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Lecture Financial accounting (7/e): Chapter 14 - Robert Libby, Patricia A. Libby, Daniel G. Short

Chapter 14 - Analyzing financial statements. After studying this chapter, you should be able to: Explain how a company's business strategy affects financial analysis, discuss how analysts use financial statements; compute and interpret component percentages; compute and interpret profitability ratios; compute and interpret liquidity ratios; compute and interpret solvency ratios; compute and interpret market test ratios. | Analyzing Financial Statements Chapter 14 Chapter 14: Analyzing Financial Statements Financial Statement Analysis Examines a single company to identify trends over time. Financial statement analysis is based on comparisons. Time series analysis Comparison with similar companies Provides insights concerning a company’s relative performance. In order to compare companies or to assess the status of a single company, analysts use two different forms of analysis. Time series analysis examines a single company’s financial performance over time. It is also important to compare the company with those of other companies in the same industry. Financial results are often affected by industry factors and economy-wide factors. By comparing one company’s financial performance with other companies in the same line of business, in the same time period, we get an indication of the relative performance of the companies. Component Percentages Express each item on a particular statement as a percentage of a single base amount. Total assets on the balance sheet Net sales on the income statement The comparative income statements of Home Depot for 2007, 2008, and 2009 appear on the next slide. Prepare component percentage income statements where net sales equal 100%. Component percentages express all items on a financial statement in terms of one component of that statement. For the income statement we generally express all items as a percent of net sales revenue. For the balance sheet we generally express all items as a percent of total assets The comparative income statements of Home Depot for 2007, 2008, and 2009 appear on the next slide. Let’s prepare component percentage income statements for each year where net sales equal 100%. 2009 Cost of Sales ÷ 2009 Net Sales $47,298 ÷ $71,288 = .664 or 66.4% 2009 Gross Profit ÷ 2009 Net Sales $23,990 ÷ $71,288 = .336 or 33.6% 2009 Selling, G&A ÷ 2009 Net Sales $17,846 ÷ $71,288 = .250 or 25.0% Net Sales will be set to 100% and | Analyzing Financial Statements Chapter 14 Chapter 14: Analyzing Financial Statements Financial Statement Analysis Examines a single company to identify trends over time. Financial statement analysis is based on comparisons. Time series analysis Comparison with similar companies Provides insights concerning a company’s relative performance. In order to compare companies or to assess the status of a single company, analysts use two different forms of analysis. Time series analysis examines a single company’s financial performance over time. It is also important to compare the company with those of other companies in the same industry. Financial results are often affected by industry factors and economy-wide factors. By comparing one company’s financial performance with other companies in the same line of business, in the same time period, we get an indication of the relative performance of the companies. Component Percentages Express each item on a particular statement as a