Chapter 14 - Performance measurement. This chapter include objectives: Explain and apply comparative analysis, calculate and interpret ratios that are used to analyze liquidity, calculate and interpret ratios that are used to analyze solvency,. | CHAPTER 14: Performance Measurement LO 1: Explain and apply comparative analysis. LO 2: Calculate and interpret ratios that are used to analyze liquidity. LO 3: Calculate and interpret ratios that are used to analyze solvency. LO 4: Identify and calculate ratios that are used to analyze profitability. LO 5: Understand the limitations of financial analysis. LEARNING OBJECTIVES Horizontal Analysis Also known as trend analysis A technique to determine the change over time Can be expressed as an amount or percentage Percentage of base-period amount Percentage change for the period Horizontal Percentage of a Base-Period Amount Horizontal Percentage Change for the Period Vertical Analysis Also known as common size analysis A technique that expresses each item in a financial statement as a percent of a base amount (total assets or net sales) Expressed as a percentage Discussion Question Identify some situations when a horizontal or vertical percentage cannot be calculated or is not . | CHAPTER 14: Performance Measurement LO 1: Explain and apply comparative analysis. LO 2: Calculate and interpret ratios that are used to analyze liquidity. LO 3: Calculate and interpret ratios that are used to analyze solvency. LO 4: Identify and calculate ratios that are used to analyze profitability. LO 5: Understand the limitations of financial analysis. LEARNING OBJECTIVES Horizontal Analysis Also known as trend analysis A technique to determine the change over time Can be expressed as an amount or percentage Percentage of base-period amount Percentage change for the period Horizontal Percentage of a Base-Period Amount Horizontal Percentage Change for the Period Vertical Analysis Also known as common size analysis A technique that expresses each item in a financial statement as a percent of a base amount (total assets or net sales) Expressed as a percentage Discussion Question Identify some situations when a horizontal or vertical percentage cannot be calculated or is not meaningful. Comparative Analysis Three types of comparisons: Intracompany basis – comparisons within a company Intercompany basis – comparisons between one or more competitor companies Industry averages Ratio Analysis Liquidity Ratios: Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash Solvency Ratios: Measure the ability of the company to survive over a long period of time Profitability Ratios: Measure the operating success of a company for a specific period of time Liquidity Ratios Working capital Current ratio Receivables turnover Average collection period Inventory turnover Days in inventory Working Capital Measures short-term debt paying ability Working Capital = Current Assets – Current Liabilities Current Ratio is a better indicator Higher is better Current Ratio Measures short-term debt paying ability Current Ratio = Current Assets Current Liabilities Higher is normally (but not always) better. Be cautious about influences of
