McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 13
Measuring and Evaluating
Financial Performance
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, CA
Horizontal, Vertical, and Ratio
Analyses
Horizontal (trend) analyses are conducted to help financial statement
users recognize important financial changes that unfold over time.
12/31/09
Gross Profit in 2009
Trend Analysis
12/31/10
Gross Profit in 2010
Δ in Gross Profit $
and/or % from 2009
Vertical analyses focus on important relationships between items on the
same financial statement.
2010
Amount
Sales
Cost of Goods Sold
Gross Profit
13-3
$200,000
150,000
$ 50,000
Percent
100%
75%
25%
Horizontal (Trend) Computations
Trend analyses are usually calculated in terms of
year-to-year dollar and percentage changes.
(Current Year’s Total – Prior Year’s Total)
Year-to-Year
Change This Year
=
× 100
Change (%)
Prior Year’s Total
Let’s look at an example
13-4
Horizontal (Trend) Computations
$48,230 – $48,283
× 100
$48,283
Calculate
Now let’sthe
calculate
changethe
in dollars
percentage
for Net
Now
Can
let’s
youlook
calculate
at the remainder
the dollar and
of the
change
Sales in
Revenue
Net Sales
between
Revenue
2009
between
and
trend
percentage
analysischange
of the Income
for CostStatement.
of Sales?
20092008.
and 2008.
13-5
Vertical (Common Size) Computations
Vertical, or common size, analysis focuses on
important relationships within financial statements.
Income Statement
Sales = 100%
Balance Sheet
Total Assets = 100%
Cost of Sales
× 100
Net Sales Revenue
13-6
Ratio Computations
Ratio analysis compares the amounts for one or more line
items to the amounts for other line items in the same year.
Ratios are classified into three categories . . .
Solvency ratios
examine a company’s
ability to pay
interest and repay
debt when due.
Profitability ratios
examine a company’s
ability to generate
income.
Liquidity ratios
help us determine if a
company has sufficient
current assets to repay
liabilities when due.
13-7
Common Profitability Ratios
13-8
Common Liquidity Ratios
13-9
Common Solvency Ratios
13-10
Interpreting Horizontal and Vertical
With 60 new stores opened, Lowe’s had
Analyses
a 7.9% increase in inventory, and a 6.4%
increase in Property and Equipment.
Lowe’s grew
by 5.9% in
fiscal 2009.
13-11
Interpreting Horizontal and Vertical
Analyses
The Company’s cash position
weakened significantly between
fiscal 2007 and 2008.
13-12
There was a
large increase in
the inventory
carried by the
company. The
accumulation of
inventory is a
sign of a
weakening
business
outlook.
Interpreting Horizontal and Vertical
Analyses
Cost of sales and operating expenses
Much of the decline in
fiscal 2008 Net Income
is explained by the
increase in Cost of
Sales and Operating
Expenses.
13-13
are the most important determinant of
the company’s profitability.
Interpreting Horizontal and Vertical
Analyses
Lowe’s has experienced a 0.4% increase
Lowe’s did not do a good
job of controlling its
operating expenses
between 2007 and 2008.
The company is faced with
lower gross profit and poor
operating expense control.
13-14
in its cost of goods sold from fiscal 2007
to 2008. Increasing cost of sales means
lower gross profit.
End of Chapter 13