5. Interpreting Accounting Data

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Interpreting Accounting Data
Interpreting Accounting Data
We know
 That Accounting provides information for
decision making
 However, the figures on any one set of financial
statements are not especially revealing by
themselves. The gain significance when
compared to other Financial statements (either
past ones or ones from other companies). They
also become more important when they are
expressed in a manner that indicates developing
trends.
Interpreting Accounting Data
We know
 That Accounting provides information
for:
1. Owners (or Management)
2. Creditors (or Banks considering lending
money to the company)
3. Investors (when deciding whether to
invest in the company)
Interpreting Accounting Data
 Accounting Analysis
 There are 5 components that can be
used when analyzing a company
1. Analysis of Comparative Financial
Statements
2. Condensed Statement Analysis
3. Trend Analysis
4. Ratio Analysis
5. Comparison with a similar business &
Analysis of Non-Financial Factors
Analysis of Comparative
Statements
 Comparative financial statements
illustrate changes over several years
 Please open your textbook to page 659
and notice the changes in the
Comparative Income Statement for
McEwan Enterprises
Interpreting Accounting Data
 What can you tell me about the
difference in between Income
Statements in 20-2 from 20-1




Revenue?
COGS?
Operating Expenses?
Net Income?
Condensed Financial Statements
 Condensed Statements (Income &
Balance Sheet) provide single totals
for key items on the statements
 Many of you saw these statements in
your annual reports yesterday
 Please open your textbook to page 662
and notice how Cosentino Enterprises
has a Condensed Income Statement to
show the key amounts for each year
Condensed Income Statements
 This can also be shown in Percentage
(%) form. (bottom of 662)
 To change an Income Statement to
Percentage Form, you will need to
1. Give a 100% Value to Net Sales
2. Divide all other numbers by the Net
Sales total to get their percentage
Example:
Net Sales 450,000
Cost of Goods Sold 367,500
Condensed Balance Sheet
 Companies may also use Condensed
Balance Sheets to compare Assets,
Liabilities, and Owner’s Equity
 Page 663
 You would calculate the Percentage of
Current Assets, Fixed Assets, Current
Liabilities, Long-Term Liabilities, and
Owner’s Equity by using Total Assets as
your base figure (like Net Sales in the
Income Statement)
Condensed Income Statements
 On page 664, you will see what a
Common-Size Statement looks like
 Common-Size Statements show key
items as percentages (from previous
years), without dollar values
Condensed Financial
Statements
 My question is simple:
 Why do companies include these
condensed financial statements in the
annual report?
 Summarize lots of information into a few
lines
 Easier to spot trends occuring within the
business
 Example: Cost of Goods Sold becoming a larger
part of the costs
 Direct your attention to one particular area
of concern to focus on in further reports
Trend Analysis
 Trend Analysis is used to forecast
future results
 A company chooses a “base year” to
which all other years are compared
 Example: Net Income in 2009 was
$45 300,2010 was $46 400, 2011 $47
230
 What would a reasonable projection for
2012?
Trend Analysis
 Please see page 665 and Consentino
Enterprises
 What conclusions can we make?
Interpreting Accounting Data
 Practice Makes Perfect!
 Answer Questions 1,2,7,9,11,12 on page
666
 Page 667
 Ex 2,4,8,9
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