Download Comparative Balance Sheet

1-1
Chapter 16
How to Read, Analyze,
and Interpret Financial
Reports
1-2
McGraw-Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
#16
How to Read, Analyze, and Interpret
Financial Reports
Learning Unit Objectives
LU16.1 Balance Sheet -- Report as of a Particular
Date
1-3
•
Explain the purpose and the key items on the
balance sheet
•
Explain and complete vertical and horizontal
analysis
#16
How to Read, Analyze, and Interpret
Financial Reports
Learning Unit Objectives
LU16.2 Income Statement -- Report for a Specific
Period of Time
1-4
•
Explain the purpose and the key items on the
income statement
•
Explain and complete vertical and horizontal
analysis
#16
How to Read, Analyze, and Interpret
Financial Reports
Learning Unit Objectives
LU16.3 Trend and Ratio Analysis
1-5
•
Explain and complete a trend analysis
•
List, explain, and calculate key financial ratios
Accounting Equation
Accounting Equation: Assets = Liabilities + Owner’s Equity
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Balance Sheet
Gives a financial picture of what a company is
worth as of particular date.
How
much the
company
owns
1-7
Assets
=
Liabilities
+
Owner’s
Equity
How
much the
company
owes
How
much the
owner is
worth
Figure 16.1 - Elements of the Balance Sheet
MOOL COMPANY
Balance Sheet
December 31, 2001
Assets
a. Current assets:
b. Cash
c. Accounts receivable
d. Merchandise inventory
e. Prepaid expenses
f. Total current assets
g. Plant and equipment:
h. Building (net)
i. Land
j. Total plant and equipment
k. Total assets
1-8
$ 7,000
9,000
30,000
15,000
$61,000
$60,000
84,000
$205,000
Liabilities
a. Current liabilities:
b. Accounts payable
c. Salaries payable
d. Total current liabilities
e. Long-term liabilities:
f. Mortgage note payable
g. Total liabilities
Stockholders Equity
144,000 a. Common stock
b. Retained earnings
c. Total stockholders equity
d. Total liab. and stkhlds equity
$ 80,000
12,000
$ 92,000
58,000
$150,000
$ 20,000
35,000
55,000
$205,000
Preparing a Vertical Analysis of a Balance
Sheet
Step 1. Divide each asset (the
portion) as a percent of total
assets (the base). Round as
indicated.
Step 2. Round each liability and
stockholders’ equity (the
portions) as a percent of total
liabilities and stockholders’
equity (the base). Round as
indicated.
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Figure 16.2 - Comparative Balance Sheet:
Vertical Analysis
* Due to rounding
ROGER COMPANY
Comparative Balance Sheet
December 31, 2003 and 2004
2003
Amount Percent
Assets
Current Assets:
Cash
Accounts Receivable
Merchandise inventory
Prepaid rent
Total current assets
Plant and equipment:
Building (net)
Land
Total plant and equipment
Total assets
1-10
2004
Amount Percent
$22,000
8,000
9,000
4,000
$43,000
25.88
9.41
10.59
4.71
50.59
$18,000
9,000
7,000
5,000
$39,000
$18,000
24,000
$42,000
$85,000
21.19
28.24
49.41*
100.00
$18,000
24,000
$42,000
$81,000
22.22
11.11
8.64
6.71
48.15*
22.22
29.63
51.85
100.00
Preparing a Horizontal Analysis of a
Comparative Balance Sheet
Step 1. Calculate the increase
or decrease (portion) in each
item from the base year.
Step 2. Divide the increase or
decrease in Step 1 by the old or
base year.
Step 3. Round as
indicated.
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Figure 16.3 - Comparative Balance Sheet:
Horizontal Analysis
ABBY ELLEN COMPANY
Comparative Balance Sheet
December 31, 2003 and 2004
2004
Assets
Current Assets:
Cash
Accounts Receivable
Merchandise inventory
Prepaid rent
Total current assets
Plant and equipment:
Building (net)
Land
Total plant and equipment
Total assets
1-12
2003
Increase(decrease)
Amount Percent
$ 6,000
5,000
9,000
5,000
$25,000
$ 4,000
6,000
4,000
7,000
$21,000
$ 2,000
(1,000)
5,000
(2,000)
$ 4,000
$12,000
18,000
$30,000
$55,000
$12,000
18,000
$30,000
$51,000
0
0
0
$4,000
50.00
-16.67
125.00
-28.57
19.05
0
0
0
7.84
Income Statement
A financial report that tells how well a
company is performing (its profitability or net
profit) during a specific period of time.
Retail Business
Service Business
Revenues
Revenues
- Cost of merchandise sold
-Operating Expenses
= Gross profit from sales
=Net Income
- Operating Expenses
= Net Income
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Figure 16.4 MOOL
- Income
Statement
COMPANY
Income Statement
For Month Ended December 31, 2004
Revenues
a.
Gross Sales
b. Less: Sales returns and allowances
c.
Sales discounts
d. Net Sales
Cost of merchandise (goods) sold:
a. Merchandise Inventory 12/1/2004
b. Purchases
c. Less: Purchases returns and allowances $336
d. Less: Purchase discounts
204
e. Cost of net purchases
f. Cost of merchandise (goods available for sale)
g. Less: Merchandise inventory 12/31/2004
h. Cost of merchandise (goods sold)
Gross profit from sales
Operating expenses:
a.
Salary
b.
Insurance
c.
Utilities
d.
Plumbing
e.
Rent
c.
Depreciation
Total operating expenses
Net income
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$22,080
$ 1,082
432
1,514
$20,566
$ 1,248
$10,512
540
9,972
$11,220
1,600
9,620
$10,946
$ 2,200
1.300
400
120
410
200
4,630
$ 6,316
Key Calculations on Income Statement
Net sales = Gross sales - Sales returns and - Sales discounts
Allowances
Cost of
merchandise = Beginning +
(goods) sold
inventory
Net purchases
(purchase less
- Ending
returns & discounts) inventory
Gross profit = Net sales - Cost of merchandise
from sales
(goods) sold
Net income = Gross profit - Operating expenses
1-15
Figure 16.5 - Income Statement Vertical
Analysis
ROYAL COMPANY
Comparative Income Statement
For Years Ended December 31, 2003 and 2004
2004
Net Sales
Cost of merchandise sold
Gross profit from sales
Operating expenses:
Depreciation
Selling and Advertising
Research
Miscellaneous
Total operating expenses
Income before interest and taxes
Interest expense
Income before taxes
Provision for taxes
Net income
* Due to rounding
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$45,000
19,000
$26,000
Percent
of net
100.00
42.22
57.78
$1,000
4,200
2,900
500
$8,600
$17,400
6,000
$11,400
5,500
$ 5,900
2.22
9.33
6.44
1.11
19.11*
38.67
13.33
25.33*
12.22
13.11
2003
$29,000
12,000
$17,000
$
500
1,600
2,000
200
$ 4,300
$12,700
3,000
$ 9,700
3,000
$ 6,700
Percent
of net
100.00
41.38
58.62
1.72
5.52
6.90
.69
14.83
43.79
10.34
33.45
10.34
23.10*
Figure 16.6 - Horizontal Analysis Income
Statement
FLINT COMPANY
Comparative Income Statement
For Years Ended December 31, 2003 and 2004
2004
Sales
Sales returns and allowances
Net Sales
Cost of merchandise sold
Gross profit from sales
Operating expenses:
Depreciation
Selling and Advertising
Research
Miscellaneous
Total operating expenses
Income before interest and taxes
Interest expense
Income before taxes
Provision for taxes
Net income
1-17
2003
$ 90,000
2,000
$88,000
45,000
$43,000
$80,000
2,000
$78,000
40,000
$38,000
$ 6,000
16,000
600
1,200
$23,800
$19,200
4,000
$15,200
3,800
$11,400
$ 5,000
12,000
1,000
500
$18,500
$19,500
4,000
$15,500
4,000
$11,500
Increase (decrease)
Amount
Percent
$10,000
0
$10,000 + 12.82
5,000 + 12.50
$ 5,000
+ 13.16
$ 1,000
4,000
(400)
700
$ 5,300
$ (300)
0
$ (300)
(200)
$ (100)
+ 20.00
+ 33.33
- 40.00
+ 140.00
+ 28.65
- 1.54
-
1.94
5.00
.87
Completing a Trend Analysis
Analyzes the changes that occur by expressing each
number as a percent of the base year
Each Item
Base Amount
Step 1.
Select the
base year
(100%)
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Step 2. Express
each amount as a
percent of the base
year amount
(rounded to the
nearest whole
percent)
Trend Analysis
Given (base year 2002)
Sales
Gross Profit
2005
$750,000
200,000
2004
$650,000
150,000
2003
$625,000
135,000
2002
$650,000
140,000
Net Income
75,000
50,000
35,000
40,000
Trend Analysis
Sales*
Gross Profit
Net Income
2005
2004
2003
2002
115%
143
188
100%
107
125
96%
96
88
100%
100
100
* Round to nearest whole percent
1-19
$625,000
$650,000
Ratio Analysis
A relationship of one number to another. Used
to make comparisons versus previous performance
or other companies
Asset Management ratios
How well the company
manages its assets
Profitability ratios
The company’s
profitability picture
1-20
Debt Management ratios
The company’s debt
situation
Summary of Key Ratios
Current ratio = Current assets
Current liabilities
Industry average, 2 to 1
Acid test (quick ratio) = Current assets - inventory-prepaid expenses
Current liabilities
Industry average, 1 to 1
Average day’s collection = Accounts receivable
Net sales
360
Industry average, 90-120 days
Total debt to total assets = Total liabilities
Total assets
Industry average, 50% - 70%
1-21
Summary of Key Ratios
Return on equity =
Net Income
Stockholders equity
Industry average, 15% - 20%
Asset turnover =
Net sales
Total assets
Industry average, $.03 to $.08
Profit margin on net sales = Net income
Net sales
Industry average, 25% - 40%
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