?The McGraw-Hill Companies,Inc.,1999
Slide
14-1
Irwin/McGraw-Hill
Chapter 14
Financial Statement Analysis
The McGraw-Hill Companies,Inc.,1999
Slide
14-2
Irwin/McGraw-Hill
Purpose of Analysis
Internal Users External Users
Financial statement analysis helps users
make better decisions.
Managers
Officers
Internal Auditors
Shareholders
Lenders
Customers
The McGraw-Hill Companies,Inc.,1999
Slide
14-3
Irwin/McGraw-Hill
Purpose of Analysis
G r o w t h
i n s a l e s
R e t urn t o
s t oc k ho l de r s
P r o f i t
m a r g i n s
R e t urn on
e qu i t y
D e t e r m i n e d b y
a n a l y zi n g t h e
f i n a n c i a l
s t a t e m e n t s,
F i n a n c i a l m e a s u r e s a r e o f t e n u s e d
t o r a n k c o r p o r a t e p e r f o r m a n c e,
E x a m p l e m e a s u r e s i n c l u d e,
The McGraw-Hill Companies,Inc.,1999
Slide
14-4
Irwin/McGraw-Hill
Financial Statements are Designed
for AnalysisR e s ul t s
i n s t a nd a r di ze d,
m e a ni ngf ul
s ubt ot a l s,
I t e m s w i t h c e r t a i n
c ha r a c t e r i s t i c s a r e
gr ou pe d t og e t he r,
C l a s s i f i e d
F i n a n c i a l
S t a t e m e n t s
H e l ps i de nt i f y
s i g n i f i c a n t
c ha ng e s a nd
t r e nd s,
A m oun t s f r om
s e v e r a l y e a r s
a pp e a s i de by s i de,
C o m p a r a t i v e
F i n a n c i a l
S t a t e m e n t s
P r e s e nt e d a s i f
t h e t w o c o m p a n i e s
a r e a s i ng l e
bu s i ne s s un i t,
I nf orm a t i on f or t he
pa r e nt a nd s ub s i di a r y
a r e p r e s e n t e d,
C o n s o l i d a t e d
F i n a n c i a l
S t a t e m e n t s
The McGraw-Hill Companies,Inc.,1999
Slide
14-5
Irwin/McGraw-Hill
Tools of Analysis
Liquidity
and
Efficiency
Solvency
Profitability Market
Ability to meet
short-term
obligations and
to efficiently
generate
revenues
Ability to
generate future
revenues and
meet long-term
obligations
Ability to
generate
positive
market
expectations
Ability to provide
financial rewards
sufficient to
attract and retain
financing
The McGraw-Hill Companies,Inc.,1999
Slide
14-6
Irwin/McGraw-Hill
Dollar Change:
Analysis Period
Amount
Base Period
Amount
Dollar
Change =
Dollar and Percentage Changes
Percentage Change:
Dollar Change Base PeriodAmountPercentChange =%
The McGraw-Hill Companies,Inc.,1999
Slide
14-7
Irwin/McGraw-Hill
Dollar and Percentage Changes
S a l e s a n d e a r n i n g s
s h o u l d i n c r e a s e a t
m o r e t h a t t h e r a t e
o f i n f l a t i o n,
I n m e a s u r i n g q u a r t e r l y
c h a n g e s,c o m p a r e t o
t h e s a m e q u a r t e r i n
t h e p r e v i o u s y e a r,
P e r c e n t a g e s m a y b e
m i s l e a d i n g w h e n t h e
b a s e a m o u n t i s s m a l l,
E v a lu a t in g P e r c e n t a g e C h a n g e s
in S a le s a n d E a r n in g s
The McGraw-Hill Companies,Inc.,1999
Slide
14-8
Irwin/McGraw-Hill
Let s look at the asset
section of Clover
Corporation s comparative
balance sheet and income
statement for 2001 and
2000.
Compute the dollar change
and the percentage for
cash.
Dollar and Percentage Changes
Example
The McGraw-Hill Companies,Inc.,1999
Slide
14-9
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-10
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
$12,000?$23,500 = $(11,500)
The McGraw-Hill Companies,Inc.,1999
Slide
14-11
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$ -4 8, 9 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
($11,500?$23,500)?100% = 48.94%
Complete the
analysis for the
other assets.
The McGraw-Hill Companies,Inc.,1999
Slide
14-12
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$ -4 8, 9 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0 2 0,0 0 0 5 0, 0 %
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0 (2 0,0 0 0 ) -2 0, 0 %
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0 1,8 0 0 1 5 0, 0 %
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$ (9,7 0 0 ) -5, 9 %
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0 - 0, 0 %
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0 3 5,0 0 0 4 1, 2 %
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$ 3 5,0 0 0 2 8, 0 %
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 2 5,3 0 0$ 8, 7 %
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-13
Irwin/McGraw-Hill
Trend Analysis
Trend analysis is used to reveal patterns in data
covering successive periods.
Trend
Percent
Analysis Period Amount
Base Period Amount 100%=
The McGraw-Hill Companies,Inc.,1999
Slide
14-14
Irwin/McGraw-Hill
Trend Analysis
Example
1997 is the base period so its
amounts will equal 100%.
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-15
Irwin/McGraw-Hill
Trend Analysis
Example
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 105% 100%
C o s t o f s a l e s 104% 100%
G r o s s p r o f i t 108% 100%
( 2 9 0,0 0 0 ? 2 7 5,0 0 0 ) ? 100% = 105%
( 1 9 8,0 0 0 ? 1 9 0,0 0 0 ) ? 100% = 104%
( 9 2,0 0 0 ? 8 5,0 0 0 ) ? 100% = 108%
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-16
Irwin/McGraw-Hill
Trend Analysis
Example
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 145% 129% 116% 105% 100%
C o s t o f s a l e s 150% 132% 118% 104% 100%
G r o s s p r o f i t 135% 124% 112% 108% 100%
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-17
Irwin/McGraw-Hill
Component Percentages
Examine the relative size of each item in the
financial statements by computing component
(or common-sized) percentages.
Component
Percent 100%
Analysis Amount
Base Amount=
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
The McGraw-Hill Companies,Inc.,1999
Slide
14-18
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ 3, 8 % 8, 1 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p l e t e t h e c o m m o n - s i z e a n a l y s i s f o r t h e o t h e r
a s s e t s,
($12,000?$315,000)?100% = 3.8%
($23,500?$289,700)?100% = 8.1%
The McGraw-Hill Companies,Inc.,1999
Slide
14-19
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ 3, 8 % 8, 1 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0 1 9, 0 % 1 3, 8 %
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0 2 5, 4 % 3 4, 5 %
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0 1, 0 % 0, 4 %
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$ 4 9, 2 % 5 6, 9 %
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0 1 2, 7 % 1 3, 8 %
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0 3 8, 1 % 2 9, 3 %
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$ 5 0, 8 % 4 3, 1 %
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-20
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
L i a b i l i ti e s a n d Sh a r e h o l d e r s ' Eq u i ty
C u r r e n t l i a b i l i ti e s,
A c c o u n ts p a y a b l e 6 7,0 0 0$ 4 4,0 0 0$
N o te s p a y a b l e 3,0 0 0 6,0 0 0
T o ta l c u r r e n t l i a b i l i ti e s 7 0,0 0 0$ 5 0,0 0 0$
L o n g -te r m l i a b i l i ti e s,
B o n d s p a y a b l e,8 % 7 5,0 0 0 8 0,0 0 0
T o ta l l i a b i l i ti e s 1 4 5,0 0 0$ 1 3 0,0 0 0$
Sh a r e h o l d e r s ' e q u i ty,
Pr e fe r r e d s to c k 2 0,0 0 0 2 0,0 0 0
C o m m o n s to c k 6 0,0 0 0 6 0,0 0 0
A d d i ti o n a l p a i d -i n c a p i ta l 1 0,0 0 0 1 0,0 0 0
T o ta l p a i d -i n c a p i ta l 9 0,0 0 0$ 9 0,0 0 0$
R e ta i n e d e a r n i n g s 8 0,0 0 0 6 9,7 0 0
T o ta l s h a r e h o l d e r s ' e q u i ty 1 7 0,0 0 0$ 1 5 9,7 0 0$
T o ta l l i a b i l i ti e s a n d s h a r e h o l d e r s ' e q u i ty 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p l e te th e c o m m o n -s i z e a n a l y s i s fo r th e l i a b i l i ti e s a n d e q u i ty
a c c o u n ts,
The McGraw-Hill Companies,Inc.,1999
Slide
14-21
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
L i a b i l i ti e s a n d Sh a r e h o l d e r s ' Eq u i ty
C u r r e n t l i a b i l i ti e s,
A c c o u n ts p a y a b l e 6 7,0 0 0$ 4 4,0 0 0$ 2 1, 3 % 1 5, 2 %
N o te s p a y a b l e 3,0 0 0 6,0 0 0 1, 0 % 2, 1 %
T o ta l c u r r e n t l i a b i l i ti e s 7 0,0 0 0$ 5 0,0 0 0$ 2 2, 2 % 1 7, 3 %
L o n g -te r m l i a b i l i ti e s,
B o n d s p a y a b l e,8 % 7 5,0 0 0 8 0,0 0 0 2 3, 8 % 2 7, 6 %
T o ta l l i a b i l i ti e s 1 4 5,0 0 0$ 1 3 0,0 0 0$ 4 6, 0 % 4 4, 9 %
Sh a r e h o l d e r s ' e q u i ty,
Pr e fe r r e d s to c k 2 0,0 0 0 2 0,0 0 0 6, 3 % 6, 9 %
C o m m o n s to c k 6 0,0 0 0 6 0,0 0 0 1 9, 0 % 2 0, 7 %
A d d i ti o n a l p a i d -i n c a p i ta l 1 0,0 0 0 1 0,0 0 0 3, 2 % 3, 5 %
T o ta l p a i d -i n c a p i ta l 9 0,0 0 0$ 9 0,0 0 0$ 2 8, 6 % 3 1, 1 %
R e ta i n e d e a r n i n g s 8 0,0 0 0 6 9,7 0 0 2 5, 4 % 2 4, 1 %
T o ta l s h a r e h o l d e r s ' e q u i ty 1 7 0,0 0 0$ 1 5 9,7 0 0$ 5 4, 0 % 5 5, 1 %
T o ta l l i a b i l i ti e s a n d s h a r e h o l d e r s ' e q u i ty 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-22
Irwin/McGraw-Hill
C L O V E R C O R P O R A T I O N
C o m p a r a ti v e I n c o m e S ta te m e n ts
F o r th e Y e a r s E n d e d D e c e m b e r 3 1,
C o m m o n -s i z e
P e r c e n ts *
2001 2000 2001 2000
R e v e n u e s 5 2 0,0 0 0$ 4 8 0,0 0 0$
C o s ts a n d e x p e n s e s,
C o s t o f s a l e s 3 6 0,0 0 0 3 1 5,0 0 0
S e l l i n g a n d a d m i n, 1 2 8,6 0 0 1 2 6,0 0 0
I n te r e s t e x p e n s e 6,4 0 0 7,0 0 0
I n c o m e b e fo r e ta x e s 2 5,0 0 0$ 3 2,0 0 0$
I n c o m e ta x e s (3 0 % ) 7,5 0 0 9,6 0 0
N e t i n c o m e 1 7,5 0 0$ 2 2,4 0 0$
N e t i n c o m e p e r s h a r e 0, 7 9$ 1, 0 1$
A v g, # c o m m o n s h a r e s 2 2,2 0 0 2 2,2 0 0
* R o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p u te th e c o m m o n -s i z e p e r c e n ta g e s fo r
r e v e n u e s a n d e x p e n s e s,
The McGraw-Hill Companies,Inc.,1999
Slide
14-23
Irwin/McGraw-Hill
C L O V E R C O R P O R A T I O N
C o m p a r a ti v e I n c o m e S ta te m e n ts
F o r th e Y e a r s E n d e d D e c e m b e r 3 1,
C o m m o n -s i z e
P e r c e n ts *
2001 2000 2001 2000
R e v e n u e s 5 2 0,0 0 0$ 4 8 0,0 0 0$ 1 0 0, 0 % 1 0 0, 0 %
C o s ts a n d e x p e n s e s,
C o s t o f s a l e s 3 6 0,0 0 0 3 1 5,0 0 0 6 9, 2 % 6 5, 6 %
S e l l i n g a n d a d m i n, 1 2 8,6 0 0 1 2 6,0 0 0 2 4, 7 % 2 6, 3 %
I n te r e s t e x p e n s e 6,4 0 0 7,0 0 0 1, 2 % 1, 5 %
I n c o m e b e fo r e ta x e s 2 5,0 0 0$ 3 2,0 0 0$ 4, 8 % 6, 7 %
I n c o m e ta x e s (3 0 % ) 7,5 0 0 9,6 0 0 1, 4 % 2, 0 %
N e t i n c o m e 1 7,5 0 0$ 2 2,4 0 0$ 3, 4 % 4, 7 %
N e t i n c o m e p e r s h a r e 0, 7 9$ 1, 0 1$
A v g, # c o m m o n s h a r e s 2 2,2 0 0 2 2,2 0 0
* R o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-24
Irwin/McGraw-Hill
Common-Size Graphics
Example
Pe rc e nt
0%
20%
40%
60%
80%
100%
B ui l di ngs & e qui p.,ne t
La nd
Pre pa i d e x pe ns e s
I nv e nt or y
A c c oun t s re c e i v a bl e,ne t
C a s h a nd e qui v a l e nt s
This is a graphical analysis of Clover Corporation抯
common-size assets for 2001.
The McGraw-Hill Companies,Inc.,1999
Slide
14-25
Irwin/McGraw-Hill
Ratios
P a s t p e rf o rm a n c e t o
p re s e n t p e rf o rm a n c e,
O t h e r c o m p a n i e s t o
y o u r c o m p a n y,
A l o n g w i t h d o l l a r a n d p e rc e n t a g e c h a n g e s,
t re n d p e rc e n t a g e s,a n d c o m p o n e n t p e rc e n t a g e s,
ra t i o s c a n b e u s e d t o c o m p a re,
A ra t i o i s a s i m p l e m a t h e m a t i c a l e x p re s s i o n
o f t h e re l a t i o n s h i p b e t we e n o n e i t e m a n d a n o t h e r.
The McGraw-Hill Companies,Inc.,1999
Slide
14-26
Irwin/McGraw-Hill
N O R TO N C O R P O R A TI O N
2001
C a s h 3 0,0 0 0$
A c c ou nt s r e c e i v a bl e,ne t
B e gi nn i ng of y e a r 1 7,0 0 0
E nd of y e a r 2 0,0 0 0
I nv e nt or y
B e gi nn i ng of y e a r 1 0,0 0 0
E nd of y e a r 1 2,0 0 0
To t a l c ur r e nt a s s e t s 6 5,0 0 0
To t a l c ur r e nt l i a bi l i t i e s 4 2,0 0 0
To t a l l i a bi l i t i e s 1 0 3,9 1 7
To t a l a s s e t s
B e gi nn i ng of y e a r 3 0 0,0 0 0
E nd of y e a r 3 4 6,3 9 0
R e v e nu e s 4 9 4,0 0 0
Use this
information to
calculate the
liquidity ratios
for Norton
Corporation.
The McGraw-Hill Companies,Inc.,1999
Slide
14-27
Irwin/McGraw-Hill
Working Capital
N o r t o n C o r p o r a t i o n D e c, 3 1,2 0 0 1
C u r r e n t a s s e t s 6 5,0 0 0$
C u r r e n t l i a b i l i t i e s ( 4 2,0 0 0 )
W o r k i n g c a p i t a l 2 3,0 0 0$
Working capital is the excess of current
assets over current liabilities.
The McGraw-Hill Companies,Inc.,1999
Slide
14-28
Irwin/McGraw-Hill
Current Ratio
Current
Ratio
Current Assets
Current Liabilities=
Current
Ratio
$65,000
$42,000= = 1.55, 1
This ratio measures
the short-term debt-
paying ability of the
company.
The McGraw-Hill Companies,Inc.,1999
Slide
14-29
Irwin/McGraw-Hill
Quick Ratio
Quick assets are cash,marketable securities,
and receivables.
This ratio is like the current
ratio but excludes current assets
such as inventories that may be
difficult to quickly convert into cash,
Quick Assets
Current Liabilities=
Quick
Ratio
The McGraw-Hill Companies,Inc.,1999
Slide
14-30
Irwin/McGraw-Hill
Quick Assets
Current Liabilities=
Quick
Ratio
$50,000
$42,000 = 1.19, 1=
Quick
Ratio
Quick Ratio
This ratio is like the current
ratio but excludes current assets
such as inventories that may be
difficult to quickly convert into cash,
The McGraw-Hill Companies,Inc.,1999
Slide
14-31
Irwin/McGraw-Hill
Debt Ratio
A measure of creditor抯 long-term risk,
The smaller the percentage of assets that
are financed by debt,the smaller the risk
for creditors.
D e bt
R a t i o =
Tot a l
Li a bi l i t i e s Tot a l A s s e t s
= 1 0 3,9 1 7$ 3 4 6,3 9 0$
= 3 0, 0 0 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-32
Irwin/McGraw-Hill
Debt Ratio
A measure of creditor抯 long-term risk,
The smaller the percentage of assets that
are financed by debt,the smaller the risk
for creditors.
D e bt
R a t i o
=
Tot a l
Li a bi l i t i e s
Tot a l A s s e t s
= 1 0 3,9 1 7$ 3 4 6,3 9 0$
= 3 0, 0 0 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-33
Irwin/McGraw-Hill
Usefulness and Limitations of
Financial Ratios
R a t i o s h e l p u s e r s
u n d e r s t a n d
f i n a n c i a l r e l a t i o n s h i p s,
R a t i o s p r o v i d e f o r
q u i c k c o m p a r i s o n
o f c o m p a n i e s,
U s e s
M a n a g e m e n t m a y e n t e r
i n t o t r a n s a c t i o n s m e r e l y
t o i m p r o v e t h e r a t i o s,
R a t i o s d o n o t h e l p w i t h
a n a l y s i s o f t h e c o m p a n y ' s
p r o g r e s s t o w a r d
n o n f i n a n c i a l g o a l s,
L im ita tio n s
The McGraw-Hill Companies,Inc.,1999
Slide
14-34
Irwin/McGraw-Hill
Profitability
An income statement can be prepared in either a
multiple-step or single-step format.
The single-step format is simpler.
The multiple-step format provides
more detailed information.
The McGraw-Hill Companies,Inc.,1999
Slide
14-35
Irwin/McGraw-Hill
C e n t r a l C o m p a n y
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d 1 2 / 3 1 / 9 9
S a l e s,n e t 7 8 5,2 5 0$
C o s t o f g o o d s s o l d 3 5 1,8 0 0
G r o s s m a r g i n 4 3 3,4 5 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1 9 7,3 5 0$
G e n e r a l & A d m i n, 7 8,5 0 0
D e p r e c i a t i o n 1 7,5 0 0 2 9 3,3 5 0
I n c o m e f r o m O p e r a t i o n s 1 4 0,1 0 0$
O t h e r r e v e n u e s & g a i n s,
I n t e r e s t i n c o m e 6 2,1 8 7$
G a i n 2 4,6 0 0 8 6,7 8 7
O t h e r e x p e n s e s,
I n t e r e s t 2 7,0 0 0$
L o s s 9,0 0 0 ( 3 6,0 0 0 )
I n c o m e b e f o r e t a x e s 1 9 0,8 8 7$
I n c o m e t a x e s 6 2,5 0 0
N e t i n c o m e 1 2 8,3 8 7$
Proper Heading {
Gross
Margin {
Operating
Expenses {
{Non-operating Items
Income Statement (Multiple-Step) Example
Remember to
compute EPS.
The McGraw-Hill Companies,Inc.,1999
Slide
14-36
Irwin/McGraw-Hill
C e n t r a l C o m p a n y
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d 1 2 / 3 1 / 9 9
R e v e n u e s a n d g a i n s,
S a l e s,n e t 7 8 5,2 5 0$
I n t e r e s t i n c o m e 6 2,1 8 7
G a i n o n s a l e o f p l a n t a s s e t s 2 4,6 0 0
T o t a l r e v e n u e s a n d g a i n s 8 7 2,0 3 7$
E x p e n s e s a n d l o s s e s,
C o s t o f g o o d s s o l d 3 5 1,8 0 0$
S e l l i n g E x p e n s e s 1 9 7,3 5 0
G e n e r a l a n d A d m i n, E x p, 7 8,5 0 0
D e p r e c i a t i o n 1 7,5 0 0
I n t e r e s t 2 7,0 0 0
I n c o m e t a x e s 6 2,5 0 0
L o s s, s a l e o f i n v e s t m e n t 9,0 0 0
T o t a l e x p e n s e s & l o s s e s 7 4 3,6 5 0
O p e r a t i n g i n c o m e 1 2 8,3 8 7$
Proper Heading {
Income Statement (Single-Step) Example
Expenses
& Losses {
Revenues
& Gains {
Remember to
compute EPS.
The McGraw-Hill Companies,Inc.,1999
Slide
14-37
Irwin/McGraw-Hill
Use this
information
to calculate
the
profitability
ratios for
Norton
Corporation.
N O R T O N C O R PO R A T I O N
2001
N u m b e r o f c o m m o n
s h a r e s o u t s t a n d i n g a l l o f
1998 2 7,4 0 0
N e t i n c o m e 5 3,6 9 0$
S h a r e h o l d e r s ' e q u i t y
B e g i n n i n g o f y e a r 1 8 0,0 0 0
E n d o f y e a r 2 3 4,3 9 0
R e v e n u e s 4 9 4,0 0 0
C o s t o f s a l e s 1 4 0,0 0 0
T o t a l a s s e t s
B e g i n n i n g o f y e a r 3 0 0,0 0 0
E n d o f y e a r 3 4 6,3 9 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-38
Irwin/McGraw-Hill
Return On Investment (ROI)
Used by investors to evaluate the
efficiency with which financial
resources are employed.
R O I = R e t u r n
A v e r a g e
a m o u n t
i n v e s t e d
= 5 3,6 9 0$ 4 9 4,0 0 0$
= 1 0, 8 7 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-39
Irwin/McGraw-Hill
Return On Assets (ROA)
This ratio is generally considered
the best overall measure of a
company抯 profitability.
R O A =
O pe r a t i ng
i nc om e
A v e r a ge t ot a l a s s e t s
= 5 3,6 9 0$ ( $ 3 0 0,0 0 0 + $ 3 4 6,3 9 0 )? 2
= 1 6, 6 1 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-40
Irwin/McGraw-Hill
Return On Equity (ROE)
R O E =
O pe r a t i ng
i nc om e
A v e r a ge t ot a l s t oc k hol de r s '
e qui t y
= 5 3,6 9 0$ ( $ 1 8 0,0 0 0 + $ 2 3 4,3 9 0 )? 2
= 2 5, 9 1 %
This measure indicates how well the
company employed the
owners?investments to earn income.
The McGraw-Hill Companies,Inc.,1999
Slide
14-41
Irwin/McGraw-Hill
Sources of Financial Information
C a n b e
a u d i t e d o r
u n a u d i t e d,
A n n u a l a n d
q u a rt e rl y
f i n a n c i a l
re p o rt s,
R e p o rt s f i l e d
w i t h t h e S E C b y
p u b l i c l y o w n e d
c o m p a n i e s,
I n t e rn e t a n d
o t h e r f re e
s o u rc e s,
D e t a i l e d
a n a l y s e s b y
f i n a n c i a l
a n a l y s t s,
The McGraw-Hill Companies,Inc.,1999
Slide
14-42
Irwin/McGraw-Hill
No more ratios,please!
Slide
14-1
Irwin/McGraw-Hill
Chapter 14
Financial Statement Analysis
The McGraw-Hill Companies,Inc.,1999
Slide
14-2
Irwin/McGraw-Hill
Purpose of Analysis
Internal Users External Users
Financial statement analysis helps users
make better decisions.
Managers
Officers
Internal Auditors
Shareholders
Lenders
Customers
The McGraw-Hill Companies,Inc.,1999
Slide
14-3
Irwin/McGraw-Hill
Purpose of Analysis
G r o w t h
i n s a l e s
R e t urn t o
s t oc k ho l de r s
P r o f i t
m a r g i n s
R e t urn on
e qu i t y
D e t e r m i n e d b y
a n a l y zi n g t h e
f i n a n c i a l
s t a t e m e n t s,
F i n a n c i a l m e a s u r e s a r e o f t e n u s e d
t o r a n k c o r p o r a t e p e r f o r m a n c e,
E x a m p l e m e a s u r e s i n c l u d e,
The McGraw-Hill Companies,Inc.,1999
Slide
14-4
Irwin/McGraw-Hill
Financial Statements are Designed
for AnalysisR e s ul t s
i n s t a nd a r di ze d,
m e a ni ngf ul
s ubt ot a l s,
I t e m s w i t h c e r t a i n
c ha r a c t e r i s t i c s a r e
gr ou pe d t og e t he r,
C l a s s i f i e d
F i n a n c i a l
S t a t e m e n t s
H e l ps i de nt i f y
s i g n i f i c a n t
c ha ng e s a nd
t r e nd s,
A m oun t s f r om
s e v e r a l y e a r s
a pp e a s i de by s i de,
C o m p a r a t i v e
F i n a n c i a l
S t a t e m e n t s
P r e s e nt e d a s i f
t h e t w o c o m p a n i e s
a r e a s i ng l e
bu s i ne s s un i t,
I nf orm a t i on f or t he
pa r e nt a nd s ub s i di a r y
a r e p r e s e n t e d,
C o n s o l i d a t e d
F i n a n c i a l
S t a t e m e n t s
The McGraw-Hill Companies,Inc.,1999
Slide
14-5
Irwin/McGraw-Hill
Tools of Analysis
Liquidity
and
Efficiency
Solvency
Profitability Market
Ability to meet
short-term
obligations and
to efficiently
generate
revenues
Ability to
generate future
revenues and
meet long-term
obligations
Ability to
generate
positive
market
expectations
Ability to provide
financial rewards
sufficient to
attract and retain
financing
The McGraw-Hill Companies,Inc.,1999
Slide
14-6
Irwin/McGraw-Hill
Dollar Change:
Analysis Period
Amount
Base Period
Amount
Dollar
Change =
Dollar and Percentage Changes
Percentage Change:
Dollar Change Base PeriodAmountPercentChange =%
The McGraw-Hill Companies,Inc.,1999
Slide
14-7
Irwin/McGraw-Hill
Dollar and Percentage Changes
S a l e s a n d e a r n i n g s
s h o u l d i n c r e a s e a t
m o r e t h a t t h e r a t e
o f i n f l a t i o n,
I n m e a s u r i n g q u a r t e r l y
c h a n g e s,c o m p a r e t o
t h e s a m e q u a r t e r i n
t h e p r e v i o u s y e a r,
P e r c e n t a g e s m a y b e
m i s l e a d i n g w h e n t h e
b a s e a m o u n t i s s m a l l,
E v a lu a t in g P e r c e n t a g e C h a n g e s
in S a le s a n d E a r n in g s
The McGraw-Hill Companies,Inc.,1999
Slide
14-8
Irwin/McGraw-Hill
Let s look at the asset
section of Clover
Corporation s comparative
balance sheet and income
statement for 2001 and
2000.
Compute the dollar change
and the percentage for
cash.
Dollar and Percentage Changes
Example
The McGraw-Hill Companies,Inc.,1999
Slide
14-9
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-10
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
$12,000?$23,500 = $(11,500)
The McGraw-Hill Companies,Inc.,1999
Slide
14-11
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$ -4 8, 9 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
($11,500?$23,500)?100% = 48.94%
Complete the
analysis for the
other assets.
The McGraw-Hill Companies,Inc.,1999
Slide
14-12
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
2001 2000
D o l l a r
C h a n g e
Pe r c e n t
C h a n g e *
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ (1 1,5 0 0 )$ -4 8, 9 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0 2 0,0 0 0 5 0, 0 %
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0 (2 0,0 0 0 ) -2 0, 0 %
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0 1,8 0 0 1 5 0, 0 %
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$ (9,7 0 0 ) -5, 9 %
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0 - 0, 0 %
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0 3 5,0 0 0 4 1, 2 %
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$ 3 5,0 0 0 2 8, 0 %
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 2 5,3 0 0$ 8, 7 %
* Pe r c e n t r o u n d e d to o n e d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-13
Irwin/McGraw-Hill
Trend Analysis
Trend analysis is used to reveal patterns in data
covering successive periods.
Trend
Percent
Analysis Period Amount
Base Period Amount 100%=
The McGraw-Hill Companies,Inc.,1999
Slide
14-14
Irwin/McGraw-Hill
Trend Analysis
Example
1997 is the base period so its
amounts will equal 100%.
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-15
Irwin/McGraw-Hill
Trend Analysis
Example
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 105% 100%
C o s t o f s a l e s 104% 100%
G r o s s p r o f i t 108% 100%
( 2 9 0,0 0 0 ? 2 7 5,0 0 0 ) ? 100% = 105%
( 1 9 8,0 0 0 ? 1 9 0,0 0 0 ) ? 100% = 104%
( 9 2,0 0 0 ? 8 5,0 0 0 ) ? 100% = 108%
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-16
Irwin/McGraw-Hill
Trend Analysis
Example
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 145% 129% 116% 105% 100%
C o s t o f s a l e s 150% 132% 118% 104% 100%
G r o s s p r o f i t 135% 124% 112% 108% 100%
Berry Products
Income Information
For the Years Ended December 31,
I t e m 2001 2000 1999 1998 1997
R e v e n u e s 4 0 0,0 0 0$ 3 5 5,0 0 0$ 3 2 0,0 0 0$ 2 9 0,0 0 0$ 2 7 5,0 0 0$
C o s t o f s a l e s 2 8 5,0 0 0 2 5 0,0 0 0 2 2 5,0 0 0 1 9 8,0 0 0 1 9 0,0 0 0
G r o s s p r o f i t 1 1 5,0 0 0 1 0 5,0 0 0 9 5,0 0 0 9 2,0 0 0 8 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-17
Irwin/McGraw-Hill
Component Percentages
Examine the relative size of each item in the
financial statements by computing component
(or common-sized) percentages.
Component
Percent 100%
Analysis Amount
Base Amount=
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
The McGraw-Hill Companies,Inc.,1999
Slide
14-18
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ 3, 8 % 8, 1 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p l e t e t h e c o m m o n - s i z e a n a l y s i s f o r t h e o t h e r
a s s e t s,
($12,000?$315,000)?100% = 3.8%
($23,500?$289,700)?100% = 8.1%
The McGraw-Hill Companies,Inc.,1999
Slide
14-19
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
A s s e ts
C u r r e n t a s s e ts,
C a s h a n d e q u i v a l e n ts 1 2,0 0 0$ 2 3,5 0 0$ 3, 8 % 8, 1 %
A c c o u n ts r e c e i v a b l e,n e t 6 0,0 0 0 4 0,0 0 0 1 9, 0 % 1 3, 8 %
I n v e n to r y 8 0,0 0 0 1 0 0,0 0 0 2 5, 4 % 3 4, 5 %
Pr e p a i d e x p e n s e s 3,0 0 0 1,2 0 0 1, 0 % 0, 4 %
T o ta l c u r r e n t a s s e ts 1 5 5,0 0 0$ 1 6 4,7 0 0$ 4 9, 2 % 5 6, 9 %
Pr o p e r ty a n d e q u i p m e n t:
L a n d 4 0,0 0 0 4 0,0 0 0 1 2, 7 % 1 3, 8 %
B u i l d i n g s a n d e q u i p m e n t,n e t 1 2 0,0 0 0 8 5,0 0 0 3 8, 1 % 2 9, 3 %
T o ta l p r o p e r ty a n d e q u i p m e n t 1 6 0,0 0 0$ 1 2 5,0 0 0$ 5 0, 8 % 4 3, 1 %
T o ta l a s s e ts 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-20
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
L i a b i l i ti e s a n d Sh a r e h o l d e r s ' Eq u i ty
C u r r e n t l i a b i l i ti e s,
A c c o u n ts p a y a b l e 6 7,0 0 0$ 4 4,0 0 0$
N o te s p a y a b l e 3,0 0 0 6,0 0 0
T o ta l c u r r e n t l i a b i l i ti e s 7 0,0 0 0$ 5 0,0 0 0$
L o n g -te r m l i a b i l i ti e s,
B o n d s p a y a b l e,8 % 7 5,0 0 0 8 0,0 0 0
T o ta l l i a b i l i ti e s 1 4 5,0 0 0$ 1 3 0,0 0 0$
Sh a r e h o l d e r s ' e q u i ty,
Pr e fe r r e d s to c k 2 0,0 0 0 2 0,0 0 0
C o m m o n s to c k 6 0,0 0 0 6 0,0 0 0
A d d i ti o n a l p a i d -i n c a p i ta l 1 0,0 0 0 1 0,0 0 0
T o ta l p a i d -i n c a p i ta l 9 0,0 0 0$ 9 0,0 0 0$
R e ta i n e d e a r n i n g s 8 0,0 0 0 6 9,7 0 0
T o ta l s h a r e h o l d e r s ' e q u i ty 1 7 0,0 0 0$ 1 5 9,7 0 0$
T o ta l l i a b i l i ti e s a n d s h a r e h o l d e r s ' e q u i ty 3 1 5,0 0 0$ 2 8 9,7 0 0$
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p l e te th e c o m m o n -s i z e a n a l y s i s fo r th e l i a b i l i ti e s a n d e q u i ty
a c c o u n ts,
The McGraw-Hill Companies,Inc.,1999
Slide
14-21
Irwin/McGraw-Hill
C L O V ER C O R PO R A T I O N
C o m p a r a ti v e B a l a n c e Sh e e ts
D e c e m b e r 3 1,
C o m m o n -s i z e
Pe r c e n ts *
2001 2000 2001 2000
L i a b i l i ti e s a n d Sh a r e h o l d e r s ' Eq u i ty
C u r r e n t l i a b i l i ti e s,
A c c o u n ts p a y a b l e 6 7,0 0 0$ 4 4,0 0 0$ 2 1, 3 % 1 5, 2 %
N o te s p a y a b l e 3,0 0 0 6,0 0 0 1, 0 % 2, 1 %
T o ta l c u r r e n t l i a b i l i ti e s 7 0,0 0 0$ 5 0,0 0 0$ 2 2, 2 % 1 7, 3 %
L o n g -te r m l i a b i l i ti e s,
B o n d s p a y a b l e,8 % 7 5,0 0 0 8 0,0 0 0 2 3, 8 % 2 7, 6 %
T o ta l l i a b i l i ti e s 1 4 5,0 0 0$ 1 3 0,0 0 0$ 4 6, 0 % 4 4, 9 %
Sh a r e h o l d e r s ' e q u i ty,
Pr e fe r r e d s to c k 2 0,0 0 0 2 0,0 0 0 6, 3 % 6, 9 %
C o m m o n s to c k 6 0,0 0 0 6 0,0 0 0 1 9, 0 % 2 0, 7 %
A d d i ti o n a l p a i d -i n c a p i ta l 1 0,0 0 0 1 0,0 0 0 3, 2 % 3, 5 %
T o ta l p a i d -i n c a p i ta l 9 0,0 0 0$ 9 0,0 0 0$ 2 8, 6 % 3 1, 1 %
R e ta i n e d e a r n i n g s 8 0,0 0 0 6 9,7 0 0 2 5, 4 % 2 4, 1 %
T o ta l s h a r e h o l d e r s ' e q u i ty 1 7 0,0 0 0$ 1 5 9,7 0 0$ 5 4, 0 % 5 5, 1 %
T o ta l l i a b i l i ti e s a n d s h a r e h o l d e r s ' e q u i ty 3 1 5,0 0 0$ 2 8 9,7 0 0$ 1 0 0, 0 % 1 0 0, 0 %
* Pe r c e n t r o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-22
Irwin/McGraw-Hill
C L O V E R C O R P O R A T I O N
C o m p a r a ti v e I n c o m e S ta te m e n ts
F o r th e Y e a r s E n d e d D e c e m b e r 3 1,
C o m m o n -s i z e
P e r c e n ts *
2001 2000 2001 2000
R e v e n u e s 5 2 0,0 0 0$ 4 8 0,0 0 0$
C o s ts a n d e x p e n s e s,
C o s t o f s a l e s 3 6 0,0 0 0 3 1 5,0 0 0
S e l l i n g a n d a d m i n, 1 2 8,6 0 0 1 2 6,0 0 0
I n te r e s t e x p e n s e 6,4 0 0 7,0 0 0
I n c o m e b e fo r e ta x e s 2 5,0 0 0$ 3 2,0 0 0$
I n c o m e ta x e s (3 0 % ) 7,5 0 0 9,6 0 0
N e t i n c o m e 1 7,5 0 0$ 2 2,4 0 0$
N e t i n c o m e p e r s h a r e 0, 7 9$ 1, 0 1$
A v g, # c o m m o n s h a r e s 2 2,2 0 0 2 2,2 0 0
* R o u n d e d to fi r s t d e c i m a l p o i n t.
C o m p u te th e c o m m o n -s i z e p e r c e n ta g e s fo r
r e v e n u e s a n d e x p e n s e s,
The McGraw-Hill Companies,Inc.,1999
Slide
14-23
Irwin/McGraw-Hill
C L O V E R C O R P O R A T I O N
C o m p a r a ti v e I n c o m e S ta te m e n ts
F o r th e Y e a r s E n d e d D e c e m b e r 3 1,
C o m m o n -s i z e
P e r c e n ts *
2001 2000 2001 2000
R e v e n u e s 5 2 0,0 0 0$ 4 8 0,0 0 0$ 1 0 0, 0 % 1 0 0, 0 %
C o s ts a n d e x p e n s e s,
C o s t o f s a l e s 3 6 0,0 0 0 3 1 5,0 0 0 6 9, 2 % 6 5, 6 %
S e l l i n g a n d a d m i n, 1 2 8,6 0 0 1 2 6,0 0 0 2 4, 7 % 2 6, 3 %
I n te r e s t e x p e n s e 6,4 0 0 7,0 0 0 1, 2 % 1, 5 %
I n c o m e b e fo r e ta x e s 2 5,0 0 0$ 3 2,0 0 0$ 4, 8 % 6, 7 %
I n c o m e ta x e s (3 0 % ) 7,5 0 0 9,6 0 0 1, 4 % 2, 0 %
N e t i n c o m e 1 7,5 0 0$ 2 2,4 0 0$ 3, 4 % 4, 7 %
N e t i n c o m e p e r s h a r e 0, 7 9$ 1, 0 1$
A v g, # c o m m o n s h a r e s 2 2,2 0 0 2 2,2 0 0
* R o u n d e d to fi r s t d e c i m a l p o i n t.
The McGraw-Hill Companies,Inc.,1999
Slide
14-24
Irwin/McGraw-Hill
Common-Size Graphics
Example
Pe rc e nt
0%
20%
40%
60%
80%
100%
B ui l di ngs & e qui p.,ne t
La nd
Pre pa i d e x pe ns e s
I nv e nt or y
A c c oun t s re c e i v a bl e,ne t
C a s h a nd e qui v a l e nt s
This is a graphical analysis of Clover Corporation抯
common-size assets for 2001.
The McGraw-Hill Companies,Inc.,1999
Slide
14-25
Irwin/McGraw-Hill
Ratios
P a s t p e rf o rm a n c e t o
p re s e n t p e rf o rm a n c e,
O t h e r c o m p a n i e s t o
y o u r c o m p a n y,
A l o n g w i t h d o l l a r a n d p e rc e n t a g e c h a n g e s,
t re n d p e rc e n t a g e s,a n d c o m p o n e n t p e rc e n t a g e s,
ra t i o s c a n b e u s e d t o c o m p a re,
A ra t i o i s a s i m p l e m a t h e m a t i c a l e x p re s s i o n
o f t h e re l a t i o n s h i p b e t we e n o n e i t e m a n d a n o t h e r.
The McGraw-Hill Companies,Inc.,1999
Slide
14-26
Irwin/McGraw-Hill
N O R TO N C O R P O R A TI O N
2001
C a s h 3 0,0 0 0$
A c c ou nt s r e c e i v a bl e,ne t
B e gi nn i ng of y e a r 1 7,0 0 0
E nd of y e a r 2 0,0 0 0
I nv e nt or y
B e gi nn i ng of y e a r 1 0,0 0 0
E nd of y e a r 1 2,0 0 0
To t a l c ur r e nt a s s e t s 6 5,0 0 0
To t a l c ur r e nt l i a bi l i t i e s 4 2,0 0 0
To t a l l i a bi l i t i e s 1 0 3,9 1 7
To t a l a s s e t s
B e gi nn i ng of y e a r 3 0 0,0 0 0
E nd of y e a r 3 4 6,3 9 0
R e v e nu e s 4 9 4,0 0 0
Use this
information to
calculate the
liquidity ratios
for Norton
Corporation.
The McGraw-Hill Companies,Inc.,1999
Slide
14-27
Irwin/McGraw-Hill
Working Capital
N o r t o n C o r p o r a t i o n D e c, 3 1,2 0 0 1
C u r r e n t a s s e t s 6 5,0 0 0$
C u r r e n t l i a b i l i t i e s ( 4 2,0 0 0 )
W o r k i n g c a p i t a l 2 3,0 0 0$
Working capital is the excess of current
assets over current liabilities.
The McGraw-Hill Companies,Inc.,1999
Slide
14-28
Irwin/McGraw-Hill
Current Ratio
Current
Ratio
Current Assets
Current Liabilities=
Current
Ratio
$65,000
$42,000= = 1.55, 1
This ratio measures
the short-term debt-
paying ability of the
company.
The McGraw-Hill Companies,Inc.,1999
Slide
14-29
Irwin/McGraw-Hill
Quick Ratio
Quick assets are cash,marketable securities,
and receivables.
This ratio is like the current
ratio but excludes current assets
such as inventories that may be
difficult to quickly convert into cash,
Quick Assets
Current Liabilities=
Quick
Ratio
The McGraw-Hill Companies,Inc.,1999
Slide
14-30
Irwin/McGraw-Hill
Quick Assets
Current Liabilities=
Quick
Ratio
$50,000
$42,000 = 1.19, 1=
Quick
Ratio
Quick Ratio
This ratio is like the current
ratio but excludes current assets
such as inventories that may be
difficult to quickly convert into cash,
The McGraw-Hill Companies,Inc.,1999
Slide
14-31
Irwin/McGraw-Hill
Debt Ratio
A measure of creditor抯 long-term risk,
The smaller the percentage of assets that
are financed by debt,the smaller the risk
for creditors.
D e bt
R a t i o =
Tot a l
Li a bi l i t i e s Tot a l A s s e t s
= 1 0 3,9 1 7$ 3 4 6,3 9 0$
= 3 0, 0 0 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-32
Irwin/McGraw-Hill
Debt Ratio
A measure of creditor抯 long-term risk,
The smaller the percentage of assets that
are financed by debt,the smaller the risk
for creditors.
D e bt
R a t i o
=
Tot a l
Li a bi l i t i e s
Tot a l A s s e t s
= 1 0 3,9 1 7$ 3 4 6,3 9 0$
= 3 0, 0 0 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-33
Irwin/McGraw-Hill
Usefulness and Limitations of
Financial Ratios
R a t i o s h e l p u s e r s
u n d e r s t a n d
f i n a n c i a l r e l a t i o n s h i p s,
R a t i o s p r o v i d e f o r
q u i c k c o m p a r i s o n
o f c o m p a n i e s,
U s e s
M a n a g e m e n t m a y e n t e r
i n t o t r a n s a c t i o n s m e r e l y
t o i m p r o v e t h e r a t i o s,
R a t i o s d o n o t h e l p w i t h
a n a l y s i s o f t h e c o m p a n y ' s
p r o g r e s s t o w a r d
n o n f i n a n c i a l g o a l s,
L im ita tio n s
The McGraw-Hill Companies,Inc.,1999
Slide
14-34
Irwin/McGraw-Hill
Profitability
An income statement can be prepared in either a
multiple-step or single-step format.
The single-step format is simpler.
The multiple-step format provides
more detailed information.
The McGraw-Hill Companies,Inc.,1999
Slide
14-35
Irwin/McGraw-Hill
C e n t r a l C o m p a n y
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d 1 2 / 3 1 / 9 9
S a l e s,n e t 7 8 5,2 5 0$
C o s t o f g o o d s s o l d 3 5 1,8 0 0
G r o s s m a r g i n 4 3 3,4 5 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1 9 7,3 5 0$
G e n e r a l & A d m i n, 7 8,5 0 0
D e p r e c i a t i o n 1 7,5 0 0 2 9 3,3 5 0
I n c o m e f r o m O p e r a t i o n s 1 4 0,1 0 0$
O t h e r r e v e n u e s & g a i n s,
I n t e r e s t i n c o m e 6 2,1 8 7$
G a i n 2 4,6 0 0 8 6,7 8 7
O t h e r e x p e n s e s,
I n t e r e s t 2 7,0 0 0$
L o s s 9,0 0 0 ( 3 6,0 0 0 )
I n c o m e b e f o r e t a x e s 1 9 0,8 8 7$
I n c o m e t a x e s 6 2,5 0 0
N e t i n c o m e 1 2 8,3 8 7$
Proper Heading {
Gross
Margin {
Operating
Expenses {
{Non-operating Items
Income Statement (Multiple-Step) Example
Remember to
compute EPS.
The McGraw-Hill Companies,Inc.,1999
Slide
14-36
Irwin/McGraw-Hill
C e n t r a l C o m p a n y
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d 1 2 / 3 1 / 9 9
R e v e n u e s a n d g a i n s,
S a l e s,n e t 7 8 5,2 5 0$
I n t e r e s t i n c o m e 6 2,1 8 7
G a i n o n s a l e o f p l a n t a s s e t s 2 4,6 0 0
T o t a l r e v e n u e s a n d g a i n s 8 7 2,0 3 7$
E x p e n s e s a n d l o s s e s,
C o s t o f g o o d s s o l d 3 5 1,8 0 0$
S e l l i n g E x p e n s e s 1 9 7,3 5 0
G e n e r a l a n d A d m i n, E x p, 7 8,5 0 0
D e p r e c i a t i o n 1 7,5 0 0
I n t e r e s t 2 7,0 0 0
I n c o m e t a x e s 6 2,5 0 0
L o s s, s a l e o f i n v e s t m e n t 9,0 0 0
T o t a l e x p e n s e s & l o s s e s 7 4 3,6 5 0
O p e r a t i n g i n c o m e 1 2 8,3 8 7$
Proper Heading {
Income Statement (Single-Step) Example
Expenses
& Losses {
Revenues
& Gains {
Remember to
compute EPS.
The McGraw-Hill Companies,Inc.,1999
Slide
14-37
Irwin/McGraw-Hill
Use this
information
to calculate
the
profitability
ratios for
Norton
Corporation.
N O R T O N C O R PO R A T I O N
2001
N u m b e r o f c o m m o n
s h a r e s o u t s t a n d i n g a l l o f
1998 2 7,4 0 0
N e t i n c o m e 5 3,6 9 0$
S h a r e h o l d e r s ' e q u i t y
B e g i n n i n g o f y e a r 1 8 0,0 0 0
E n d o f y e a r 2 3 4,3 9 0
R e v e n u e s 4 9 4,0 0 0
C o s t o f s a l e s 1 4 0,0 0 0
T o t a l a s s e t s
B e g i n n i n g o f y e a r 3 0 0,0 0 0
E n d o f y e a r 3 4 6,3 9 0
The McGraw-Hill Companies,Inc.,1999
Slide
14-38
Irwin/McGraw-Hill
Return On Investment (ROI)
Used by investors to evaluate the
efficiency with which financial
resources are employed.
R O I = R e t u r n
A v e r a g e
a m o u n t
i n v e s t e d
= 5 3,6 9 0$ 4 9 4,0 0 0$
= 1 0, 8 7 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-39
Irwin/McGraw-Hill
Return On Assets (ROA)
This ratio is generally considered
the best overall measure of a
company抯 profitability.
R O A =
O pe r a t i ng
i nc om e
A v e r a ge t ot a l a s s e t s
= 5 3,6 9 0$ ( $ 3 0 0,0 0 0 + $ 3 4 6,3 9 0 )? 2
= 1 6, 6 1 %
The McGraw-Hill Companies,Inc.,1999
Slide
14-40
Irwin/McGraw-Hill
Return On Equity (ROE)
R O E =
O pe r a t i ng
i nc om e
A v e r a ge t ot a l s t oc k hol de r s '
e qui t y
= 5 3,6 9 0$ ( $ 1 8 0,0 0 0 + $ 2 3 4,3 9 0 )? 2
= 2 5, 9 1 %
This measure indicates how well the
company employed the
owners?investments to earn income.
The McGraw-Hill Companies,Inc.,1999
Slide
14-41
Irwin/McGraw-Hill
Sources of Financial Information
C a n b e
a u d i t e d o r
u n a u d i t e d,
A n n u a l a n d
q u a rt e rl y
f i n a n c i a l
re p o rt s,
R e p o rt s f i l e d
w i t h t h e S E C b y
p u b l i c l y o w n e d
c o m p a n i e s,
I n t e rn e t a n d
o t h e r f re e
s o u rc e s,
D e t a i l e d
a n a l y s e s b y
f i n a n c i a l
a n a l y s t s,
The McGraw-Hill Companies,Inc.,1999
Slide
14-42
Irwin/McGraw-Hill
No more ratios,please!
