2Learning unit objectives LU16-1: Balance Sheet -- Report as of a Particular DateExplain the purpose and the key items on the balance sheet.Explain and complete vertical and horizontal analysis.LU 16-1: Income Statement -- Report for a Specific Period of TimeExplain the purpose and the key items on the income statement.Explain and complete vertical and horizontal analysis.LU 16-3: Trend and Ratio AnalysisExplain and complete a trend analysis.List, explain, and calculate key financial ratios.16-
4Balance SheetGives a financial picture of what a company is worth as of a particular date.=AssetsLiabilities + Owner’s Equity(How much the owner is worth)(How much the company owns)(How much the company owes)
5Elements of the Balance Sheet (Figure 16.1) Assets broken down into current assets and plant and equipmentLiabilities broken down into current and long-termMOOL COMPANYBalance SheetDecember 31, 2014Assets Liabilitiesa. Current assets: a. Current liabilities:b. Cash $ 7, b. Accounts payable $ 80,000c Accounts receivable , c. Salaries payable ,000d. Merchandise inventory , d Total current liabilities $ 92,000e. Prepaid expenses , e. Long-term liabilities:f Total current assets $61, f Mortgage note payable ,000g. Plant and equipment: g Total liabilities $150,000h Building (net) $60,000i Land , Stockholders’ Equityj Total plant and equipment , a. Common stock $ 20,000b. Retained earnings ,000c Total stockholders’ equity ,000k. Total assets $205,000 d. Total liab. and stkhlds’ equity $205,000Total of current assets and plant and equipment.(Total is double-ruled)Total of all liabilities and stockholders’ equity.
6Preparing a Vertical Analysis of a Balance Sheet Step 1. Divide each asset (the portion) as a percent of total assets (the base). Round as indicated.Step 2. Round each liability and stockholders’ equity (the portions) as a percent of total liabilities and stockholders’ equity (the base). Round as indicated.
7Comparative Balance Sheet: Vertical Analysis (Figure 16.2) ROGER COMPANYComparative Balance SheetDecember 31, 2013 and 2014Amount Percent Amount PercentAssetsCurrent Assets:Cash $22, $18,Accounts Receivable , ,Merchandise inventory , ,Prepaid rent , ,Total current assets $43, $39, *Plant and equipment:Building (net) $18, $18,Land , ,Total plant and equipment $42, * $42,Total assets $85, $81,* Due to rounding
8Comparative Balance Sheet: Vertical Analysis (Figure 16.2) ROGER COMPANYComparative Balance SheetDecember 31, 2013 and 2014Amount Percent Amount PercentLiabilitiesCurrent liabilities:Accounts payable $14, $8,Salaries payable , ,Total current liabilities $32, $25, *Long-term liabilities:Mortgage note payable $12, $20,Total liabilities $44, * $25, *Stockholders’ EquityCommon stock $20, $20,Retained earnings , ,Total stockholders’ equity $41, $36,Total liabilities and stockholders’ equity $85, $81,* Due to rounding
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.
11Comparative Balance Sheet: Horizontal Analysis (Figure 16.3) ABBY ELLEN COMPANYComparative Balance SheetDecember 31, 2013 and 2014Increase (decrease)Amount PercentLiabilitiesCurrent liabilities:Accounts payable $ 3,200 $ 1,800 $ 1,Salaries payable 2, , (300)Total current liabilities $ 6, , ,Long-term liabilities:Mortgage note payable 17, ,000 2,Total liabilities $ 23,100 20,000 3,Owner’s EquityAbby Ellen, capital $31,900 31,000 $Total liabilities and owner’s equity $55, ,000 $4,
12Income StatementIncome Statement - A financial report that tells how well a company is performing (its profitability or net profit) during a specific period of time.Income Statement$Service Business:Revenues -- Operating expenses= Net incomeRetail Business:Revenues (sales)-- Cost of merchandise sold= Gross profit from sales-- Operating expenses= Net income (profit)
13Income Statement (Figure 16.4) MOOL COMPANYIncome StatementFor Month Ended December 31, 2014Revenuesa. Gross Sales $22,080b. Less: Sales returns and allowances $ 1,082c Sales discounts ,514d. Net SalesCost of merchandise (goods) sold: $20,566a. Merchandise Inventory 12/1/ ,248b. Purchases 10,512c. Less: Purchases returns and allowances $336d. Less: Purchase discountse. Cost of net purchases 9,972f. Cost of merchandise (goods available for sale) ,220g. Less: Merchandise inventory 12/31/ ,600h. Cost of merchandise (goods sold) 9,620Gross profit from sales 10,946Operating expenses:a Salary ,200b Insurancec Utilitiesd Plumbinge Rentf Depreciationg. Total operating expenses 4,630Net income $ 6,316
14Key Calculations on Income Statement Net sales = Gross sales -- Sales returns allowances -- Sales discountsCost of Net purchasesmerchandise = Beginning (purchase less Ending(goods) sold inventory returns & discounts) inventoryGross profit from sales = Net sales -- Cost of merchandise (goods) soldNet income = Gross profit -- Operating expenses
15Income Statement Vertical Analysis (Figure 16.5) ROYAL COMPANYComparative Income StatementFor Years Ended December 31, 2013 and 2014Percent Percentof net of netNet Sales $45, $29,Cost of merchandise sold 19, ,Gross profit from sales $26, $17,Operating expenses:Depreciation $1, $Selling and Advertising , ,Research , ,MiscellaneousTotal operating expenses $8, * $ 4,Income before interest and taxes $17, $12,Interest expense , ,Income before taxes $11, * $ 9,Provision for taxes , ,Net income $ 5, $ 6, ** Due to rounding
16Horizontal Analysis Income Statement (Figure 16.6) FLINT COMPANYComparative Income StatementFor Years Ended December 31, 2013 and 2014Increase (decrease)Amount PercentSale $ 90,000 $80,000 $10,000Sales returns and allowances 2, ,Net Sales $88, $78,000 $10,Cost of merchandise sold 45, , ,Gross profit from sales $43,000 $38,000 $ 5,Operating expenses:Depreciation $ 6,000 $ 5,000 $ 1,Selling and Advertising 16, , ,Research , (400)Miscellaneous 1,Total operating expenses $23,800 $18,500 $ 5,Income before interest and taxes $19,200 $19,500 $ (300)Interest expense 4, ,Income before taxes $15,200 $15,500 $ (300)Provision for taxes 3, ,000 (200)Net income $11,400 $11,500 $ (100)
17Completing a Trend Analysis Analyzes the changes that occur by expressing each number as a percent of the base year.Each ItemBase AmountStep 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).
18Trend Analysis Given (base year 2012) 2015 2014 2013 2012 Sales $621,000 $460,000 $340,000 $420,000Gross Profit 182, , , ,000Net Income , , , ,000Trend AnalysisSales* 148% 110% 81% 100%Gross ProfitNet Income$340,000$420,000* Round to nearest whole percent