Chapter 15 - Financial statement analysis. This chapter focuses on financial statement analysis, which is used to assess the financial health of a company. It includes examining trends in key financial data, comparing financial data across companies, and analyzing financial ratios. | Financial Statement Analysis Chapter 15 Limitations of Financial Statement Analysis We use the LIFO method to value inventory. We use the average cost method to value inventory. Differences in accounting methods between companies sometimes make comparisons difficult. Limitations of Financial Statement Analysis Managers should look beyond the ratios. Economic factors Industry trends Changes within the company Technological changes Consumer tastes Statements in Comparative and Common-Size Form Dollar and percentage changes on statements Common-size statements Ratios An item on a financial statement has little meaning by itself. The meaning of the numbers can be enhanced by drawing comparisons. Dollar and Percentage Changes on Statements Horizontal analysis (or trend analysis) shows the changes between years in the financial data in both dollar and percentage form. Quantifying dollar changes over time serves to highlight the changes that are the most important economically. Quantifying . | Financial Statement Analysis Chapter 15 Limitations of Financial Statement Analysis We use the LIFO method to value inventory. We use the average cost method to value inventory. Differences in accounting methods between companies sometimes make comparisons difficult. Limitations of Financial Statement Analysis Managers should look beyond the ratios. Economic factors Industry trends Changes within the company Technological changes Consumer tastes Statements in Comparative and Common-Size Form Dollar and percentage changes on statements Common-size statements Ratios An item on a financial statement has little meaning by itself. The meaning of the numbers can be enhanced by drawing comparisons. Dollar and Percentage Changes on Statements Horizontal analysis (or trend analysis) shows the changes between years in the financial data in both dollar and percentage form. Quantifying dollar changes over time serves to highlight the changes that are the most important economically. Quantifying percentage changes over time serves to highlight the changes that are the most unusual. Horizontal Analysis Dollar Change Current Year Figure Base Year Figure = – The dollar amounts for last year become the “base” year figures. Calculating Change in Dollar Amounts Percentage Change Dollar Change Base Year Figure 100% = × Horizontal Analysis Calculating Change as a Percentage Trend Percentages Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent. Trend Analysis Trend Percentage Current Year Amount Base Year Amount 100% = × Common-Size Statements Vertical analysis focuses on the relationships among financial statement items at a given point in time. A common-size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage. Common-Size Statements In balance sheets, all items usually are expressed as a percentage of total assets. Common-Size Statements In income statements, all items .
