CHAPTER 13
PowerPoint Author:
LuAnn Bean, Ph.D., CPA, CIA, CFE
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Factors in Communicating
Useful Information
The primary objective of accounting is to provide
information useful for decision making. To provide
information that supports this objective, accountants must
consider the following:
Users
Types of
Decisions
Information
Analysis
13-2
Methods of Analysis
Horizontal Analysis
Percentage Analysis
Vertical Analysis
Ratio Analysis
13-3
Milavec Company
Financial Statements
2015
2014
13-4
Milavec Company Balance Sheets
2015
2014
13-5
Horizontal and Percentage
Analysis
Horizontal analysis (or trend analysis)
refers to studying the behavior of
individual financial statement items over
several accounting periods.
Absolute
Amounts
Percentage Analysis
13-6
Milavec Company
Horizontal Analysis
2015
2014
13-7
Vertical Analysis
Vertical analysis uses
percentages to compare
individual components of
financial statements to a key
statement figure. A commonsize financial statement is a
vertical analysis in which
each financial statement item
is expressed as a
percentage.
13-8
Vertical Analysis of Income
Statement
In income
statements, all
items are
usually
expressed as a
percentage of
sales.
13-9
Milavec Company Vertical
Analysis
2015
2014
13-10
Vertical Analysis of
Balance Sheet
In balance
sheets, all items
are usually
expressed as a
percentage of
total assets.
13-11
2015
2014
13-12
Liquidity Ratios
Liquidity ratios indicate a
company’s ability to pay shortterm debts. They focus on
current assets and current
liabilities.
1. Working Capital
2. Current Ratio
3. Quick Ratio
4. Accounts Receivable Ratios
5. Inventory Ratios
13-13
Solvency Ratios
Solvency ratios are used to analyze
a company’s long-term debtpaying ability and its financing
structure.
1. Debt to Assets Ratio
2. Debt to Equity Ratio
3. Number of Times Interest Earned
4. Plant Assets to Long-Term Liabilities
13-14
Profitability Ratios
Profitability ratios measure a
company’s ability to generate
earnings.
1. Net Margin (or Return on Sales)
2. Asset Turnover Ratio
3. Return on Investment
4. Return on Equity
13-15
Stock Market Ratios
Stock market ratios analyze the
earnings and dividends of a
company.
1. Earnings Per Share
2. Book Value
3. Price-Earnings (PE) Ratio
4. Dividend Yield
13-16
Limitations of Financial
Statement Analysis
Different
Industries
Changing
Economic
Environment
Accounting
Principles
13-17
End of Chapter 13
13-18