2 Learning 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-
4 Balance 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)
5 Elements 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.
6 Preparing 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.
7 Comparative 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, $81,* Due to rounding
9 Preparing a Horizontal Analysis of a Comparative Balance Sheet Step 1. Calculate the increase or decrease (portion) in each item from the base year.Step 2. Divide the increase or decrease in Step 1 by the old or base year.Step 3. Round as indicated.
12 Income StatementIncome Statement - A financial report that tells how well a company is performing (its profitability or net profit) during a specific period of time.Income Statement$Service Business:Revenues -- Operating expenses= Net incomeRetail Business:Revenues (sales)-- Cost of merchandise sold= Gross profit from sales-- Operating expenses= Net income (profit)
13 Income 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
14 Key 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
15 Income 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
16 Horizontal 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)
17 Completing 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).
18 Trend 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