (EPS)

Measures net income earned on each share of common stock.

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Ratio Analysis

10 Price-Earnings Ratio

The price-earnings (P-E) ratio reflects investors’ assessments of

a company’s future earnings.

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Ratio Analysis

Solvency Ratios

Solvency ratios measure the ability of a company

to survive over a long period of time.

 Debt to total assets and times interest

earned are two ratios that provide information about debt-paying ability.

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Ratio Analysis

12 Debt to Total Assets Ratio

Measures the percentage of the total assets provided by

creditors.

Solvency Ratios

SO 5 Identify and compute ratios used in

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Ratio Analysis

13 Times Interest Earned

Provides an indication of the company’s ability to meet interest payments as they come due.

Solvency Ratios

SO 5 Identify and compute ratios used in

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power, and how irregular items are presented.

Earning Power and Irregular Items

income to be obtained in the future.

“Irregular” items are separately identified on the income statement Two types are:

1 Discontinued operations.

2 Extraordinary items.

These “irregular” items are reported net of

income taxes.

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operations in two parts:

1 income (loss) from operations (net of tax) and

2 gain (loss) on disposal (net of tax).

SO 6 Understand the concept of earning

power, and how irregular items are

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Illustration: During 2011 Acro Energy Inc has income

from continuing operations of $560,000 During 2011 Acro discontinued and sold its unprofitable chemical division

The loss in 2011 from chemical operations (net of $60,000 taxes) was $140,000 The loss on disposal of the chemical division (net of $30,000 taxes) was $70,000 Assuming a

Total loss on discontinued operations 210,000

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I ncome bef ore taxes 79,000

I ncome tax expense 24,000

I ncome from continuing operations 55,000

Discontinued operations:

Loss from operations, net of tax 315 Loss on disposal, net of tax 189 Total loss on discontinued operations 504

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Extraordinary items are nonrecurring

material items that differ significantly from a

company’s typical business activities.

An extraordinary item must be both of an

Unusual Nature and Occur Infrequently

which it operates.

Amounts reported “net of tax.”

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Are these considered Extraordinary

Items?

(a) A large portion of a tobacco manufacturer’s

crops are destroyed by a hail storm Severe

damage from hail storms in the locality

where the manufacturer grows tobacco is

rare.

(b) A citrus grower's Florida crop is damaged

by frost

(c) Loss from sale of temporary investments.

(d) Loss attributable to a labor strike.

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(d) Loss from flood damage (The nearby

Black River floods every 2 to 3 years.)

(e) An earthquake destroys one of the oil

refineries owned by a large multi-national

oil company Earthquakes are rare in this

geographical location.

(f) Write-down of obsolete inventory.

(g) Expropriation of a factory by a foreign

government.

NO

YES

NO

Are these considered Extraordinary

Items?

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Illustration: In 2011 a foreign government

expropriated property held as an investment by Acro

Energy Inc If the loss is $70,000 before applicable

income taxes of $21,000, the income statement will

report a deduction of $49,000.

SO 6

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Extraordinary loss, net of tax 539

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I nterest expense (21,000) Total other (4,000)

Discontinued operations:

Loss from operations, net of tax 315 Loss on disposal, net of tax 189 Total loss on discontinued operations 504

I ncome before extraordinary item 54,496

Extraordinary loss, net of tax 539

Net income $ 53,957

I ncome Statement (in thousands)

Cost of goods sold 149,000

Reporting when both

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In its proposed 2011 income statement, AIR Corporation reports income before income

Taxes $400,000, extraordinary loss due to earthquake

$100,000, income taxes $120,000 (not including

irregular items), loss on operation of discontinued

flower division $50,000, and loss on disposal of

discontinued flower division $90,000 The income tax rate is 30% Prepare a correct income statement,

beginning with “Income before income taxes.”

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Prepare a correct income statement

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Change in Accounting Principle

Occurs when the principle used in the current year is different from the one used in the

preceding year.

Accounting rules permit a change if justified.

Changes are reported retroactively.

Example would include a change in inventory costing method such as FIFO to average cost.

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I ncome from operations 83,000

Other revenue:

Net income $ 76,000

Unrealized gains and losses on available- for-sale securities.

Plus other items

+

Reported in Stockholders’ Equity

Comprehensive

Income

All changes in stockholders’ equity except those resulting from investments by stockholders and

distributions to stockholders.

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Comprehensive Income

Why are gains and losses on available-for-sale

securities excluded from net income?

Because disclosing them separately

1 reduces the volatility of net income due to

fluctuations in fair value,

2 yet informs the financial statement user of the

gain or loss that would be incurred if the securities were sold at fair value.

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expectations, so that

the market price of stock increases and the value of stock options increase

information that will not confuse or mislead

users of the financial statements.

Quality of Earnings

SO 7 Understand the concept of quality of earnings.

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Alternative Accounting Methods

Variations among companies in the application

of GAAP may hamper comparability and reduce quality of earnings.

Quality of Earnings

SO 7 Understand the concept of quality of earnings.

Pro Forma Income

Pro forma income usually excludes items that the company thinks are unusual or

nonrecurring.

Some companies have abused the flexibility that pro forma numbers allow.

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Improper Recognition

Some managers have felt pressure to continually

increase earnings and have manipulated the

earnings numbers to meet these expectations.

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1 _ Measures the ability of the company to survive

over a long period of time.

2 _ Usually excludes items that a company thinks

are unusual or non-recurring.

Match each of the following terms with the phrase that it best matches.

c

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3 _ Includes all changes in stockholders’ equity during

a period except those resulting from investments by

stockholders and distributions to stockholders.

4 _ Indicates the level of full and transparent

information provided to users of the financial

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5 _ Describes events and transactions that are

unusual in nature and infrequent in occurrence.

6 _ Expresses each item within a financial statement

as a percent of a base amount.

Match each of the following terms with the phrase that it best matches.

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