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Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   1
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   2
Financial Statement AnalysisChapter 13             Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   3
Perform a horizontal analysis of financialstatements           Copyright ©2010 Pearson Education Inc. Publishing as Prenti...
Horizontal Analysis• Study of percentage changes from year-to-  year• Two steps:   1. Compute dollar amount of change   2....
Exercise 13-16A                        Sensible Music Company                    Comparative Income Statements            ...
Trend Percentages• Form of horizontal analysis• Base year selected and set equal to 100%                                  ...
Perform a vertical analysis of financialstatements           Copyright ©2010 Pearson Education Inc. Publishing as Prentice...
Vertical Analysis• Shows relationship of a financial-statement item  to its base   Vertical                               ...
Prepare common-size financial statements          Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   10
Common-Size Statements• Report only vertical analysis percents• Help in the comparison of different  companies           C...
Benchmarking• Compares company to a standard set by  others• Facilitated by common-size statements• Has goal of improvemen...
Use the statement of cash flows for decisions           Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall...
Cash-Flow Signs of HealthyCompany         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   14
Compute the standard financial ratios           Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   15
Ratio Categories        Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   16
Ability to Pay Current Liabilities         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   17
Working Capital & Current Ratio Working                           Current                                        Current c...
Acid-Test Ratio                                             ?                                              ?         Copyr...
Ability to Sell Inventory andCollect Receivables         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hal...
Inventory Turnover            Cost of goods sold            Average inventory   (Beginning inventory + Ending inventory)/2...
Accounts Receivable Turnover                              Net sales      Average net accounts receivable(Beginning net rec...
Days’-Sales-In-Receivables                                                               Net sales    One day’s      sales...
Exercise 13-21A                                                               Current               Preceding             ...
Exercise 13-21ACurrent                                          Current                    Current ratio                  ...
Exercise 13-21A Acid- test ratio =                                               ? Cash + Short-term investments + Net cur...
Exercise13-21A  Inventory turnover =       Cost of goods sold                                                             ...
Exercise 13-21A                                                     Accounts receivable                                   ...
Exercise 13-21A     Days’ Sales in Average Receivables      One day’s                                  Net sales1.      sa...
Exercise 13-21A     Days’ Sales in Average Receivables                                                            Average ...
Measuring Ability to Pay Debts         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   31
Debt ratio          Total liabilities                 Total assets         Copyright ©2010 Pearson Education Inc. Publishi...
Times-Interest-Earned      Income from operations           Interest expense        Copyright ©2010 Pearson Education Inc....
Measuring Profitability         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   34
Rate of Return on Sales             Net income                  Net sales         Copyright ©2010 Pearson Education Inc. P...
Rate of Return on Total Assets     Net income + Interest expense          Average total assets         Copyright ©2010 Pea...
Rate of Return on Common Equity Net income – Preferred dividends  Average common stockholders’             equity        C...
Leverage• Borrowing at a lower rate than invested  funds earn           Copyright ©2010 Pearson Education Inc. Publishing ...
Earnings per Share      Net income –Preferred dividends     Average number of common shares               outstanding     ...
Use ratios in decision making           Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   40
Analyzing Stock Investments        Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   41
Price/Earnings Ratio        Market price per share of            common stock              Earnings per share         Copy...
Dividend Yield      Dividend per share of common                  stock        Market price per share of            common...
Book Value Total stockholders’                                                             Preferred equity        equity ...
Measure the economic value added byoperations          Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall....
Economic Value Added (EVA ®)• Combines accounting and finance data• Measures if operations have increased  stockholder wea...
Cost of Capital                    Capital charge =                                Current     Notes                    ma...
Red Flags in Financial StatementAnalysis•   Earnings problems•   Decreased cash flow•   Too much debt•   Inability to coll...
Efficient Markets• Market prices fully reflect all information  ▫ Managers cannot fool market with accounting    manipulat...
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   50
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Hhtfa8e ch13 stud devry Accounting 212 FINANCIAL ACCOUNTING

  1. 1. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 1
  2. 2. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 2
  3. 3. Financial Statement AnalysisChapter 13 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 3
  4. 4. Perform a horizontal analysis of financialstatements Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 4
  5. 5. Horizontal Analysis• Study of percentage changes from year-to- year• Two steps: 1. Compute dollar amount of change 2. Divide dollar amount of change by base-period amount Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 5
  6. 6. Exercise 13-16A Sensible Music Company Comparative Income Statements Years Ended December 31, 2010 and 2009 2010 2009 $ Change % ChangeTotal revenue $852,000 $912,000Expenses:Cost of goods sold $402,000 $408,000Selling & gen’l expense 232,000 261,000Interest expense 9,200 10,500Income tax expense 83,000 84,000Total expenses 726,200 763,500Net income $125,800 $148,500 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 6
  7. 7. Trend Percentages• Form of horizontal analysis• Base year selected and set equal to 100% Any year Trend % Base year Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 7
  8. 8. Perform a vertical analysis of financialstatements Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 8
  9. 9. Vertical Analysis• Shows relationship of a financial-statement item to its base Vertical Each income statement item analysis % Total revenue Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 9
  10. 10. Prepare common-size financial statements Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 10
  11. 11. Common-Size Statements• Report only vertical analysis percents• Help in the comparison of different companies Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 11
  12. 12. Benchmarking• Compares company to a standard set by others• Facilitated by common-size statements• Has goal of improvement Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 12
  13. 13. Use the statement of cash flows for decisions Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 13
  14. 14. Cash-Flow Signs of HealthyCompany Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 14
  15. 15. Compute the standard financial ratios Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 15
  16. 16. Ratio Categories Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 16
  17. 17. Ability to Pay Current Liabilities Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 17
  18. 18. Working Capital & Current Ratio Working Current Current capital assets liabilities Current Current Current ratio assets liabilities Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 18
  19. 19. Acid-Test Ratio ? ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 19
  20. 20. Ability to Sell Inventory andCollect Receivables Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 20
  21. 21. Inventory Turnover Cost of goods sold Average inventory (Beginning inventory + Ending inventory)/2) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21
  22. 22. Accounts Receivable Turnover Net sales Average net accounts receivable(Beginning net receivables + Ending net receivables)/2) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 22
  23. 23. Days’-Sales-In-Receivables Net sales One day’s sales 365 days Average net accounts Days’ sales in receivable average accounts receivable One day’s sales Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 23
  24. 24. Exercise 13-21A Current Preceding year year Balance Sheet: Cash Short-term investments Net receivables Inventory Prepaid expenses Total current assets Total current liabilities Income Statement: Net credit sales Cost of goods sold Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 24
  25. 25. Exercise 13-21ACurrent Current Current ratio assets liabilities ? ? ? ? ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 25
  26. 26. Exercise 13-21A Acid- test ratio = ? Cash + Short-term investments + Net current receivables Current liabilities Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 26
  27. 27. Exercise13-21A Inventory turnover = Cost of goods sold ? Average inventory ?(Beginning inventory + Ending Inventory)/2) ? (76,000 +94,000)/2) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 27
  28. 28. Exercise 13-21A Accounts receivable ? turnover = Net sales ? Average net ? accounts receivable(Beginning net receivables +Ending net receivables)/2) ($73,000 + 50,000)/2 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 28
  29. 29. Exercise 13-21A Days’ Sales in Average Receivables One day’s Net sales1. sales ? ? ? ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 29
  30. 30. Exercise 13-21A Days’ Sales in Average Receivables Average net accounts Days’ sales in receivable2. average accounts receivable One day’s sales ? 46 days Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 30
  31. 31. Measuring Ability to Pay Debts Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 31
  32. 32. Debt ratio Total liabilities Total assets Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 32
  33. 33. Times-Interest-Earned Income from operations Interest expense Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 33
  34. 34. Measuring Profitability Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 34
  35. 35. Rate of Return on Sales Net income Net sales Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 35
  36. 36. Rate of Return on Total Assets Net income + Interest expense Average total assets Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 36
  37. 37. Rate of Return on Common Equity Net income – Preferred dividends Average common stockholders’ equity Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 37
  38. 38. Leverage• Borrowing at a lower rate than invested funds earn Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 38
  39. 39. Earnings per Share Net income –Preferred dividends Average number of common shares outstanding Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 39
  40. 40. Use ratios in decision making Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 40
  41. 41. Analyzing Stock Investments Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 41
  42. 42. Price/Earnings Ratio Market price per share of common stock Earnings per share Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 42
  43. 43. Dividend Yield Dividend per share of common stock Market price per share of common stock Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 43
  44. 44. Book Value Total stockholders’ Preferred equity equity Number of common shares outstanding Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 44
  45. 45. Measure the economic value added byoperations Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 45
  46. 46. Economic Value Added (EVA ®)• Combines accounting and finance data• Measures if operations have increased stockholder wealth ▫ Positive EVA® suggests increase in wealth Net Interest Capital income expense charge Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 46
  47. 47. Cost of Capital Capital charge = Current Notes maturities of payable long-term debt Cost of capital Long-term Stockholders’ debt equity Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 47
  48. 48. Red Flags in Financial StatementAnalysis• Earnings problems• Decreased cash flow• Too much debt• Inability to collect receivables• Buildup of inventories• Trends of sales, inventory and receivables Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 48
  49. 49. Efficient Markets• Market prices fully reflect all information ▫ Managers cannot fool market with accounting manipulations ▫ Market sets fair price for stock• Appropriate investment strategy: ▫ Manage risk ▫ Diversify investments ▫ Minimize transaction costs Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 49
  50. 50. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 50
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    Apr. 24, 2013

devry Accounting 212 FINANCIAL ACCOUNTING ch13

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