Chapter 13 - Analyzing and interpreting financial statements. After completing this unit, you should be able to: Explain the purpose and identify the building blocks of analysis, describe standards for comparisons in analysis, summarize and report results of analysis, explain and apply methods of horizontal analysis. | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 13 Analyzing and Interpreting Financial Statements Liquidity and Efficiency Solvency Profitability Market Prospects Ability to meet short-term obligations and to efficiently generate revenues Ability to generate future revenues and meet long-term obligations Ability to generate positive market expectations Ability to provide financial rewards sufficient to attract and retain financing Building Blocks of Analysis C1 13- Standards for Comparison When interpreting measures, we need to decide whether the measures indicate good, bad, or average performance. We can use the following to make that judgment: Intracompany Competitor Industry Guidelines (rules of thumb) 13- C2 Horizontal Analysis Comparing a company’s financial condition and performance across time. Tools of Analysis Comparing a company’s financial condition and performance to a base amount. Vertical Analysis Measurement of key relations between financial statement items. 13- C1 Ratio Analysis Calculate Change in Dollar Amount Dollar change Analysis period amount Base period amount = – Since we are measuring the amount of the change between 2013 and 2012, the dollar amounts for 2012 become the “base” period amounts. Horizontal Analysis Comparative Statements P1 Calculate Change as a Percent Percent change Dollar change Base period amount 100 = × 13- Trend analysis is used to reveal patterns in data covering successive periods. Trend percent Analysis period amount Base period amount 100 = × Horizontal Analysis Trend Analysis P1 13- Calculate Common-Size Percent Common-size percent Analysis amount Base amount 100 = × Financial Statement Base Amount Balance Sheet Total Assets Income Statement Revenues Vertical Analysis Common-Size Statements P2 13- | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 13 Analyzing and Interpreting Financial Statements Liquidity and Efficiency Solvency Profitability Market Prospects Ability to meet short-term obligations and to efficiently generate revenues Ability to generate future revenues and meet long-term obligations Ability to generate positive market expectations Ability to provide financial rewards sufficient to attract and retain financing Building Blocks of Analysis C1 13- Standards for Comparison When interpreting measures, we need to decide whether the measures indicate good, bad, or average performance. We can use the following to make that judgment: Intracompany Competitor Industry Guidelines (rules of thumb) 13- C2 Horizontal Analysis Comparing a company’s financial condition and performance across .
