17-1
Financial Statement Analysis
Who analyzes financial statements?
Internal users (i.e., management)
 External users

Examples?
Investors, creditors, regulatory agencies & …
stock market analysts and
auditors
625
17-2
Financial Statement Analysis

What do internal users use it for?
Planning, evaluating and controlling
company operations

What do external users use it for?
Assessing past performance and current
financial position and making predictions
about the future profitability and solvency
of the company as well as evaluating the
effectiveness of management

First sentence in chapter says...
Methods of
Financial Statement Analysis
 Horizontal
 Vertical
Analysis
Analysis
 Common-Size
 Trend
 Ratio
Statements
Percentages
Analysis
17-3
17-4
Chapter 3
rizontal and Vertical ANALY
OF
FINANCIAL STATEMENTS
17-5
Horizontal Analysis
Using comparative financial
statements to calculate dollar
or percentage changes in a
financial statement item from
one period to the next
17-6
Vertical Analysis
For a single financial
statement, each item
is expressed as a
percentage of a
significant total,
e.g., all income
statement items are
expressed as a
percentage of sales
17-7
Common-Size Statements
Financial statements that show
only percentages and no
absolute dollar amounts
17-8
Trend Percentages
Show changes over time in
given financial statement items
(can help evaluate financial
information of several years)
17-9
Ratio Analysis
Expression of logical relationships
between items in a financial
statement of a single period
(e.g., percentage relationship
between revenue and net income)
17-10
Horizontal Analysis Example
The management of Clover Company
provides you with comparative balance
sheets of the years ended December 31,
1999 and 1998. Management asks you to
prepare a horizontal analysis on the
information.
17-11
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Assets
Current assets:
Cash
$
12,000
$
23,500
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
3,000
1,200
155,000
164,700
40,000
40,000
Prepaid expenses
Total current assets
Property and equipment:
Land
Incr
Am
17-12
Horizontal Analysis Example
Calculating Change in Dollar Amounts
Dollar
Change
=
Current Year
Figure
–
Base Year
Figure
17-13
Horizontal Analysis Example
Calculating Change in Dollar Amounts
Dollar
Change
=
Current Year
Figure
–
Base Year
Figure
Since we are measuring the amount of
the change between 1998 and 1999, the
dollar amounts for 1998 become the
“base” year figures.
17-14
Horizontal Analysis Example
Calculating Change as a Percentage
Percentage
Change
=
Dollar Change
Base Year Figure
×
100%
17-15
Horizontal Analysis Example
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Increase (Decrease)
Amount
%
Assets
Current assets:
Cash
$
12,000 $
23,500 $ (11,500)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
Total current assets
155,000
164,700
$12,000
–
$23,500
= $(11,500)
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment
160,000
125,000
Total assets
$ 315,000 $ 289,700
17-16
Horizontal Analysis Example
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
1998
Increase (Decrease)
Amount
%
Assets
Current assets:
Cash
$
12,000 $
23,500 $ (11,500)
(48.9)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
Total current assets
155,000
164,700
($11,500
÷
$23,500)
× 100% = 48.9%
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment
160,000
125,000
Total assets
$ 315,000 $ 289,700
17-17
Horizontal Analysis Example
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
Amount
%
1999
1998
12,000 $
60,000
80,000
3,000
155,000
23,500 $ (11,500)
40,000
20,000
100,000
(20,000)
1,200
1,800
164,700
(9,700)
40,000
120,000
160,000
315,000 $
40,000
85,000
125,000
289,700 $
Assets
Current assets:
Cash
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
$
$
35,000
35,000
25,300
(48.9)
50.0
(20.0)
150.0
(5.9)
0.0
41.2
28.0
8.7
17-18
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Notes payable
Total current liabilities
Long-term liabilities:
Bonds payable, 8%
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
67,000 $
3,000
70,000
1998
Increase (Decrease)
Amount
%
44,000 $
6,000
50,000
23,000
(3,000)
20,000
52.3
(50.0)
40.0
75,000
145,000
80,000
130,000
(5,000)
15,000
(6.3)
11.5
20,000
60,000
10,000
90,000
80,000
170,000
315,000 $
20,000
60,000
10,000
90,000
69,700
159,700
289,700 $
10,300
10,300
25,300
0.0
0.0
0.0
0.0
14.8
6.4
8.7
17-19
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Net income before taxes
25,000
32,000
(7,000)
(21.9)
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
yielding an overall decrease in net
income.
17-20
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Net income before taxes
25,000
32,000
(7,000)
(21.9)
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
17-21
Vertical Analysis Example
Sample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999
1998
1999
1998
Cash
$ 82,000
$ 30,000
17%
8%
Accts. Rec.
120,000
100,000
25%
26%
Inventory
87,000
82,000
18%
21%
Land
101,000
90,000
21%
23%
Equipment
110,000
100,000
23%
26%
Accum. Depr.
(17,000)
(15,000)
-4%
-4%
Total
$ 483,000
$ 387,000
100%
100%
17-22
Vertical Analysis Example
Sample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999
1998
1999
1998
Cash
$ 82,000
$ 30,000
17%
8%
Accts. Rec.
120,000
100,000
25%
26%
Inventory
87,000
82,000
18%
21%
$82,000 ÷ $483,000 = 17% rounded
Land
101,000
90,000
21%
23%
$30,000110,000
÷ $387,000 100,000
= 8% rounded
Equipment
23%
26%
Accum. Depr.
(17,000)
(15,000)
-4%
-4%
Total
$ 483,000
$ 387,000
100%
100%
17-23
Trend Percentages Example
Wheeler, Inc. provides you with the
following operating data and asks that
you prepare a trend analysis.
1999
Revenues $ 2,405
Expenses
2,033
Net income $
372
Wheeler, Inc.
Operating Data
1998
1997
$ 2,244
$ 2,112
1,966
1,870
$
278
$
242
1996
$ 1,991
1,803
$
188
1995
$ 1,820
1,701
$
119
17-24
Trend Percentages Example
Wheeler, Inc. provides you with the
following operating data and asks that
you prepare a trend analysis.
$1,991 - $1,820 = $171
17-25
Trend Percentages Example
Using 1995 as the base year, we develop
the following percentage relationships.
Wheeler, Inc.
Wheeler, Inc.
Operating Data
Operating Data
1999
1998
1997
1999
1998
1997
Revenues
132%
123%
116%
Revenues
132%
123%
116%
Expenses
120%
116%
110%
Expenses
120%
116%
110%
Net income
313%
234%
203%
Net income
313%
234%
203%
1996
1996
109%
109%
106%
106%
158%
158%
1995
1995
100%
100%
100%
100%
100%
100%
$1,991 - $1,820 = $171
$171 ÷ $1,820 = 9% rounded
17-26
140
Trend line
for Sales
% of 100 Base
130
120
110
100
90
Sales
Expenses
1995
1996
1997
Years
1998
1999