Financial Statement Analysis

Perform a horizontal analysis

of comparative financial
statements.

Horizontal Analysis
The study of percentage changes in comparative
statements is called horizontal analysis.
1. Compute the dollar amount of the change
from the base period to the later period.
2. Divide the dollar amount of change
by the base-period amount.

Horizontal Analysis

In millions

Sales

2001

$19,423

2000

Increase/
(Decrease)

$18,216

$1,207

$1,207 $18,216 = 0.066, or 6.6%

Comparative Income Statement

Horizontal Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

2000
$18,216
4,759
$13,457

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

$
$
$
$

$
$
$
$

Inc./(Dec.) Percent
$ 1,207
6.6
816
17.1
$ 391
2.9
43
(239)
3,064
$(2,477)
15
$(2,492)
(923)
$(1,569)
2,103
$ 534

1.1
(14.3)
158.0
(41.4)
3.0
(45.5)
(66.8)
(38.3)
342.0
11.3

Comparative Income Statement

Horizontal Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

2000
$18,216
4,759
$13,457

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

$
$
$
$

$
$
$
$

Inc./(Dec.) Percent
$ 1,207
6.6
816
17.1
$ 391
2.9
43
(239)
3,064
$(2,477)
15
$(2,492)
(923)
$(1,569)
2,103
$ 534

1.1
(14.3)
158.0
(41.4)
3.0
(45.5)
(66.8)
(38.3)
342.0
11.3

Comparative Income Statement

Horizontal Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

2000
$18,216
4,759
$13,457

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

$
$
$
$

$
$
$
$

Inc./(Dec.) Percent
$ 1,207
6.6
816
17.1
$ 391
2.9
43
(239)
3,064
$(2,477)
15
$(2,492)
(923)
$(1,569)
2,103
$ 534

1.1
(14.3)
158.0
(41.4)
3.0
(45.5)
(66.8)
(38.3)
342.0
11.3

Trend Percentages
Trend percentages are computed by selecting
a base year whose amounts are set equal to 100%.
Trend % = Any year $ Base year $

Earnings from
continuing operations
*1996 is the base year

2001
2000
1999
1998
1997
1996*
$2,527 $4,096 $3,789 $2,750 $2,744 $2,484
102% 165% 153% 111% 110% 100%

Perform a vertical analysis

of financial statements.

Vertical Analysis
Vertical analysis reveals the relationship
of each statement item to a specified
base, which is the 100% figure.
Every other item on the financial statement
is then reported as a percentage of that base.

Comparative Income Statement

Vertical Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

$
$
$
$

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

Percent
100.0
28.7
71.3
20.1
7.4
25.7
18.1
2.7
15.4
2.4
13.0
14.0
27.0

2000
$18,216
4,759
$13,457

$
$
$
$

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

Percent
100.0
26.1
73.9
21.2
9.2
10.6
32.9
2.8
30.1
7.6
22.5
3.4
25.9

Comparative Income Statement

Vertical Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

$
$
$
$

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

Percent
100.0
28.7
71.3
20.1
7.4
25.7
18.1
2.7
15.4
2.4
13.0
14.0
27.0

2000
$18,216
4,759
$13,457

$
$
$
$

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

Percent
100.0
26.1
73.9
21.2
9.2
10.6
32.9
2.8
30.1
7.6
22.5
3.4
25.9

Comparative Income Statement

Vertical Analysis
(Dollar amounts in millions)
Net sales
Cost of products sold
Gross profit
Operating expenses:
Marketing, selling, and admin.
Advertising and promotion
Research and development
Operating income
Other expenses
Earnings before taxes
Income taxes
Earnings continuous operations
Discontinued operations
Net earnings

2001
$19,423
5,575
$13,848

$
$
$
$

3,903
1,433
5,003
3,509
523
2,986
459
2,527
2,718
5,245

Percent
100.0
28.7
71.3
20.1
7.4
25.7
18.1
2.7
15.4
2.4
13.0
14.0
27.0

2000
$18,216
4,759
$13,457

$
$
$
$

3,860
1,672
1,939
5,986
508
5,478
1,382
4,096
615
4,711

Percent
100.0
26.1
73.9
21.2
9.2
10.6
32.9
2.8
30.1
7.6
22.5
3.4
25.9

Prepare and use common-size

financial statements.

Common-Size Statements
On a common-size income statement, each
item is expressed as a percentage of net sales.
In the balance sheet, the
common size is total assets.
A common-size statement eases the
comparison of different companies.

Common-Size Statements
Bristol-Myers Squibb Company
Percent of Total Assets
2001
2000
Current Assets
45.7%

Current Assets
55.9%

Long-Term Assets
54.3%

Long-Term Assets
44.1%

Benchmarking
Benchmarking is the practice of
comparing a company to other companies.

Common-size statements are also used to

compare the company to a specific company.

Benchmarking
Percent of Net Sales
Industry
average

Bristol-Myers
Squibb Company
2.8%

2.4% 13.0%

28.7%

55.9%

Income from
continuing operations
Cost of goods sold
Operating and
and other expenses
Income taxes

5.1%

51.6%
40.5%

Benchmarking
Percent of Net Sales
Proctor & Gamble
Company

Bristol-Myers
Squibb Company
2.4% 13.0%

28.7%

55.9%

Income from
continuing operations
Cost of goods sold
Operating and
and other expenses
Income taxes

4.3%

31.9%

7.5%

56.3%