1. Financial Analysis RAHUL JAIN

2. Learning Objectives  Explain the purpose of analysis.  Identify the building blocks of analysis.  Describe standards for comparisons in analysis.  Identify the tools of analysis.  Explain and apply methods of horizontal analysis.  Describe and apply methods of vertical analysis.  Define and apply ratio analysis.

3. Application of analytical tools Involves transforming data Reduces uncertainty Basics of Analysis

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

5. To help me interpret our financial statements, I use several standards of comparison.  Intracompany  Intercompany  Industry  Guidelines Standards for Comparison

6. Horizontal Analysis Time Comparing a company’s financial condition and performance across time Tools of Analysis

7. Comparing a company’s financial condition and performance to a base amount Tools of Analysis VerticalAnalysisVerticalAnalysis VerticalAnalysisVerticalAnalysis

8. Time Now, let’s look at some ways to use horizontal analysis. Horizontal Analysis horizontal analysis The term horizontal analysis arises from left-to-right (or right-to-left) movement of our eyes as we review comparative financial statements across time.

10. Calculate Change in Dollar Amount Dollar Change Analysis Period Amount Base Period Amount =– Since we are measuring the amount of the change between 2003 and 2004, the dollar amounts for 2003 become the “base” period amounts. Comparative Statements

11. Calculate Change as a Percent Percent Change Dollar Change Base Period Amount 100% = × Comparative Statements

12. ($11,500 ÷ $23,500) × 100% = 48.9% $12,000 – $23,500 = $(11,500)

14. Now, let’s review the dollar and percent changes for the liabilities and shareholders’ equity accounts.

16. VerticalAnalysisVerticalAnalysis VerticalAnalysisVerticalAnalysis Now, let’s look at some vertical analysis tools!

17. Vertical Analysis is also called as common-size analysis Vertical Analysis VerticalAnalysisVerticalAnalysis VerticalAnalysisVerticalAnalysis vertical analysis The term vertical analysis arises from the up- down (down-up) movement of our eyes as we review common-size financial statements.

18. Calculate Common-size Percent Common-size Percent Analysis Amount Base Amount 100% = × Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Common-Size Statements

19. ($12,000 ÷ $315,000) × 100% = 3.8% ($23,500 ÷ $289,700) × 100% = 8.1%