22 - 1 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater

Analyzing Financial
Statements
Chapter 22
22 - 2 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Preparing comparative
balance sheets.
Learning Objective 1
22 - 3 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Users of Financial Reports
Investors
Creditors
Management
22 - 4 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
Current assets:
Cash
Accounts receivable, net
Merchandise inventory
Prepaid expenses
Total current assets
Plant and equipment:
Office equipment, net
Total assets

$ 3,040
20,000
24,160
80,000
$ 48,000

$125,200
$173,200

$ 4,080
16,000
26,120
60,000
$ 46,800

$116,800
$163,600

$(1,040)
4,000
(1,960)
200
$ 1,200

$ 8,400
$ 9,600

(25.5)
25
(7.5)
33.3
2.6

7.2
5.9
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Assets
December 31

20x8 20x7
Incr.
or Dec.
20x8
% Incr.
or Dec.
20x8
22 - 5 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
Current liabilities:
Notes payable
Accounts payable
Total current liabilities
Long-term liabilities:
Mortgage payable
Total liabilities

$ 20,960
240
$ 21,200

$ 60,000
$ 81,200

$3,640
(40)
$3,600

-0-
$3,600

21
(14.3)
20.5

-0-
4.6

$ 17,320
280
$ 17,600

$ 60,000
$ 77,600
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Liabilities
December 31

20x8 20x7
Incr.
or Dec.
20x8
% Incr.
or Dec.
20x8
22 - 6 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
Stockholders equity:
Common stock, $10 par
Retained earnings
Total stockholders equity

Total liabilities and
stockholders equity

$ 60,000
32,000
$ 92,000


$173,200

-0-
$6,000
$6,000


$9,600

-0-
23.1
7.0


5.9

$ 60,000
26,000
$ 86,000


$163,600
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Stockholders Equity
December 31

20x8 20x7
Incr.
or Dec.
20x8
% Incr.
or Dec.
20x8
22 - 7 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Using horizontal and vertical
analysis techniques.
Learning Objective 2
22 - 8 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
$1,040 $4,080 = 0.2549, or 25.5%
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
20x8 20x7 Difference
Cash $3,040 $4,080 $(1,040)
22 - 9 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
Vertical analysis compares each item on
a report to a base number set to 100%.
The base will be either total assets or
total liabilities and stockholders
equity on a balance sheet.
22 - 10 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-1 (Horizontal
and Vertical Analysis)
Assets 20x8 %
Current assets:
Cash $ 3,040 1.8
Accounts receivable net 20,000 11.5
Merchandise inventory 24,160 13.9
Prepaid expenses 800 .5
Total current assets $ 48,000 27.7
Plant and equipment
Office equipment, net $125,200 72.3
Total assets $173,200 100.0
22 - 11 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-2
(Trend Analysis)
20x8 %
Net sales $317,600 100.0
Cost of goods sold 198,000 62.3
Gross profit from sales $119,600 37.7
Total operating expenses 83,600 26.3
Operating income $ 36,000 11.3
Less interest expense 4,200 1.3
Income before taxes $ 31,800 10.0
Income taxes 15,900 5.0
Net income $ 15,900 5.0
22 - 12 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-2
(Trend Analysis)
What is trend analysis?
It is a special type of horizontal analysis that
deals with the percentage of changes in
certain key items over several years.
Trend % = Any year $ Base year $
22 - 13 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-2
(Trend Analysis)
Year 20x8 20x7 20x5
Sales $317,600 $302,000 $270,000
Cost of Goods Sold 198,000 194,000 142,000
Gross Profit $119,600 $108,000 $128,000
20x5 is the base year.
What are the trend percentages?
22 - 14 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-2
(Trend Analysis)
Year 20x8 20x7 20x5
Sales 118% 112% 100%
Cost of Goods Sold 139% 137% 100%
Gross Profit 93% 84% 100%
22 - 15 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Calculating the four different
types of ratios: liquidity ratios,
asset management ratios,
debt management ratios,
and profitability ratios.
Learning Objective 3
22 - 16 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-3
(Ratio Analysis)
A ratio is the relationship of two quantities
or numbers, one divided by the other.
Ratio analysis looks at the relationship
of figures on the financial statements.
22 - 17 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Acid test ratio =
(Current assets Merchandise inventory
Prepaid expenses) Current liabilities
Current ratio =
Total current assets Total current liabilities
Learning Unit 22-3
(Ratio Analysis)
22 - 18 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Average collection period =
365 days Accounts receivable turnover
Accounts receivable turnover =
Net credit sales Average accounts receivable
Learning Unit 22-3
(Ratio Analysis)
22 - 19 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Accounts receivable turnover
shows how many times
accounts receivable is
converted to cash in one year.
Learning Unit 22-3
(Ratio Analysis)
22 - 20 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Asset turnover = Net sales Total assets
Inventory turnover =
Cost of goods sold Average inventory
Learning Unit 22-3
(Ratio Analysis)
22 - 21 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
The asset turnover indicates whether or not assets
have been used efficiently to generate sales.
The inventory turnover calculates the number
of times inventory turns over in one period.
Learning Unit 22-3
(Ratio Analysis)
22 - 22 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Debt to stockholders equity =
Total liabilities Stockholders equity
Debt to total assets =
Total liabilities Total assets
Learning Unit 22-3
(Ratio Analysis)
22 - 23 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-3
(Ratio Analysis)
The debt-to-stockholders-equity ratio shows
stockholders risk compared to creditors risk.
The debt-to-total-assets ratio indicates the amount
of assets that are financed by creditors.
22 - 24 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-3
(Ratio Analysis)
Times interest earned =
Income before taxes and interest expense
Interest expense
It reveals ability to meet interest
payment due dates.
22 - 25 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Return on sales =
Net income before taxes Net sales
Gross profit rate = Gross profit Net sales
Learning Unit 22-3
(Ratio Analysis)
22 - 26 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-3
(Ratio Analysis)
Rate of return on common stockholders equity =
(Net income before taxes Preferred dividends)
Common stockholders equity
Rate of return on total assets =
Net income before interest and taxes Total assets
22 - 27 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 22-3
(Ratio Analysis)
The rate of return on common stockholders
equity shows the amount of the net income
share that remains for the common stockholders
(after preferred dividends are deducted).
The rate of return on total assets
indicates earning power.
22 - 28 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
End of Chapter 22