PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51IRREGULAR OPERATIONS STUDY OBJECTIVE 6DISCONTINUED OPERATIONSSlide 54EXTRAORDINARY ITEMSSlide 56Slide 57CHANGE IN ACCOUNTING PRINCIPLESlide 59Slide 60Slide 61Slide 62Slide 63Slide 64Slide 65John Wiley & Sons, Inc. © 2005Chapter 19Chapter 19Financial Statement AnalysisCHAPTER 19 FINANCIAL STATEMENT ANALYSISAfter studying this chapter, you should be able to:1 Discuss the need for comparative analysis.2 Identify the tools of financial statement analysis.3 Explain and apply horizontal analysis.4 Describe and apply vertical analysis.After studying this chapter, you should be able to:5 Identify and compute ratios and describe their purpose and use in analyzing a firm’s liquidity, profitability, and solvency.6 Understand the concept of earning power; and indicate how material items not typical of regular operations are presented. 7 Recognize the limitations of financial statement analysis.CHAPTER 19 FINANCIAL STATEMENT ANALYSIS•Three characteristics of a company: 1) liquidity 2) profitability3) solvency.• Companies need to obtain information as to whether the amount 1) represents an increase over prior years or 2) is adequate in relation to the company’s need for cash. Thus, the amounts must be compared with other financial statement data.BASICS OF FINANCIAL STATEMENT ANALYSISSTUDY OBJECTIVE 1COMPARATIVE ANALYSISThree commonly used tools are utilized to evaluate the significance of financial statement data.1) Horizontal analysis (trend analysis) evaluates a series of financial statement data over a period of time.2) Vertical analysis evaluates financial statement data expressing each item in a financial statement as a percent of a base amount.3) Ratio analysis expresses the relationship among selected items of financial statement data.TOOLS OF FINANCIAL STATEMENT ANALYSISSTUDY OBJECTIVE 2SEARS, ROEBUCK’S NET SALESSTUDY OBJECTIVE 3The purpose of horizontal analysis is to determine the increase or decrease that has taken place This change may be expressed as either an amount or a percentage. The recent net sales figures of Sears, Roebuck and Co. are shown above.The purpose of horizontal analysis is to determine the increase or decrease that has taken place This change may be expressed as either an amount or a percentage. The recent net sales figures of Sears, Roebuck and Co. are shown above.FORMULA FOR HORIZONTAL ANALYSIS OF CHANGES SINCE BASE PERIODGiven that 2000 is the base year, we can measure all percentage increases or decreases from this base period amount as shown below.Given that 2000 is the base year, we can measure all percentage increases or decreases from this base period amount as shown below.Change since base periodFORMULA FOR HORIZONTAL ANALYSIS OF CURRENT YEARCurrent results in relation to base periodAlternatively, we can express current year sales as a percentage of the base period. This is done by dividing the current year amount, as shown below.Alternatively, we can express current year sales as a percentage of the base period. This is done by dividing the current year amount, as shown below.Horizontal Analysis Of A Balance SheetThe two-year condensed balance sheet of Quality Department Store Inc. for 2002 and 2001 showing dollar and percentage changes is displayed in the Illustration 19-5. In the asset section, plant assets (net) increased $167,500 or 26.5%. In the liabilities section, current liabilities increased $41,500 or 13.7%. In the stockholders’ equity section, retained earnings increased $202,600 or 38.6%.It appears the company expanded its asset base during 2002 and financed the expansion by retaining income in the firm.Horizontal Analysis Of Income StatementsThe two-year comparative income statements of Quality Department Store Inc. for 2002 and 2001 is shown in condensed form on illustration 19-6. Horizontal analysis of the comparative income statement shows the following changes:1) Net sales increased $260,000, or 14.2% ($260,000 ÷ $1,837,000).2) Cost of goods sold increased $141,000, or 12.4% ($141,000 ÷ $1,140,000).3) Total operating expenses increased $37,000, or 11.6% ($37,000 ÷ $320,000).HORIZONTAL ANALYSIS OF RETAINED EARNINGS STATEMENTSAnalyzed horizontally:1) Net income increased $55,300, or 26.5%.2) Common dividends increased only $1,200, or 2%.3) Ending retained earnings increased 38.6%.In horizontal analysis, each item is expressed as a percentage of the:a. net income amount.b. stockholders’ equity amount.c. total assets amount.d. base year amount.In horizontal analysis, each item is expressed as a percentage of the:a. net income amount.b. stockholders’ equity amount.c. total assets amount.d. base year amount.VERTICAL ANALYSIS OF BALANCE SHEETSSTUDY OBJECTIVE 4On the next slide is the two-year comparative balance sheet of Quality Department Store Inc. for 2002 and 2001.1 Current assets increased $75,000 from 2001 to 2002, they decreased from 59.2% to 55.6% of total assets.2 Plant assets (net) increased from 39.7% to 43.6% of total assets, and3 Retained earnings increased from 32.9% to 39.7% of total liabilities and stockholders’ equity.These results reinforce earlier observations that Quality is financing its growth through retention of earnings rather than from issuing additional debt.VERTICAL ANALYSIS OF BALANCE SHEETSVERTICAL ANALYSIS OF INCOME STATEMENTSVertical analysis of the two-year comparative income statement of Quality Department Store Inc. for 2002 and 2001 is shown on the next slide.1) Cost of goods sold as a percentage of net sales declined 1% (62.1% versus 61.1%).2) Total operating expenses declined 0.4% (17.4% versus 17.0%).3) Net income as a percent of net sales therefore increased from 11.4% to 12.6%.Quality appears to be a profitable enterprise that is becoming more successful.VERTICAL ANALYSIS OF INCOME STATEMENTSINTERCOMPANY INCOME STATEMENT COMPARISONVertical analysis enables you to compare companies of different sizes. Quantity’s major competitor is a Sears, Roebuck store in a nearby town. Using vertical analysis,