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Lecture Introduction to financial accounting - Chapter 13: Financial analysis

Chapter 13 - Financial analysis. After you have mastered the material in this chapter, you will be able to: Describe factors associated with communicating useful information, differentiate between horizontal and vertical analysis, explain ratio analysis, calculate ratios for assessing a company's liquidity,. | 201Lec13.PPTX 1 13 Financial Analysis is best use of past data to forecast profitability. is the ability to generate future profits. comes from recurring items such as: - net income from operations - recurring non-operating items (such as investment income or interest expense) GAAP Rule: Statements must separate out non-recurring irregular items. 2 Sustainable Income are separated on the income statement. are reported net of tax expense (or refund). Example: $100,000 irregular item, 30% tax rate » Report as $70,000 after tax Types of irregular items: - discontinued operations - extraordinary items Irregular Items 3 Irregular items on the Income Statement Components of the income statement 4 PACE CORPORATION Income Statement and Statement of Comprehensive Income For the Year Ended December 31, 2014 PACE CORPORATION Income Statement and Statement of Comprehensive Income For the Year Ended December 31, 2014 Irregular items on the Income Statement Components of the income statement 5 Discontinued Operations Termination of one business (sale, dissolution, etc.) Separate year of disposal effects. Clutters up view of ongoing operations. PACE CORPORATION Income Statement and Statement of Comprehensive Income For the Year Ended December 31, 2014 Irregular items on the Income Statement Components of the income statement 6 Extraordinary Items Must be UNUSUAL and INFREQUENT Required by GAAP Includes certain items that affect equity which aren’t on the income statement. Often shown below irregular items on income stmt Comprehensive Income Don’t confuse with “Proforma” Income: - Supplemental info published by some companies - Not required and often doesn’t even follow GAAP - Company decides what is unusual or infrequent - Can be pretty bogus 7 Basic tools used in statement analysis: Horizontal analysis Vertical analysis Ratio analysis 8 34 PowerPoint Slides Evaluates a series of financial statement data over a period of time. (Sometimes called trend analysis) Determines whether | 201Lec13.PPTX 1 13 Financial Analysis is best use of past data to forecast profitability. is the ability to generate future profits. comes from recurring items such as: - net income from operations - recurring non-operating items (such as investment income or interest expense) GAAP Rule: Statements must separate out non-recurring irregular items. 2 Sustainable Income are separated on the income statement. are reported net of tax expense (or refund). Example: $100,000 irregular item, 30% tax rate » Report as $70,000 after tax Types of irregular items: - discontinued operations - extraordinary items Irregular Items 3 Irregular items on the Income Statement Components of the income statement 4 PACE CORPORATION Income Statement and Statement of Comprehensive Income For the Year Ended December 31, 2014 PACE CORPORATION Income Statement and Statement of Comprehensive Income For the Year Ended December 31, 2014 Irregular items on the Income Statement Components of the income statement 5 .