financial&managerial accounting_15e williamshakabettner chap 14

8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 14

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McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights

Financial StatementFinancial Statement

AnalysisAnalysisChapter 14


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14-2

R e s u l ti n s t a n d a

m e a n i n

s u b t o t a

I t e m s w i t h

c h a r a c t e r i

g r o u p e d t

C l a s s i f i e

F i n a n c i a

S t a t e m e n

H e l p s i ds i g n i f i c

c h a n g e s

t r e n d s

A m o u n t s f

s e v e r a l y e

a p p e a r s i d e

C o m p a r

F i n a n c

S t a t e m e

P r e s e n t e dt h e t w o c o m

a r e a s i n g

b u s i n e s s

I n f o r m a t i o n

p a r e n t a n d s

a r e p r e s e n

C o n s o l i d

F i n a n c i

S t a t e m e

Financial Statements AreFinancial Statements Are

Designed for AnalysisDesigned for Analysis


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14-3

Dollar &

PercentageChanges

TrendPercentages

ComponentPercentages

Ratios

Tools of AnalysisTools of Analysis


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14-4

Dollar and PercentageDollar and Percentage

ChangesChanges

Dollar Change:

Analysis Period

Amount

Base Period

Amount

Dollar

Change =

Percentage Change:

Dollar ChangeBase Period

AmountPercentChange =


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14-6

Component PercentagesComponent Percentages

Examine the relative size of each item in the financialstatements by computing component

(or common-sized) percentages.

ComponentPercentage

100%Analysis Amount

Base Amount=

Financial Statement Base Amount

Balance Sheet Total Assets

Income Statement Revenues


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P a s t p e r f o

p r e s e n t p e

O t h e r c o m

y o u r c o m

A l o n g w i t h d o l l a r a n d

t r e n d p e r c e n t a g e s , a n d

r a t i o s c a n b e u s e d

A r a t i o i s a s i m p l e m a t

o f t h e r e l a t i o n s h i p b e t w

RatiosRatios


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CurrentRatio

Current AssetsCurrent Liabilities

=

= 1.55 : 1

This ratio measures theshort-term debt-payingability of the company.

This ratio measures theshort-term debt-payingability of the company.

Current RatioCurrent Ratio

CurrentRatio

$65,000

$42,000

=


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Quick assetsare cash, marketablesecurities, and receivables.

This ratio is like the current

ratio but excludes current assetssuch as inventories that may be

difficult to quickly convert into cash.

Quick AssetsCurrent Liabilities

=QuickRatio

Quick RatioQuick Ratio


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R a t i o s h e l pu n d e r s t a

f i n a n c i a l r e l

R a t i o s p r o vq u i c k c o m p

o f c o m p a n

U s e s

M a n a g e m e ni n t o t r a n s a c t

t o i m p r o v e t

R a t i o s d o n oa n a l y s i s o f t h

p r o g r e s s t

n o n f i n a n c i a

L i m i t a t i o

Uses and Limitations ofUses and Limitations of

Financial RatiosFinancial Ratios


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An income statement can be prepared in either amultiple-step or single-step format.

The single-step formatis simpler. The multiple-step

format provides more detailedinformation.

Measures of ProfitabilityMeasures of Profitability


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Earning Per ShareEarning Per Share

Net IncomeAverage Shares of Capital Stock Outstanding

= EPS

Look back at the information from Babson and get theLook back at the information from Babson and get thevalues we need to calculate earning per share.values we need to calculate earning per share.

$53,690$53,690

27,40027,400= $1.96= $1.96


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Price-Earnings RatioPrice-Earnings Ratio

Current Market Price of one Share of StockEarnings Per Share

= P/E

$15.25$15.25$1.96$1.96

= 7.78= 7.78

The measure shows us the relationship between earning

of the company and the market price of its stock.


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This ratio is a good measure ofthe efficiency of utilization of

assets by the business.

Return On InvestmentReturn On Investment

(ROI)(ROI)

Annual return (profit) from and investment

Average amount investedROI =


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Operating CycleOperating Cycle

Cash

InventoryAccounts

Receivable

1.PurchaseofMerchandise

2. Sale of merchandise on account

3.C

olle

ctio

nof

accou

ntsre

ceiv

able


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financial&managerial accounting_15e williamshakabettner chap 14

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