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PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA

Jon A. Booker, Ph.D., CPA, CIA

Cnthia J. !oone, Ph.D., CPA

"inan#ial Statement AnalsisChapter 15

 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc !ll rights reser"e#

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Limitations of Financial Statement

Analysis

We use the LIFO method to

value inventory.

We use the average cost

method to value inventory.

Differences in accounting methods

between companies sometimes make

comparisons difficult.

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Limitations of Financial Statement

Analysis

Analysts should look beyond the ratios.

conomicfactors

Industrytrends

!hanges within

the company

"echnologicalchanges

!onsumer

tastes

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Statements in Comparative and

Common-Size Form

 Dollar and percentage  changes on statements

 !ommon#si$e  statements

 %atios

An item on a financialAn item on a financial

statement has littlestatement has little

meaning by itself. "hemeaning by itself. "he

meaning of the numbersmeaning of the numbers

can be enhanced bycan be enhanced by

drawing comparisons.drawing comparisons.

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Horizontal Analysis

Dollar 

!hange

!urrent &ear 

Figure

'ase &ear 

Figure( )

"he dollar

amounts for

last year

become the

*base+ year

figures.

!alculating !hange in Dollar Amounts

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,ercentage

!hange

Dollar !hange

  'ase &ear Figure -/( 0

Horizontal Analysis

!alculating !hange as a ,ercentage

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Trend Percentages

  "rend percentages

state several years1financial data in terms

of a base year 2 which

e3uals - percent.

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Trend Analysis

"rend

,ercentage

  !urrent &ear Amount

'ase &ear Amount-/( 0

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Common-Size Statements

4ertical analysis focuses

on the relationships

among financial

statement items at agiven point in time. A

common#si$e financial

statement is a vertical

analysis in which eachfinancial statement item

is e5pressed as a

percentage.

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ross !argin Percentage

6ross 7argin

,ercentage

  6ross 7argin

8ales(

"his measure indicates how muchof each sales dollar is left after

deducting the cost of goods sold to

cover e5penses and provide a profit.

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Financial Leverage

Financial leverage results from the difference between

the rate of return the company earns on investments

in its own assets and the rate of return that the

company must pay its creditors.

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P"#lished So"rces That Provide Comparative $atio %ata

$% $(

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&nd of Chapter 15