Slide 1Slide 2Horizontal, Vertical, and Ratio AnalysesHorizontal, Vertical, and Ratio AnalysesSlide 5Horizontal (Trend) ComputationsHorizontal (Trend) ComputationsSlide 8Vertical (Common Size) ComputationsInterpreting Horizontal and Vertical AnalysesInterpreting Horizontal and Vertical AnalysesInterpreting Horizontal and Vertical AnalysesSlide 13Ratio ComputationsCommon Profitability RatiosCommon Liquidity RatiosCommon Solvency RatiosSlide 18Slide 19Ratio CalculationsProfitability RatiosProfitability RatiosProfitability RatiosProfitability RatiosLiquidity RatiosLiquidity RatiosLiquidity RatiosSolvency RatiosSlide 29Underlying Accounting Decisions and ConceptsFactors Contributing to Going-Concern ProblemsSlide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45End of Chapter 13McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 13Measuring and EvaluatingFinancial Performance**You may exclude supplement sectionsPowerPoint Authors:Brandy MackintoshLindsay Heiser Edited by: Muriel Anderson, MBA, CPA13-2Describe the purpose and uses of horizontal, vertical, and ratio analyses.13-3Horizontal, Vertical, and Ratio AnalysesHorizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time.Gross Profit in 2012Δ in Gross Profit $ and/or % from 201212/31/12 12/31/13Gross Profit in 2013Trend AnalysisVertical analyses focus on important relationships between items on the same financial statement.SalesCost of Goods SoldGross Profit$200,000 100% 150,000 75%$ 50,000 25%Amount Percent201313-4Horizontal, Vertical, and Ratio AnalysesRatio analyses are conducted to understand relationships among various items reported in one or more of the financial statements.It is essential to understand that no analysis is complete unless it leads to an interpretation that helps financial statement users understand and evaluate a company’s financial resultsReceivableTurnoverRatio=Net Sales RevenueAverage Net Receivables13-5Use horizontal (trend) analysis to recognize financial changes that unfold over time.13-6Horizontal (Trend) ComputationsTrend analyses are usually calculated in terms of year-to-year dollar and percentage changes.Let’s look at an example13-7Horizontal (Trend) Computations$48,815 – $47,220$47,220× 10013-8Use vertical (common size) analysis to understand important relationships within financial statements.13-9Vertical (Common Size) ComputationsVertical, or common size, analysis focuses on important relationships within financial statements. Vertical, or common size, analysis focuses on important relationships within financial statements. Income StatementBalance SheetSales = 100%Total Assets = 100%Cost of SalesNet Sales Revenue× 10013-10Interpreting Horizontal and Vertical AnalysesLowe’s began relying more on debt and less equity financing. Long-term liabilities increased 28.7 percent and stockholders’ equity decreased by 5%.Lowe’s began relying more on debt and less equity financing. Long-term liabilities increased 28.7 percent and stockholders’ equity decreased by 5%.Lowe’s assets grew only by 2.1% in fiscal 2010.Lowe’s assets grew only by 2.1% in fiscal 2010.13-11Interpreting Horizontal and Vertical AnalysesCost of sales and operating expenses are the most important determinants of the company’s profitability. Cost of sales and operating expenses are the most important determinants of the company’s profitability. The increase in Net Income in fiscal 2010 is explained by the increase in Net Sales Revenue and the decreases in Cost of Sales and Operating Expenses as a percentage of sales.The increase in Net Income in fiscal 2010 is explained by the increase in Net Sales Revenue and the decreases in Cost of Sales and Operating Expenses as a percentage of sales.13-12Interpreting Horizontal and Vertical AnalysesLowe’s has experienced a small decrease in its percentage of Cost of Sales in relation to Sales Revenue from fiscal 2009 to 2010. Decreasing cost of sales means higher Gross Profit.Lowe’s has experienced a small decrease in its percentage of Cost of Sales in relation to Sales Revenue from fiscal 2009 to 2010. Decreasing cost of sales means higher Gross Profit.Lowe’s did a better job of controlling its Operating Expenses between 2009 and 2010. Lowe’s did a better job of controlling its Operating Expenses between 2009 and 2010.13-13Use financial ratios to assess profitability, liquidity, and solvency.13-14Ratio ComputationsRatio analysis compares the amounts for one or more line items to the amounts for other line items in the same year.Ratio analysis compares the amounts for one or more line items to the amounts for other line items in the same year.Ratios are classified into three categories . . .Profitability ratiosexamine a company’sability to generate income.Profitability ratiosexamine a company’sability to generate income. Liquidity ratios help us determine if acompany has sufficientcurrent assets to repayliabilities when due. Liquidity ratios help us determine if acompany has sufficientcurrent assets to repayliabilities when due. Solvency ratios examine a company’sability to payinterest and repaydebt when due. Solvency ratios examine a company’sability to payinterest and repaydebt when due.13-15Common Profitability Ratios13-16Common Liquidity Ratios13-17Common Solvency Ratios13-18Interpret the results of financial analyses.13-19RatioCalculations13-20Ratio Calculations13-21Profitability RatiosNet Profit Margin – The slowly improving economy helped boost Lowe’s profits in 2010 as shown by the increase in Net Profit Margin.Gross Profit Percentage – Lowe’s gross profit percentage indicates how much profit was made on each dollar of sales after deducting the Cost of Goods Sold.13-22Profitability RatiosAsset Turnover Ratio – indicates the amount of sales revenue generated for each dollar invested in assets during the period.Fixed Asset Turnover – indicates how much revenue the company generates in sales for each dollar invested in fixed assets,Home Depot 2010 fixed asset turnover ratio was 2.69Home Depot 2010 fixed asset turnover ratio was 2.6913-23Profitability RatiosReturn on Equity (ROE) – Compares the amount of net income to average stockholders’ equity. ROE reports the net amount earnedduring the period as a