Chapter Thirteen Financial Statement Analysis McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Factors in Communicating Useful Information Users Types of Decisions Information Analysis The primary objective of accounting is to provide information useful for decision making. To provide information that supports this objective, accountants must consider the following: 13-1

Methods of Analysis Horizontal Analysis Vertical Analysis Ratio Analysis 13-2

Horizontal Analysis Horizontal analysis (or trend analysis) refers to studying the behavior of individual financial statement items over several accounting periods. Absolute Amounts Percentage Analysis 13-3

Milavec Company Horizontal Analysis

Vertical Analysis Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. A common- size Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. A common- size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage. 13-5

Vertical Analysis of Income Statement In income statements, all items are usually expressed as a percentage of sales. 13-6

Milavec Company Vertical Analysis

Vertical Analysis of Balance Sheet In balance sheets, all items are usually expressed as a percentage of total assets. 13-8

Ratio Analysis Ratio analysis involves studying various relationships between different items reported in a set of financial statements. 13-9

Liquidity Ratios Liquidity ratios indicate a company’s ability to pay short-term debts. They focus on current assets and current liabilities. 1.Working capital 2.Current ratio 3.Quick ratio 4.Accounts receivable ratios 5.Inventory ratios 13-10

Solvency Ratios Solvency ratios are used to analyze a company’s long-term debt- paying ability and its financing structure. 1.Debt to assets ratio 2.Debt to equity ratio 3.Number of times interest earned 4.Plant assets to long-term liabilities 13-11

Profitability Ratios Profitability ratios measure a company’s ability to generate earnings. 1.Net margin (or return on sales) 2.Asset turnover ratio 3.Return on investment 4.Return on equity 13-12

Stock Market Ratios Stock market ratios analyze the earnings and dividends of a company. 1.Earnings per share 2.Book value per share 3.Price-earnings (P E) ratio 4.Dividend yield 13-13

Limitations of Financial Statement Analysis Different Industries Changing Economic Environment Accounting Principles 13-14

End of Chapter Thirteen 13-15