1. Analyzing Financial Statements
Chapter 22 2

2. Preparing comparative
Learning Objective 1
Preparing comparative
balance sheets. 4

3. Users of Financial Reports
Investors
Creditors
Management

4. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Current assets:
Cash
Accounts receivable, net
Merchandise inventory
Prepaid expenses
Total current assets
Plant and equipment:
Office equipment, net
Total assets
$ 3,040
20,000
24,160
80,000
$ 48,000
$125,200
$173,200
$ 4,080
16,000
26,120
60,000
$ 46,800
$116,800
$163,600
$(1,040)
4,000
(1,960)
200
$ 1,200
$ 8,400
$ 9,600
(25.5) 25
(7.5)
33.3
2.6
7.2
5.9
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Assets
December 31
20x x7
Incr.
or Dec.
20x8
% Incr.

5. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Current liabilities:
Notes payable
Accounts payable
Total current liabilities
Long-term liabilities:
Mortgage payable
Total liabilities
$ 20,960
240
$ 21,200
$ 60,000
$ 81,200
$3,640
(40)
$3,600
-0- 21
(14.3)
20.5
4.6
$ 17,320
280
$ 17,600
$ 77,600
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Liabilities
December 31
20x x7
Incr.
or Dec.
20x8
% Incr.

6. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Stockholders’ equity:
Common stock, $10 par
Retained earnings
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$ 60,000
32,000
$ 92,000
$173,200
-0-
$6,000
$9,600
23.1
7.0
5.9
26,000
$ 86,000
$163,600
Scrupper Supply Company
Comparative Balance Sheet
As of December 31, 20x8, and December 31, 20x7
Stockholders’ Equity
December 31
20x x7
Incr.
or Dec.
20x8
% Incr.

7. Using horizontal and vertical
Learning Objective 2
Using horizontal and vertical
analysis techniques. 4

8. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Horizontal Analysis
20x x Difference
Cash $3,040 $4, $(1,040)
$1,040 ÷ $4,080 = , or 25.5%

9. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Vertical analysis compares each item on
a report to a base number set to 100%.
The base will be either total assets or
total liabilities and stockholders’
equity on a balance sheet.

10. Learning Unit 22-1 (Horizontal and Vertical Analysis)
Assets x %
Current assets:
Cash $ 3,
Accounts receivable net ,
Merchandise inventory ,
Prepaid expenses
Total current assets $ 48,
Plant and equipment
Office equipment, net $125,
Total assets $173,

11. Learning Unit 22-2 (Trend Analysis)
20x %
Net sales $317,
Cost of goods sold ,
Gross profit from sales $119,
Total operating expenses ,
Operating income $ 36,
Less interest expense ,
Income before taxes $ 31,
Income taxes ,
Net income $ 15,

12. Learning Unit 22-2 (Trend Analysis)
What is trend analysis?
It is a special type of horizontal analysis that
deals with the percentage of changes in
certain key items over several years.
Trend % = Any year $ ÷ Base year $

13. Learning Unit 22-2 (Trend Analysis)
Year x x x5
Sales $317,600 $302,000 $270,000
Cost of Goods Sold , , ,000
Gross Profit $119,600 $108,000 $128,000
20x5 is the base year.
What are the trend percentages?

14. Learning Unit 22-2 (Trend Analysis)
Year x x x5
Sales % % %
Cost of Goods Sold % % %
Gross Profit % % % %

15. Calculating the four different types of ratios: liquidity ratios,
Learning Objective 3
Calculating the four different
types of ratios: liquidity ratios,
asset management ratios,
debt management ratios,
and profitability ratios. 4

16. Learning Unit 22-3 (Ratio Analysis)
A ratio is the relationship of two quantities
or numbers, one divided by the other.
Ratio analysis looks at the relationship
of figures on the financial statements.

17. Learning Unit 22-3 (Ratio Analysis)
Liquidity Ratios
Current ratio =
Total current assets ÷ Total current liabilities
Acid test ratio =
(Current assets – Merchandise inventory
– Prepaid expenses) ÷ Current liabilities

18. Learning Unit 22-3 (Ratio Analysis)
Asset Management Ratios
Accounts receivable turnover =
Net credit sales ÷ Average accounts receivable
Average collection period =
365 days ÷ Accounts receivable turnover

19. Learning Unit 22-3 (Ratio Analysis)
Accounts receivable turnover
shows how many times
accounts receivable is
converted to cash in one year.

20. Learning Unit 22-3 (Ratio Analysis)
Inventory turnover =
Cost of goods sold ÷ Average inventory
Asset turnover = Net sales ÷ Total assets

21. Learning Unit 22-3 (Ratio Analysis)
The inventory turnover calculates the number
of times inventory turns over in one period.
The asset turnover indicates whether or not assets
have been used efficiently to generate sales.

22. Learning Unit 22-3 (Ratio Analysis)
Debt Management Ratios
Debt to total assets =
Total liabilities ÷ Total assets
Debt to stockholders’ equity =
Total liabilities ÷ Stockholders’ equity

23. Learning Unit 22-3 (Ratio Analysis)
The debt-to-total-assets ratio indicates the amount
of assets that are financed by creditors.
The debt-to-stockholders’-equity ratio shows
stockholders’ risk compared to creditors’ risk.

24. Learning Unit 22-3 (Ratio Analysis)
Times interest earned =
Income before taxes and interest expense
÷ Interest expense
It reveals ability to meet interest
payment due dates.

25. Learning Unit 22-3 (Ratio Analysis)
Profitability Ratios
Gross profit rate = Gross profit ÷ Net sales
Return on sales =
Net income before taxes ÷ Net sales

26. Learning Unit 22-3 (Ratio Analysis)
Rate of return on total assets =
Net income before interest and taxes ÷ Total assets
Rate of return on common stockholders’ equity =
(Net income before taxes – Preferred dividends) ÷
Common stockholders’ equity

27. Learning Unit 22-3 (Ratio Analysis)
The rate of return on total assets
indicates earning power.
The rate of return on common stockholders’
equity shows the amount of the net income
share that remains for the common stockholders
(after preferred dividends are deducted).

28. End of Chapter 22