Transparency Master 14-1
HORIZONTAL ANALYSIS
Using the income statement for Nike, compute the
percentage change for the following items:
Percentage Change
2010–2011
Net sales (Gross Margin)
Cost of sales
Selling & admin. expense
Income before taxes
Net income
2009–2010
Transparency Master 14-2
HORIZONTAL ANALYSIS
Solution
Using
the
income
statement
for
Nike,
compute the percentage change for the following
items:
Percentage Change
2010–2011
Net sales (Gross Margin)
Cost of sales
Selling & admin. expense
8%
11.1%
5.8%
Income before taxes
13%
Net income
11.9%
2009–2010
2.3%
(3.4)%
2.9%
28.6%
28.3%
Transparency Master 14-3
VERTICAL ANALYSIS
Nike, Inc.
Consolidated Income Statement
For the Year Ended May 31, 2011
Revenues ............................................................. 219.4%
Cost of sales ........................................................ 119.4%
Gross margin ................................................. 100.0%
Expenses:
Selling & administrative ...............................
70.4%
Income B4 Taxes .......................................
29.9%
Net Income .....................................................
22.4%
Transparency Master 14-4
SOLVENCY MEASURES
1. Current Position Analysis
a. Working capital
b. Current ratio
c. Quick ratio
2. Accounts Receivable Analysis
a. Accounts receivable turnover
b. Number of days’ sales in receivables
3. Inventory Analysis
a. Inventory turnover
b. Number of days’ sales in inventory
4. Ratio of Fixed Assets to Long-Term Liabilities
5. Ratio of Liabilities to Stockholders’ Equity
6. Number of Times Interest Charges Earned
Transparency Master 14-5
SOLVENCY MEASURES
Ace Co.
Current Year
Ace Co. Industry
Prior Year Average
Current ratio ...................
2.5
2.4
2.2
Quick ratio ......................
1.2
1.2
1.0
Accounts receivable
turnover .......................
7.6
7.9
10.1
Number of days’ sales
in receivables .............
48
46
36
Inventory turnover .........
4.7
4.6
4.3
Number of days’ sales
in inventory .................
77
79
85
Ratio of fixed assets to
long-term liabilities ....
3.6
3.6
3.7
Ratio of liabilities to
stockholders’ equity ..
0.6
0.7
0.9
Number of times interest
charges earned ...........
8.2
8.0
9.5
Transparency Master 14-6
PROFITABILITY MEASURES
1. Ratio of net sales to assets
2. Rate earned on total assets
3. Rate earned on stockholders’ equity
4. Rate earned on common stockholders’
equity
5. Earnings per share on common stock
6. Price-earnings ratio
7. Dividends per share
8. Dividend yield
Transparency Master 14-7
PROFITABILITY MEASURES
Ace Co.
Current Year
Ace Co.
Prior Year
Industry
Average
Ratio of net sales to assets ..............
1.4
1.3
1.1
Rate earned on total assets ..............
12%
12%
11%
Rate earned on
stockholders’ equity ......................
18%
17%
15%
Earnings per share on
common stock ...............................
$1.80
$1.72
Price-earnings ratio ...........................
10.2
10.5
12.4
Dividend yield ....................................
4%
4%
3%
Transparency Master 14-8
SECTIONS OF A CORPORATE
ANNUAL REPORT
1. Financial highlights
2. President’s letter
3. Financial statements
4. Notes to the financial statements
5. Management’s discussion and analysis
6. Management report
7. Independent auditors’ report
8. Historical summary
Transparency Master 14-9
INDEPENDENT AUDITORS’
REPORT
1. Introductory Paragraph
Lists the financial statements that were audited.
States that management has overall responsibility
for the financial statements; the auditors’
responsibility is simply to express an opinion on
the statements prepared by management.
2. Scope Paragraph
Describes the nature of the audit process. States
that audits are conducted in accordance with
generally accepted auditing standards and include
tests needed to obtain “reasonable assurance”
that financial statements do not include material
misstatements.
3. Opinion Paragraph
Gives the auditors’ opinion on the financial
statements. In an unqualified opinion, the auditor
affirms that the financial statements present fairly,
in all material respects, a company’s financial
position, results of operations, and cash flows in
conformity with generally accepted accounting
principles.
Transparency Master 14-10
WRITING EXERCISE
Many annual reports include a Historical
Summary section, which shows key financial data for the past five to ten years. Why
would information that is five to ten years
old be presented in an annual report?
Transparency Master 14-11
WRITING EXERCISE
1. Why are the results of discontinued operations
and extraordinary items shown in separate sections at the bottom of the income statement?
2. Why are discontinued operations and extraordinary items shown net of tax?