Financial and Managerial Accounting, 9th Edition
13-1
CHAPTER 13
ANALYSIS OF FINANCIAL STATEMENTS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA, BTN, DA
Conceptual objectives:
C1. Define the building blocks of analysis
and the standards for comparisons.
1, 2, 3
13-1, 13-2
13-1, 13-2
AA 13-2
Analytical objectives:
statement. (Appendix 13A)
Procedural objectives:
P1. Explain and apply methods of
horizontal analysis.
13-3, 13-4,
13-5, 13-6
13-3, 13-5
13-1, 13-2
AA 13-1, BTN 13–4,
BTN 13-5
vertical analysis.
13-2
AA 13-1, AA 13–2,
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
Building Blocks of Analysis
1:22
Information for Analysis
1:00
1:35
0:25
Financial and Managerial Accounting, 9th Edition
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Title
Time
P1
Horizontal Analysis
2:03
P2
Vertical Analysis
1:22
P3
Ratio Analysis
1:15
COMPREHENSIVE
Applying Horizontal, Vertical, and Ratio Analyses
Req. 1
2:52
Req. 2
4:00
Req. 3a
1:03
Req. 3b
0:44
Req. 3c
0:48
Req. 3d
0:40
Req. 3e
0:52
Req. 3f
0:28
Req. 3g
0:31
Req. 3h
0:35
Req. 3i
0:32
Req. 3j
0:51
Req. 3k
0:50
Req. 3l
0:54
Concept Overview Videos
LO
Title
Time
C1
Define the building blocks of analysis and the standards for comparisons.
Financial Statement Analysis
0:35
Purpose of Analysis
0:43
Financial and Managerial Accounting, 9th Edition
13-3
A1
Summarize and report results of analysis.
Analysis Reporting
1:27
A2
Explain the form and assess the content of a complete income statement.
(Appendix 13A)
Complete Income Statement
2:13
Changes in Accounting Principles
0:28
P1
Explain and apply methods of horizontal analysis.
Horizontal Analysis
1:54
Computation of Dollar Changes
1:08
Computation of Percent Changes
0:37
Trend Analysis – Part 1
1:07
Trend Analysis – Part 2
0:34
P2
Describe and apply methods of vertical analysis.
Vertical Analysis
0:22
Common-Size Statements
1:30
Computation of Common-Size Percent
0:24
Data Visualizations
0:29
P3
Define and apply ratio analysis.
Ratio Analysis
1:44
Liquidity and Efficiency Ratios
1:39
Liquidity and Efficiency Ratio Examples Part 1
3:03
Liquidity and Efficiency Ratio Examples Part 2
4:08
Solvency Ratios
1:02
Solvency Ratio Examples
2:33
Profitability Ratios
0:21
Profitability Ratios Examples
2:33
Market Prospects Ratios and Examples
2:31
Synopsis of Chapter Revisions
Streamlined conceptual learning objectives.
Updated data for all analyses of Apple using horizontal, vertical, and ratio analysis.
Updated comparative analysis using Google and Samsung.
Financial and Managerial Accounting, 9th Edition
Chapter Outline
I. Basics of Analysis—Transforming data into useful information.
A. Purpose of Analysis
To help users (both internal and external) make better business decisions.
company efficiency and effectiveness in providing products and services.
2. External users (shareholders, lenders, and suppliers) rely on financial statement analysis to
make informed decisions in pursuing their own goals.
1. Internal users (managers, officers and internal auditors) make the strategic and operating
decisions of a company. Purposes for these users is to provide strategic information to improve
B. Building Blocks of Analysis
The four areas of inquiry or building blocks are:
1. Liquidity and efficiency—ability to meet short-term obligations and to efficiently generate
revenues.
4. Market prospects—ability to generate positive market expectations.
C. Information for Analysis
Most users conduct analysis using general purpose financial statements that include:
6. Other useful financial data—10K/other SEC filings, news releases, shareholders’ meetings,
forecasts, management letters, auditor’s report, and analyses published in annual reports.
1. Income statement
2. Balance sheet
D. Standards for Comparisons
We need standards (benchmarks) can include the following types of comparisons:
4. Guidelines (rules of thumb)—standards of comparisons developed from experience.
1. Intracompany—based on prior performance and relations between its financial items.
E. Tools of Analysis
1. Horizontal analysis
II. Horizontal Analysis—Tool to evaluate changes in financial statement data across time. This analysis
utilizes:
A. Comparative Statements
1. Reports where financial amounts for more than one period are placed side by side in columns on
a single statement.
Financial and Managerial Accounting, 9th Edition
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2. Dollar Changes and Percent Changes—usually shown in line items.
a. Dollar change = Analysis period amount minus Base period amount.
b. Percent change = (Analysis period amount minus Base period amount) divided by Base
3. Comparative Balance Sheets—balance sheets from two or more periods arranged side-by-side.
Dollar and percentage changes are often shown. We review both large and small changes.
4. Comparative Income Statements—also compares two or more periods presented side-by side
with dollar and percentage changes.
B. Trend Analysis (also called trend percent analysis or index number trend analysis)
3. Often aided by graphical depiction.
1. A form of horizontal analysis used to reveal patterns in data across successive periods.
III. Vertical Analysis—(also called common-size analysis) Comparing financial condition and performance
to a base amount. The analysis tools include:
A. Common-Size Statements—reveal changes in the relative importance of each financial statement
item by redefining each in terms of common-size percents.
3. Common-size percentage equals (Analysis amount divided by Base amounts) multiplied by 100.
1. Base amount is commonly defined as 100%. Usually a key aggregate figure is the base
B. Data Visualizations—reveal trends and insights not easily seen by looking at numbers (ex. pie charts
and bar charts) to visually highlight comparison information. Used to identify:
1. Sources of financing, including the distribution among current liabilities, noncurrent liabilities,
IV. Ratio Analysis—widely used in financial analysis because they help to uncover conditions and trends
difficult to detect by inspecting individual amounts. Ratios are organized into the four (A to D below)
building blocks of analysis:
A. Liquidity and Efficiency
1. Liquidity refers to the availability of resources to meet short-term cash requirements.
2. Efficiency refers to how productive a company is in using its assets. Efficiency is usually
Financial and Managerial Accounting, 9th Edition
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d. Accounts receivable turnover—net sales or credit sales divided by average accounts
receivable; a measure of how long it takes a company to collect its accounts.
e. Inventory turnover—cost of goods sold divided by average inventory; the number of times a
B. Solvency
1. Solvency refers to a company’s long-run financial viability and its ability to cover long-term
obligations. Capital structure is one of the most important components of solvency analysis.
2. Capital structure refers to a company’s sources of financing.
3. Ratios in this block:
a. Debt ratio—total liabilities divided by total assets.
C. Profitability
1. Profitability refers to a company’s ability to generate an adequate return on invested capital.
2. Return is judged by assessing earnings relative to the level and sources of financing.
D. Market Prospects
3. Ratios in this block:
1. Market measures are useful for analyzing corporations with publicly traded stock.
2. Market measures use stock price in their computation.
E. Summary of Ratios
Exhibit 17.16 in the text sets forth the names of each of the common ratios by category, and includes
the formula and a description of what is measured by each ratio.
Financial and Managerial Accounting, 9th Edition
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V. Decision Analysis—Analysis Reporting
5. Key factors
6. Inferences
Goal of financial statement analysis report is to reduce uncertainty through rigorous and sound
evaluation. A good analysis report usually consists of six sections:
1. Executive summary
VI. Sustainable Income—Appendix 13A
When a revenue and expense transactions are from normal, continuing operations, a simple income
statement is adequate. When activities include events that are not normal, it must disclose this
information by separating the income statement into different sections as follows (A-D):
A. Continuing Operations
Reports the revenues, expenses, and income generated by the company’s continuing operations.
B. Discontinued Segments
1. A business segment is a part of a company’s operations that serves a particular line of business or
class of customers.
C. Earnings per Share –
1. Final section of income statement
2. Reported for both continuing operations and discontinued segments (where both exist).
D. Changes in Accounting Principles
1. The consistency principle directs a company to apply the same accounting principle across
Financial and Managerial Accounting, 9th Edition
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Chapter 13 Alternate Demonstration Problem
Following are data from the statements of two companies selling similar products:
Current Year-End Balance Sheets
Sled
Company
Zip
Company
Cash ……………………………………………………………..
$ 11,900
$ 20,000
Notes receivable—short-term …………………………
7,700
3,200
Accounts receivable, net ……………………………….
42,000
64,000
58,800
87,680
Total assets …………………………………………………..
$354,200
$452,800
Current liabilities……………………………………………
$ 56,000
$ 80,000
Mortgage payable ………………………………………….
70,000
80,000
Common stock, $10 par value ………………………..
140,000
160,000
Retained earnings ………………………………………….
$354,200
$452,800
Data from the Current Year’s Income Statement
Sales ……………………………………………………………..
$672,000
$880,000
Cost of goods sold ………………………………………..
528,080
699,840
4,200
5,600
Net income …………………………………………………….
23,373
28,896
$ 85,120
Total assets …………………………………………………..
345,800
443,200
217,000
285,120
Required:
1. Calculate current ratios, acid–test ratios, inventory turnovers, and days’ sales
2. Calculate return on total assets employed and return on stockholders’ equity. Then,
Financial and Managerial Accounting, 9th Edition
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Solution: Chapter 13 Alternate Demonstration Problem
Part 1
Sled Company
Zip Company
Current ratio:
$122,080
$ 56,000
= 2.18 to 1
$178,400
$ 80,000
= 2.23 to 1
$ 56,000
$ 80,000
$ 42,000
$ 64,000
Sled Company and Zip Company have almost equal current and acid-test ratios, so near
the same that the differences are not significant. However, Sled Company turns its
inventory and collects its accounts receivable more rapidly than Zip Company; and on
this basis it appears to be a better short-term credit risk.
Part 2
Return on total assets:
$ 23,373
$350,000
= 6.68%
$ 28,896
$448,000
= 6.45%
$ 23,373
$222,600
= 10.5%
$ 28,896
$288,960
= 10.0%