1. John J. Wild Sixth Edition
Financial Accounting
John J. Wild
Sixth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Analyzing and Interpreting Financial Statements
Chapter 13
Analyzing and Interpreting Financial Statements

3. Conceptual Learning Objectives
C1: Explain the purpose and identify the building blocks of analysis.
C2: Describe standards for comparisons in analysis.
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4. Analytical Learning Objectives
A1: Summarize and report results of analysis.
A2: Appendix 13A – Explain the form and assess the content of a complete income statement (see text for details).
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5. Procedural Learning Objectives
P1: Explain and apply methods of horizontal analysis.
P2: Describe and apply methods of vertical analysis.
P3: Define and apply ratio analysis.
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6. Building Blocks of Analysis
Ability to meet short-term obligations and to efficiently generate revenues
Ability to generate future revenues and meet long-term obligations
Liquidity and Efficiency
Solvency
Ability to provide financial rewards sufficient to attract and retain financing
Ability to generate positive market expectations
Market Prospects
Profitability
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7. Standards for Comparison
When interpreting measures, we need to decide whether the measures indicate good, bad, or average performance. We can use the following to make that judgment:
Intracompany
Competitor
Industry
Guidelines (rule of thumb)
The more experience one gains in performing such analyses, the easier it becomes to interpret the results. Like anything else, practice goes a long way in this area.
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8. Horizontal Analysis Vertical Analysis
Tools of Analysis
C 1
Horizontal Analysis
Comparing a company’s financial condition and performance across time.
Vertical Analysis
Comparing a company’s financial condition and performance to a base amount.
Measurement of key relations between financial statement items
Ratio Analysis
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9. Comparative Statements
Calculate Change in Dollar Amount
Dollar
change
Analysis period
amount
Base period
amount – =
Since we are measuring the amount of the change between 2011 and 2010, the dollar amounts for 2010 become the “base” period amounts.
Calculate Change as a Percent
Percent
change
Dollar change
Base period amount = ×
100
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10. Analysis period amount
Trend Analysis
P 1
Trend analysis is used to reveal patterns in data covering successive periods.
Trend
percent
Analysis period amount
Base period amount
100 = ×
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11. Common-Size Statements
P 2
Calculate Common-size Percent
Common-size
percent
Analysis amount
Base amount × =
100
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
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12. Comparative (Partial) Balance Sheets December 31, 2011 Common-size
CLOVER CORPORATION
Comparative (Partial) Balance Sheets
December 31, 2011
Common-size
Percents*
2011
2010
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
67,000 $
44,000
21.3%
15.2%
Notes payable
3,000
6,000
1.0%
2.1%
Total current liabilities
70,000
50,000
22.2%
17.3%
Long-term liabilities:
Bonds payable, 8%
75,000
80,000
23.8%
27.6%
Total liabilities
145,000
130,000
46.0%
44.9%
Shareholders' equity:
Preferred stock
20,000
6.3%
6.9%
Common stock
60,000
19.0%
20.7%
Additional paid-in capital
10,000
3.2%
3.5%
Total paid-in capital
90,000
28.6%
31.1%
Retained earnings
69,700
25.4%
24.1%
Total shareholders' equity
170,000
159,700
54.0%
55.1%
Total liabilities and shareholders' equity
315,000
289,700
100.0%
* Percent rounded to first decimal point.
P 2
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13. Liquidity and Efficiency
P 3
Current
Ratio
Inventory Turnover
Acid-test
Ratio
Days’ Sales Uncollected
Accounts Receivable Turnover
Days’ Sales in Inventory
Total Asset Turnover
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14. Pledged Assets to Secured Liabilities
Solvency
P 3
Debt
Ratio
Equity
Ratio
Pledged Assets to Secured Liabilities
Times Interest Earned
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15. Profitability Profit Margin Basic Earnings per Share Gross Margin
Book Value per Common Share
Return on Total Assets
Return on Common Stockholders’ Equity
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16. A1
Summarizing Results
A financial statement analysis report helps by directly assessing the building blocks of analysis and by identifying weaknesses in inference and by requiring explanation. It usually consists of six sections:
Executive summary
Analysis overview
Evidential matter
Assumptions
Key Factors
Inferences
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17. End of Chapter 13
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