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17-1
CHAPTER 17CHAPTER 17
ANALYSISAND
INTERPRETATION OFFINANCIAL STATEMENTS
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Non-accounting majors, especially,shoul relate !ell to this chapter
"t loo#s at accounting in$ormation $romusers% perspecti&e
Relates &ery closely to topics you !illstuy in your $inance course
There$ore, !e !ill use a some!hat 'roaer'rush on this chapter
(hat is $inancial statement analysis)*Tearing apart* the $inancial statements
an loo#ing at the relationships
+inancial tatement Analysis+inancial tatement Analysis
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(ho analy.es $inancial statements) "nternal users /i0e0, management
Eternal users /emphasis o$ chapterEamples)
"n&estors, creitors, regulatory agencies 3 4
stoc# mar#et analysts an
auitors
+inancial tatement Analysis+inancial tatement Analysis526
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(hat o internal users use it $or)
Planning, e&aluating an controllingcompany operations
(hat o eternal users use it $or)
Assessing past per$ormance an current$inancial position an ma#ing preictions
a'out the $uture pro$ita'ility an sol&ency o$the company as !ell as e&aluating thee$$ecti&eness o$ management
+irst sentence in chapter says000
+inancial tatement Analysis+inancial tatement Analysis
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17-6
"n$ormation is a&aila'le $rom Pu'lishe annual reports
/1 +inancial statements
/2 Notes to $inancial statements
/ 8etters to stoc#holers
/ Auitor%s report /"nepenent accountants
/6 9anagement%s iscussion an analysis Reports $ile !ith the go&ernment
e0g0, +orm 1:-;, +orm 1:-< an +orm =-;
527 52=
+inancial tatement Analysis+inancial tatement Analysis
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"n$ormation is a&aila'le $rom >ther sources
/1 Ne!spapers /e0g0, Wall Street Journal
/2 Perioicals /e0g0 Forbes, Fortune
/ +inancial in$ormation organi.ations such
as? 9ooy%s,tanar 3 Poor%s, @un 3 rastreet, "nc0,an Ro'ert 9orris Associates
/ >ther 'usiness pu'lications
527 52=
+inancial tatement Analysis+inancial tatement Analysis
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Hori.ontal Analysis
Bertical Analysis
Common-i.e tatements
Tren Percentages
Ratio Analysis
9ethos o$ 9ethos o$
+inancial tatement Analysis+inancial tatement Analysis
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Hori.ontal AnalysisHori.ontal Analysis
sing comparati&e $inancialstatements to calculate ollar
or percentage changes in a$inancial statement item $rom
one perio to the net
sing comparati&e $inancialstatements to calculate ollar
or percentage changes in a$inancial statement item $rom
one perio to the net
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17-D
Bertical AnalysisBertical Analysis
+or a single $inancialstatement, each item
is epresse as apercentage o$ asigni$icant total,
e0g0, all incomestatement items areepresse as a
percentage o$ sales
+or a single $inancialstatement, each item
is epresse as apercentage o$ asigni$icant total,e0g0, all income
statement items areepresse as a
percentage o$ sales
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Common-i.e tatementsCommon-i.e tatements
+inancial statements that sho!only percentages an no
a'solute rupee amounts
+inancial statements that sho!only percentages an no
a'solute rupee amounts
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Tren PercentagesTren Percentages
ho! changes o&er time ingi&en $inancial statement items
/can help e&aluate $inancialin$ormation o$ se&eral years
ho! changes o&er time ingi&en $inancial statement items
/can help e&aluate $inancialin$ormation o$ se&eral years
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Ratio AnalysisRatio Analysis
Epression o$ logical relationships'et!een items in a $inancialstatement o$ a single perio/e0g0, percentage relationship
'et!een re&enue an net income
Epression o$ logical relationships'et!een items in a $inancialstatement o$ a single perio
/e0g0, percentage relationship'et!een re&enue an net income
1 1
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Hori.ontal Analysis EampleHori.ontal Analysis Eample
The management o$ Clo&er Companypro&ies you !ith comparati&e 'alancesheets o$ the years ene @ecem'er 1,
1DDD an 1DD=0 9anagement as#s you toprepare a hori.ontal analysishori.ontal analysis on the
in$ormation0
17 1
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17 16
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17-16
Calculating Change in @ollar Amounts
@ollar
Change
Current ear
+igure
ase ear
+igureF G
Hori.ontal Analysis EampleHori.ontal Analysis Eample
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17-15
Calculating Change in @ollar Amounts
ince !e are measuring the amount o$the change 'et!een 1DD= an 1DDD, the
ollar amounts $or 1DD= 'ecome the'ase* year $igures0
@ollar
Change
Current ear
+igure
ase ear
+igureF G
Hori.ontal Analysis EampleHori.ontal Analysis Eample
17 17
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17-17
Calculating Change as a Percentage
Percentage
Change
@ollar Change
ase ear +igure 1::IF J
Hori.ontal Analysis EampleHori.ontal Analysis Eample
17 1=
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17-1=
K12,::: G K2,6:: F K/11,6::
Hori.ontal Analysis EampleHori.ontal Analysis Eample
17 1D
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/K11,6:: L K2,6:: J 1::I F =0DI
Hori.ontal Analysis EampleHori.ontal Analysis Eample
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Hori.ontal Analysis EampleHori.ontal Analysis Eample
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8et%s apply the sameproceures to the
lia'ility an stoc#holers%eMuity sections o$ the
'alance sheet0
Hori.ontal Analysis EampleHori.ontal Analysis Eample
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C8>BER C>RP>RAT">N
Comparati&e alance heets
@ecem'er 1, 1DDD an 1DD=
"ncrease /@ecrease1DDD 1DD= Amount I
8ia'ilities an toc#holers EMuity
Current lia'ilities?
Accounts paya'le 57,:::K ,:::K 2,:::K 620
Notes paya'le ,::: 5,::: /,::: /6:0:
Total current lia'ilities 7:,::: 6:,::: 2:,::: :0:
8ong-term lia'ilities?
ons paya'le, =I 76,::: =:,::: /6,::: /50
Total lia'ilities 16,::: 1:,::: 16,::: 1106
toc#holers eMuity?
Pre$erre stoc# 2:,::: 2:,::: - :0:
Common stoc# 5:,::: 5:,::: - :0:
Aitional pai-in capital 1:,::: 1:,::: - :0:
Total pai-in capital D:,::: D:,::: - :0:
Retaine earnings =:,::: 5D,7:: 1:,:: 10=
Total stoc#holers eMuity 17:,::: 16D,7:: 1:,:: 50
Total lia'ilities an stoc#holers eMuity 16,:::K 2=D,7::K 26,::K =07
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17 2
No!, let%s apply theproceures to theincome statement0
Hori.ontal Analysis EampleHori.ontal Analysis Eample
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17 2
C8>BER C>RP>RAT">N
Comparati&e "ncome tatements+or the ears Ene @ecem'er 1, 1DDD an 1DD=
"ncrease /@ecrease
1DDD 1DD= Amount I
Net sales 62:,:::K =:,:::K :,:::K =0
Cost o$ goos sol 5:,::: 16,::: 6,::: 10
Oross margin 15:,::: 156,::: /6,::: /0:
>perating epenses 12=,5:: 125,::: 2,5:: 201
Net operating income 1,:: D,::: /7,5:: /1D06
"nterest epense 5,:: 7,::: /5:: /=05
Net income 'e$ore taes 26,::: 2,::: /7,::: /210D
8ess income taes /:I 7,6:: D,5:: /2,1:: /210DNet income 17,6::K 22,::K /,D::K /210D
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17 26
C8>BER C>RP>RAT">N
Comparati&e "ncome tatements+or the ears Ene @ecem'er 1, 1DDD an 1DD=
"ncrease /@ecrease
1DDD 1DD= Amount I
Net sales 62:,:::K =:,:::K :,:::K =0
Cost o$ goos sol 5:,::: 16,::: 6,::: 10
Oross margin 15:,::: 156,::: /6,::: /0:
>perating epenses 12=,5:: 125,::: 2,5:: 201
Net operating income 1,:: D,::: /7,5:: /1D06
"nterest epense 5,:: 7,::: /5:: /=05
Net income 'e$ore taes 26,::: 2,::: /7,::: /210D
8ess income taes /:I 7,6:: D,5:: /2,1:: /210DNet income 17,6::K 22,::K /,D::K /210D
ales increase 'y =0I !hile net
income ecrease 'y 210DI0
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C8>BER C>RP>RAT">N
Comparati&e "ncome tatements+or the ears Ene @ecem'er 1, 1DDD an 1DD=
"ncrease /@ecrease
1DDD 1DD= Amount I
Net sales 62:,:::K =:,:::K :,:::K =0
Cost o$ goos sol 5:,::: 16,::: 6,::: 10
Oross margin 15:,::: 156,::: /6,::: /0:
>perating epenses 12=,5:: 125,::: 2,5:: 201
Net operating income 1,:: D,::: /7,5:: /1D06
"nterest epense 5,:: 7,::: /5:: /=05
Net income 'e$ore taes 26,::: 2,::: /7,::: /210D
8ess income taes /:I 7,6:: D,5:: /2,1:: /210DNet income 17,6::K 22,::K /,D::K /210D
There !ere increases in 'oth cost o$ goossol /10I an operating epenses /201I0These increase costs more than o$$set the
increase in sales, yieling an o&erallecrease in net income0
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Bertical Analysis EampleBertical Analysis Eample
The management o$ ample Company as#syou to prepare a &ertical analysis&ertical analysis $or the
comparati&e 'alance sheets o$ the
company0
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Bertical Analysis EampleBertical Analysis Eample
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Bertical Analysis EampleBertical Analysis Eample
K=2,::: L K=,::: F 17I roune
K:,::: L K=7,::: F =I roune
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Bertical Analysis EampleBertical Analysis Eample
K75,::: L K=,::: F 15I roune
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Tren Percentages EampleTren Percentages Eample
(heeler, "nc0 pro&ies you !ith the $ollo!ingoperating ata an as#s that you prepare a
tren analysis0
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Tren Percentages EampleTren Percentages Eample
(heeler, "nc0 pro&ies you !ith the $ollo!ingoperating ata an as#s that you prepare a
tren analysis0
K1,DD1 - K1,=2: F K171K1,DD1 - K1,=2: F K171
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Tren line
$or ales