Chapter 3 follows up on chapter 2 by introducing methods to analyze financial statements. Readers of financial analysis, types of financial analysis and use of financial information in management decision making are explored in this chapter. | Chapter 3 Analyzing Financial Statements Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Readers of Financial Statements Types of Financial Analysis Management Decision Making Financial Tricks Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Readers of Financial Analysis Owners Track and evaluate management’s performance Lenders Determine the risk of the business defaulting on its loan Managers Compare actual and budgeted results Government Ensure that taxes have been paid Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Readers of Financial Analysis cont. Suppliers Evaluate the company’s ability to pay its obligations Investment Analysts Evaluate the company’s performance Mergers and Acquisitions Highlight financial strengths, upside potential, and future value Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Types of Analysis Vertical Analysis Used to analyze variable expenses All accounts are sized using either: Total revenue or Departmental revenue Variable expenses should increase or decrease with the level of sales Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Sample Vertical Analysis Shae's Income Statement For the month ended June 30, 2008 Revenues: Amount Percent Food $ 890,000 Beverage 220,000 Others 28,100 Total Revenues $ 1,138,100 Cost of Sales: Food $ 320,400 Beverage 48,400 Others 15,455 Total Cost of Sales $ 384,255 Gross Profit: Food $ 569,600 Beverage 171,600 Others 12,645 Total Gross Profit $ 753,845 Accounts are divided by total revenues $1,138,100 Cost of Sales is divided by its respective revenue amount EX: Food $320,400 / $890,000 = 36% Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Sample Vertical Analysis cont. Operating (Controllable) Expenses: Amount Percent Salaries and Wages $ 352,811 Employee Benefits 105,843 Total Labor Cost 458,654 . | Chapter 3 Analyzing Financial Statements Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Readers of Financial Statements Types of Financial Analysis Management Decision Making Financial Tricks Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Readers of Financial Analysis Owners Track and evaluate management’s performance Lenders Determine the risk of the business defaulting on its loan Managers Compare actual and budgeted results Government Ensure that taxes have been paid Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Readers of Financial Analysis cont. Suppliers Evaluate the company’s ability to pay its obligations Investment Analysts Evaluate the company’s performance Mergers and Acquisitions Highlight financial strengths, upside potential, and future value Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Types of Analysis Vertical Analysis Used to analyze variable expenses All accounts are sized using
