Statement of cash flows –indirect method Table when adjusting Net Income to Operating Cash Flows Find the net income Determine depreciation expense. Changes in Current Accounts Analyzing gains or losses from selling investments, equipment, etc. Payments of Dividends 1

Sale of Common Stock Retirement of Bonds Payable Purchased a Building Land Transactions Managing Cash Flows Cash Budgeting 2

FINANCIAL STATEMENT ANALYSIS Chapter 14 3

Internal UsersExternal Users Financial statement analysis helps users make better decisions. Managers Officers Internal Auditors Shareholders Lenders Customers Purpose of Analysis 4

5

Financial Statements Are Designed for Analysis 6

Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of Analysis 7

Dollar and Percentage Changes Dollar Change: Analysis Period Amount Analysis Period Amount Base Period Amount Base Period Amount Dollar Change Dollar Change = = – – Percentage Change: Dollar Change Base Period Amount Percent Change = ÷ % 8

Dollar and Percentage Changes 9

Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and Compute the dollar change and the percentage for cash. Let’s look at the asset section of Clover Corporation’s comparative balance sheet and income statement for 2003 and Compute the dollar change and the percentage for cash. Dollar and Percentage Changes Example 10

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$12,000 – $23,500 = $(11,500) 12

($11,500 ÷ $23,500) × 100% = 48.94% Complete the analysis for the other assets. 13

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Trend analysis is used to reveal patterns in data covering successive periods. Trend Percent Analysis Period Amount Base Period Amount 100% = × Trend Analysis 15

1999 is the base period so its amounts will equal 100%. Berry Products Income Information For the Years Ended December 31, Trend Analysis - Example 16

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 StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Component Percentages 17

($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%

Horizontal Analysis What is horizontal analysis? 22

Horizontal Analysis It’s an analysis of the percentage increases and decreases of related items in comparative financial statements. 23

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) AmountPercent Balance Sheet Increase (Decrease) 24

Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) Horizontal Analysis: Horizontal Analysis: Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 Difference$17,000 Base year (2005)$533,000 = 3.2% AmountPercent Increase (Decrease) 25

Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) Horizontal Analysis: Horizontal Analysis: Difference$(82,500) Base year (2005)$177,500 = (46.5%) Lincoln Company Comparative Balance Sheet December 31, 2006 and AmountPercent Increase (Decrease) 26

Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) Horizontal Analysis: Horizontal Analysis: Difference? Base year (2005)? = ? Lincoln Company Comparative Balance Sheet December 31, 2006 and AmountPercent Increase (Decrease) Okay, go to the next slide and calculate the percentage change for fixed assets. 27

Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and AmountPercent Increase (Decrease) 28

Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Fixed assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— Total assets $1,139,500$1,230,500$ (91,000)(7.4%) Liabilities Current liabilities$ 210,000$ 243,000$ (33,000)(13.6%) Long-term liabilities100,000200,000(100,000)(50.0%) Total liabilities $ 310,000$ 443,000$(133,000)(30.0%) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000$ 150,000— Common stock, $10 par500,000500,000— Retained earnings179,500137,500$42, % Total stockholders’ equity $ 829,500$ 787,500$42, % Total liab. & SE $1,139,500$1230,500$(91,000)(7.4%) Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005 (5.4%) AmountPercent Increase (Decrease) 29

Sales$1,530,500$1,234,000$296, % Sales returns32,50034,000(1,500)(4.4%) Net sales$1,498,000$1,200,000$298, % Cost of goods sold1,043,000820,000223, % Gross profit $ 455,000$ 380,000$ 75, % Selling expenses$ 191,000$ 147,000$ 44, % Administrative expenses104,00097,4006, % Total operating expenses$ 295,000$ 244,400$ 50, % Operating income$ 160,000$ 135,600$ 24, % Other income8,50011,000(2,500)(22.7%) $ 168,500$ 146,600$ 21, % Other expense6,00012,000(6,000)(50.0%) Income before income tax$ 162,500$ 134,600$ 27, % Income tax71,50058,10013, % Net income$ 91,000$ 76,500$ 14, % Lincoln Company Comparative Income Statement December 31, 2006 and AmountPercent Increase (Decrease) Income Statement 30

Sales$1,530,500$1,234,000$296, % Sales returns32,50034,000(1,500)(4.4%) Net sales$1,498,000$1,200,000$298, % Cost of goods sold1,043,000820,000223, % Gross profit $ 455,000$ 380,000$ 75, % Selling expenses$ 191,000$ 147,000$ 44, % Administrative expenses104,00097,4006, % Total operating expenses$ 295,000$ 244,400$ 50, % Operating income$ 160,000$ 135,600$ 24, % Other income8,50011,000(2,500)(22.7%) $ 168,500$ 146,600$ 21, % Other expense6,00012,000(6,000)(50.0%) Income before income tax$ 162,500$ 134,600$ 27, % Income tax71,50058,10013, % Net income$ 91,000$ 76,500$ 14, % Horizontal Analysis: Horizontal Analysis: Increase amount$296,500 Base year (2005) $1,234,000 = 24.0% 24.0% Lincoln Company Comparative Income Statement December 31, 2006 and AmountPercent Increase (Decrease) 31

Sales$1,530,500$1,234,000$296, % Sales returns32,50034,000(1,500)(4.4%) Net sales$1,498,000$1,200,000$298, % Cost of goods sold1,043,000820,000223, % Gross profit $ 455,000$ 380,000$ 75, % Selling expenses$ 191,000$ 147,000$ 44, % Administrative expenses104,00097,4006, % Total operating expenses$ 295,000$ 244,400$ 50, % Operating income$ 160,000$ 135,600$ 24, % Other income8,50011,000(2,500)(22.7%) $ 168,500$ 146,600$ 21, % Other expense6,00012,000(6,000)(50.0%) Income before income tax$ 162,500$ 134,600$ 27, % Income tax71,50058,10013, % Net income$ 91,000$ 76,500$ 14, % Horizontal Analysis: Horizontal Analysis: Increase amount$298,000 Base year (2005) $1,200,000 = 24.8% 24.8% Lincoln Company Comparative Income Statement December 31, 2006 and AmountPercent Increase (Decrease) 32

Vertical Analysis A percentage analysis can be used to show the relationship of each component to a total within a single statement. 33

The total, or 100% item, on the balance sheet is “total assets.” Vertical Analysis 34

Lincoln Company Comparative Balance Sheet Assets Current assets$ 550, %$ 533, % Long-term investments95, , Property, plant, & equip. (net)444, , Intangible assets50, , Total assets$1,139, %$1,230, % Liabilities Current liabilities$ 210, %$ 243, % Long-term liabilities100, , Total liabilities$ 310, %$ 443, % Stockholders’ Equity Preferred stock, 6%, $100 par$ 150, %$ 150, % Common stock, $10 par500, , Retained earnings179, , Total stockholders’ equity$ 829, %$ 787, % Total liab. & SE$1,139, %$1,230, % December 31, 2006 December 31, 2005 AmountPercentAmountPercent Vertical Analysis: Vertical Analysis: Current assets $550,000 Total assets $1,139,500 = 48.3% 48.3%BalanceSheetBalanceSheet 35

Lincoln Company Comparative Balance Sheet Assets Current assets$ 550, %$ 533, % Long-term investments95, , Property, plant, & equip. (net)444, , Intangible assets50, , Total assets$1,139, %$1,230, % Liabilities Current liabilities$ 210, %$ 243, % Long-term liabilities100, , Total liabilities$ 310, %$ 443, % Stockholders’ Equity Preferred 6% stock, $100 par$ 150, %$ 150, % Common stock, $10 par500, , Retained earnings179, , Total stockholders’ equity$ 829, %$ 787, % Total liab. & SE$1,139, %$1,230, % Vertical Analysis: Vertical Analysis: Current assets $533,000 Total assets $1,230,500 = 43.3% 43.3% December 31, 2006 December 31, 2005 AmountPercentAmountPercent 36

Lincoln Company Comparative Balance Sheet Assets Current assets$ 550, %$ 533, % Long-term investments95, , Property, plant, & equip. (net)444, , Intangible assets50, , Total assets$1,139, %$1,230, % Liabilities Current liabilities$ 210, %$ 243, % Long-term liabilities100, , Total liabilities$ 310, %$ 443, % Stockholders’ Equity Preferred 6% stock, $100 par$ 150, %$ 150, % Common stock, $10 par500, , Retained earnings179, , Total stockholders’ equity$ 829, %$ 787, % Total liab. & SE$1,139, %$1,230, % December 31, 2006 December 31, 2005 AmountPercentAmountPercent 37

Sales$1,530, % $1,234, % Sales returns32, , Net sales$1,498, %$1,200, % Cost of goods sold1,043, , Gross profit $ 455, %$ 380, % Selling expenses$ 191, %$ 147, % Administrative expenses104, , Total operating expenses$ 295, %$ 244, % Income from operations$ 160, $ 135, % Other income8, , $ 168, %$ 146, % Other expense6, , Income before income tax$ 162, %$ 134, % Income tax expense71, , Net income$ 91,0006.1%$ 76,5006.4% Amount Percent Amount Percent Net sales is 100.0% Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and 2005 IncomeStatementIncomeStatement 38

Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and 2005 Sales$1,530, % $1,234, % Sales returns32, , Net sales$1,498, %$1,200, % Cost of goods sold1,043, , Gross profit $ 455, %$ 380, % Selling expenses$ 191,000 Selling expenses$ 191, %$ 147, % Administrative expenses104, , Total operating expenses$ 295, %$ 244, % Income from operations$ 160, $ 135, % Other income8, , $ 168, %$ 146, % Other expense6, , Income before income tax$ 162, %$ 134, % Income tax expense71, , Net income$ 91,0006.1%$ 76,5006.4% Amount Percent Amount Percent Vertical Analysis: Vertical Analysis: Selling expenses $191,000 Net sales $1,498,000 = 12.8% 12.8% 39

Sales$1,530, % $1,234, % Sales returns32, , Net sales$1,498, %$1,200, % Cost of goods sold1,043, , Gross profit $ 455, %$ 380, % Selling expenses$ 191, %$ 147, % Administrative expenses104, , Total operating expenses$ 295, %$ 244, % Income from operations$ 160, $ 135, % Other income8, , $ 168, %$ 146, % Other expense6, , Income before income tax$ 162, %$ 134, % Income tax expense71, , Net income$ 91,0006.1%$ 76,5006.4% Amount Percent Amount Percent Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and

Sales$1,530, % $1,234, % Sales returns32, , Net sales$1,498, %$1,200, % Cost of goods sold1,043, , Gross profit $ 455, %$ 380, % Selling expenses$ 191, %$ 147, % Administrative expenses104, , Total operating expenses$ 295, %$ 244, % Income from operations$ 160, $ 135, % Other income8, , $ 168, %$ 146, % Other expense6, , Income before income tax$ 162, %$ 134, % Income tax expense71, , Net income$ 91,0006.1%$ 76,5006.4% Amount Percent Amount Percent Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and

Sales$1,530, % $1,234, % Sales returns32, , Net sales$1,498, %$1,200, % Cost of goods sold1,043, , Gross profit $ 455, %$ 380, % Selling expenses$ 191, %$ 147, % Administrative expenses104, , Total operating expenses$ 295, %$ 244, % Income from operations$ 160, $ 135, % Other income8, , $ 168, %$ 146, % Other expense6, , Income before income tax$ 162, %$ 134, % Income tax expense71, , Net income$ 91,0006.1%$ 76,5006.4% Amount Percent Amount Percent Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and

Common Size Statements Vertical analysis with both dollar and percentage amounts is also useful in comparing one company with another or with industry averages. Such comparisons are easier to make with the use of common-size statements in which all items are expressed in percentages. 43

Common-Size Income Statement 44

End of Today’s Session Allah Hafiz 45