Lecture Practical business math procedures (11/e) - Chapter 16: How to read, analyze, and interpret financial reports. In this chapter students will be able to: 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
Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved McGrawHill/Irwin
Trang 21. Explain the purpose and the key items on the balance sheet.
2. Explain and complete vertical and horizontal analysis.
LU16-1: Balance Sheet Report as of a Particular Date
Learning unit objectives
LU 16-1: Income Statement Report for a Specific Period of
Time1. Explain the purpose and the key items on the income statement.
2. Explain and complete vertical and horizontal analysis.
LU 16-3: Trend and Ratio Analysis
1. Explain and complete a trend analysis.
2. List, explain, and calculate key financial ratios.
Trang 3Accounting Equation
Accounting Equation:
Assets = Liabilities + Owner’s Equity
Trang 4Balance Sheet
Gives a financial picture of what a company is worth as of a particular
date.
(How much the
company owns)
(How much the owner
is worth)
(How much the company owes)
Trang 5Elements of the Balance Sheet
(Figure 16.1)
MOOL COMPANY Balance Sheet December 31, 2014
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 Long-term 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 long-term
Total of current assets and plant and equipment.
(Total is double-ruled)
Total of all liabilities and stockholders’ equity.
Trang 6Preparing a Vertical Analysis of a
Balance Sheet
Step 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 7Comparative Balance Sheet: Vertical
Analysis (Figure 16.2)
ROGER COMPANY Comparative Balance Sheet December 31, 2013 and 2014
2013 2014
Assets
Current Assets:
Plant and equipment:
* Due to
rounding
Trang 8Comparative Balance Sheet: Vertical
Analysis (Figure 16.2)
ROGER COMPANY Comparative Balance Sheet December 31, 2013 and 2014
2013 2014
Liabilities
Current liabilities:
Total current liabilities $32,000 37.65 $25,000 30.86*
Long-term 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
Total stockholders’ equity $41,000 48.24 $36,000 44.44
Total liabilities and stockholders’ equity $85,000 100.00 $81,000 100.00
Trang 9Preparing a Horizontal Analysis
of 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 10Comparative Balance Sheet: Horizontal
Analysis (Figure 16.3)
ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2013 and 2014
2013 2014 Amount Percent
Assets
Current Assets:
Plant and equipment:
Trang 11Comparative Balance Sheet: Horizontal
Analysis (Figure 16.3)
ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2013 and 2014
2013 2014 Amount Percent
Liabilities
Current liabilities:
Long-term liabilities:
Owner’s Equity
Trang 12Income Statement
Income Statement - A 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:
Cost of merchandise sold
= Gross profit from sales Operating expenses
= Net income (profit)
Incom e
Statem ent
$
Trang 13MOOL COMPANY Income Statement
For Month Ended December 31, 2014
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 12/1/2014 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 12/31/2014 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
Income Statement
(Figure 16.4)
Trang 14Key Calculations on Income Statement
Net sales = Gross sales Sales returns allowances Sales discounts
Net income = Gross profit Operating expenses
Gross profit from sales = Net sales Cost of merchandise (goods) sold
merchandise = Beginning + (purchase less Ending
(goods) sold inventory returns & discounts) inventory
Trang 15Income Statement Vertical Analysis (Figure 16.5)
ROYAL COMPANY Comparative Income Statement For Years Ended December 31, 2013 and 2014
Selling and Advertising 4,200 9.33 1,600 5.52
* Due to
rounding
Trang 16FLINT COMPANY Comparative Income Statement For Years Ended December 31, 2013 and 2014
Sales returns and allowances 2,000 2,000 0
Research 600 1,000 (400) - 40.00
Miscellaneous 1,200 500 700 + 140.00
Interest expense 4,000 4,000 0
Horizontal Analysis Income Statement (Figure 16.6)
Trang 17Completing a Trend Analysis
Trend Analysis –
Analyzes 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 18Trend Analysis
Given (base year 2012)
Trend Analysis
Gross Profit 147 114 90 100
Net Income 126 108 58 100
$340,000
$420,000