Chapter 16 - How to read, analyze, and interpret financial reports. In this chapter, the learning objectives are: Explain the purpose and the key items on the balance sheet, explain and complete vertical and horizontal analysis, explain the purpose and the key items on the income statement, explain and complete vertical and horizontal analysis.
Trang 1How to Read, Analyze,
and Interpret Financial Reports
Trang 21 Explain the purpose and the key items
on the balance sheet
2 Explain and complete vertical and
horizontal analysis
How to Read, Analyze, and Interpret Financial Reports
#16
Learning Unit Objectives Balance Sheet Report as of a
Particular Date
LU16.1
Trang 31 Explain the purpose and the key items
on the income statement
2 Explain and complete vertical and
horizontal analysis
How to Read, Analyze, and Interpret Financial Reports
#16
Learning Unit Objectives Income Statement Report for a Specific Period of Time
LU16.2
Trang 41 Explain and complete a trend analysis
2 List, explain, and calculate key
financial ratios
How to Read, Analyze, and Interpret Financial Reports
#16
Learning Unit Objectives Trend and Ratio Analysis
LU16.3
Trang 5Accounting Equation: Assets = Liabilities + Owner’s Equity
Trang 6Gives a financial picture of what a company is worth as
of particular date.
Assets
Liabilities
+ Owner’s Equity
=
How much the
company
owns
How much the owner is worth
How much the company owes
Trang 7MOOL COMPANY Balance Sheet December 31, 2011 Assets Liabilities
a Current assets: a Current liabilities:
b Cash $ 7,000 b Accounts payable $ 80,000
c Accounts receivable 9,000 c Salaries payable 12,000
d Merchandise inventory 30,000 d Total current liabilities $ 92,000
e Prepaid expenses 15,000 e Longterm liabilities:
f Total current assets $61,000 f Mortgage note payable 58,000
g Plant and equipment: g Total liabilities $150,000
h Building (net) $60,000
i Land 84,000 Stockholders Equity
j Total plant and equipment 144,000 a Common stock $ 20,000
b Retained earnings 35,000
c Total stockholders equity 55,000
k Total assets $205,000 d Total liab. and stkhlds equity $205,000
Assets broken down
into current assets and
plant and equipment
Liabilities broken down into current and longterm
Total of current assets and plant and equipment.
(Total is double ruled)
Total of all liabilities and stockholders’ equity.
Trang 8Step 2. Round each liability
and stockholders’ equity (the
portions) as a percent of total
liabilities and stockholders’
equity (the base). Round as
indicated.
Step 1. Divide each asset
(the portion) as a percent
of total assets (the base).
Round as indicated.
Trang 9Vertical Analysis
ROGER COMPANY Comparative Balance Sheet December 31, 2010 and 2011
2011 2010
Amount Percent Amount Percent Assets
Current Assets:
Cash $22,000 25.88 $18,000 22.22 Accounts Receivable 8,000 9.41 9,000 11.11 Merchandise inventory 9,000 10.59 7,000 8.64 Prepaid rent 4,000 4.71 5,000 6.71
Total current assets $43,000 50.59 $39,000 48.15* Plant and equipment:
Building (net) $18,000 21.19 $18,000 22.22 Land 24,000 28.24 24,000 29.63
Total plant and equipment $42,000 49.41* $42,000 51.85 Total assets $85,000 100.00 $81,000 100.00
* Due to rounding
Trang 10Vertical Analysis
ROGER COMPANY Comparative Balance Sheet December 31, 2010 and 2011
2011 2010
Amount Percent Amount Percent Liabilities
Current liabilities:
Accounts payable $14,000 16.47 $8,000 9.88 Salaries payable 18,000 21.18 17,000 20.99 Total current liabilities $32,,000 37.65 $25,000 30.86* Longterm liabilities:
Mortgage note payable $12,000 14.12 $20,000 24.69 Total liabilities $44,000 51.76* $25,000 30.86*
Stockholders’ Equity Common stock $20,000 23.53 $20,000 24.69 Retained earnings 21,000 24.71 16,000 19.75 Total Stockholders’ equity $41,000 48.24 $36,000 44.44
* Due to rounding
Trang 11of a Comparative Balance Sheet
Step 1. Calculate the increase
or decrease (portion) in each
item from the base year.
Step 2. Divide the increase or decrease in Step 1 by the old or base year.
Step 3. Round as indicated.
Trang 12Horizontal Analysis
ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2010 and 2011
Increase(decrease)
2011 2010 Amount Percent
Assets
Current Assets:
Cash $ 6,000 $ 4,000 $ 2,000 50.00 Accounts Receivable 5,000 6,000 (1,000) 16.67 Merchandise inventory 9,000 4,000 5,000 125.00 Prepaid rent 5,000 7,000 (2,000) 28.57
Total current assets $25,000 $21,000 $ 4,000 19.05 Plant and equipment:
Building (net) $12,000 $12,000 0 0 Land 18,000 18,000 0 0
Total plant and equipment $30,000 $30,000 0 0
Trang 13Horizontal Analysis
ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2010 and 2011
Increase(decrease)
2010 2011 Amount Percent Liabilities
Current liabilities:
Accounts payable $ 3,200 $ 1,800 $ 1,400 77.78 Salaries payable 2,900 3,200 (300) 9.38 Total current liabilities $ 6,100 5,000 1,100 22.00 Longterm liabilities:
Mortgage note payable 17,000 15,000 2,000 13.33 Total Liabilities $ 23,100 20,000 3,100 15.50
Owner’s Equity Abby Ellen, capital $31,900 31,000 $ 900 2.90 Total liabilities and owner’s equity $55,000 51,000 $4,000 7.84
Trang 14A financial report that tells how well a
company is performing (its profitability or net
profit) during a specific period of time.
Service Business
Revenues
Operating Expenses
=Net Income
Retail Business Revenues (Sales)
Cost of merchandise sold
= Gross profit from sales
Operating Expenses
= Net Income (Profit)
Income
Statement
$
Trang 15MOOL COMPANY Income Statement For Month Ended December 31, 2011 Revenues
a. Gross Sales $22,080
b. Less: Sales returns and allowances $ 1,082
c. Sales discounts 432 1,514
d. Net Sales
Cost of merchandise (goods) sold: $20,566
a. Merchandise Inventory 12/1/2004 $ 1,248
b. Purchases $10,512
c. Less: Purchases returns and allowances $336
d. Less: Purchase discounts 204 540
e. Cost of net purchases 9,972
f. Cost of merchandise (goods available for sale) $11,220
g. Less: Merchandise inventory 12/31/2004 1,600
h. Cost of merchandise (goods sold) 9,620 Gross profit from sales $10,946 Operating expenses:
a. Salary $ 2,200
b. Insurance 1.300
c. Utilities 400
d. Plumbing 120
e. Rent 410
f. Depreciation 200
Figure 16.4 Income Statement
Trang 16Net sales = Gross sales Sales returns and Sales discounts
Allowances
Net income = Gross profit Operating expenses
Gross profit = Net sales Cost of merchandise
merchandise = Beginning + (purchase less Ending
(goods) sold inventory returns & discounts) inventory
Trang 17Vertical Analysis
ROYAL COMPANY Comparative Income Statement For Years Ended December 31, 2010 and 2011
2011 Percent 2010 Percent
of net of net Net Sales $45,000 100.00 $29,000 100.00 Cost of merchandise sold 19,000 42.22 12,000 41.38 Gross profit from sales $26,000 57.78 $17,000 58.62 Operating expenses:
Depreciation $1,000 2.22 $ 500 1.72 Selling and Advertising 4,200 9.33 1,600 5.52 Research 2,900 6.44 2,000 6.90 Miscellaneous 500 1.11 200 .69 Total operating expenses $8,600 19.11* $ 4,300 14.83 Income before interest and taxes $17,400 38.67 $12,700 43.79 Interest expense 6,000 13.33 3,000 10.34 Income before taxes $11,400 25.33* $ 9,700 33.45 Provision for taxes 5,500 12.22 3,000 10.34 Net income $ 5,900 13.11 $ 6,700 23.10*
* Due to rounding
Trang 18FLINT COMPANY Comparative Income Statement For Years Ended December 31, 2010 and 2011
2011 2010 Increase (decrease)
Amount Percent Sales $ 90,000 $80,000 $10,000
Sales returns and allowances 2,000 2,000 0
Net Sales $88,000 $78,000 $10,000 + 12.82 Cost of merchandise sold 45,000 40,000 5,000 + 12.50 Gross profit from sales $43,000 $38,000 $ 5,000 + 13.16 Operating expenses:
Depreciation $ 6,000 $ 5,000 $ 1,000 + 20.00 Selling and Advertising 16,000 12,000 4,000 + 33.33 Research 600 1,000 (400) 40.00 Miscellaneous 1,200 500 700 + 140.00 Total operating expenses $23,800 $18,500 $ 5,300 + 28.65 Income before interest and taxes $19,200 $19,500 $ (300) 1.54 Interest expense 4,000 4,000 0
Income before taxes $15,200 $15,500 $ (300) 1.94 Provision for taxes 3,800 4,000 (200) 5.00 Net income $11,400 $11,500 $ (100) .87
Figure 16.6 Horizontal Analysis
Income Statement
Trang 19Analyzes the changes that occur by expressing each number as a percent of the base year
Step 1.
Select the
base year
(100%)
Step 2. Express each amount as a percent of the base year amount (rounded to the nearest whole percent)
Each Item Base Amount
Trang 20Given (base year 2009)
Trend Analysis
$340,000
* Round to nearest whole percent