Financial Statement Analysis

Common-Size Financial Statements

and Multiple Ratios

Financial Statement Analysis

Horizontal Common-size Analysis

focuses on changes in operating results and financial position

during two or more accounting periods

The changes are expressed in terms of percentages of

corresponding amounts in a base period

Vertical Common-size Analysis

concerns the relationships among financial statement items of a

single accounting period expressed in terms of a percentage
relationship to a base item (the base is 100%)

Financial Statement Analysis

EXAMPLE -- Statement of Financial Position
Current
Prior
Current
Prior
CURRENT ASSETS:
Year End
Year End
CURRENT LIABILITIES:
Year End
Year End
Cash and equivalents
325,000
275,000
Accounts payable
200,000
125,000
Available-for-sale securities 165,000
145,000
Accrued interest on note
5,000
5,000
Accounts receivable (net)
120,000
115,000
Current portion of L.T. debt
100,000
100,000
Notes receivable
55,000
40,000
Accrued salaries and wages
15,000
10,000
Inventories
85,000
55,000
Income
taxes
payable
70,000
35,000
Prepaid
expenses
10,000
5,000
Total current assets
275,000

760,000

635,000

Total current liabilities

NONCURRENT ASSETS:
NONCURRENT LIABILITIES:
Equity-method investments 120,000
115,000
Bonds payable
600,000
PPE
1,000,000 900,000
Long-term
notes
payable
60,000
Minus: Accum. Dep.
(85,000)
(55,000)
Employee-related obligations
10,000
Goodwill
5,000
Deferred income taxes
5,000
5,000
Total noncurrent assets 1,040,000 965,000
Total noncurrent liabilities
675,000
Total
liabilities

950,000
EQUITY:
Ordinary shares, US $1 par

390,000

500,000
90,000
15,000
5,000
610,000
1,000,000
500,000

Financial Statement Analysis

EXAMPLE of an Income Statement
Net

sales

Cost of goods sold

Gross profit
SG&A
expenses

Current Year
Prior Year
1,800,000

1,400,000

(1,450,000)
(1,170,000)
350,000
230,000
(200,000)
(160,000)

Operating income
150,000
Other income and expenses
(65,000)
Income before interest and taxes
85,000
Interest expense
(15,000)
Income before taxes
70,000
Income taxes (40%)
(28,000)
Net income
42,000

70,000
(25,000)
45,000
(10,000)
35,000
(14,000)
21,000

Financial Statement Analysis

Liquidity Ratios

Liquidity Ratios

Liquidity is an entitys ability to pay its current obligations as

they come due and remain in business in the short run.

Liquidity depends on the ease with which current assets can

be converted to cash. Liquidity ratios measure this ability by
relating an entitys liquid assets to its current liabilities at a
moment in time.

Financial Statement Analysis

Activity Ratios

Activity Ratios

Reflect how quickly major noncash assets are converted to

cash.

Measure results for an accounting period

Relate information from the statement of financial position to

information from the income statement.

Activity Ratios

Financial Statement Analysis

Solvency Ratios and Leverage

Activity Ratios

An entitys ability to pay its noncurrent obligations as they

come due and remain in business in the long run

The key ingredients of solvency are the entitys capital

structure and degree of leverage

Financial Statement Analysis

Return on Investments and Profitability

Return on Investments and Profitability