Chapter Thirteen Copyright 2014 by The McGrawHill Companies Inc All rights reserved McGrawHillIrwin Explain the purpose and the key items on the balance sheet Explain and complete vertical and horizontal analysis ID: 257111
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HOW TO READ, ANALYZE, AND INTERPRET FINANCIAL REPORTS
Chapter Thirteen
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/IrwinSlide2
Explain the purpose and the key items on the balance sheet.
Explain and complete vertical and horizontal analysis.
LU13-1: Balance Sheet -- Report as of a Particular Date
Learning unit objectives
LU 13-1: Income Statement -- Report for a Specific Period of Time
Explain the purpose and the key items on the income statement.
Explain and complete vertical and horizontal analysis.
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2
LU 13-3: Trend and Ratio Analysis
Explain and complete a trend analysis.
List, explain, and calculate key financial ratios.Slide3
Accounting Equation
Accounting Equation:
Assets = Liabilities + Owner’s Equity
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3Slide4
Balance Sheet
Gives a financial picture of what a company is worth as of a particular date.
Assets
Liabilities + Owner’s Equity
=
(
How much the company owns)
(How much the owner is worth)
(How much the company owes)
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Balance sheet
Assets – Liabilities = Owner’s equity (capital)
$10,000 - $2,500 = $7,50013-
5Slide6
Elements of the Balance Sheet(Figure 13.1)
MOOL COMPANY
Balance SheetDecember 31, 2014
Assets Liabilities
a.
Current assets:
a.
Current liabilities:b. Cash $ 7,000
b. Accounts payable $ 80,000c. Accounts receivable 9,000 c. Salaries payable 12,000
d. Merchandise inventory 30,000 d. Total current liabilities $ 92,000e.
Prepaid expenses 15,000 e. Long-term liabilities:f.
Total current assets $61,000
f.
Mortgage note payable
58,000
g.
Plant and equipment:
g.
Total liabilities $150,000
h.
Building (net) $60,000
i
. Land
84,000
Stockholders’ Equity
j.
Total plant and equipment 144,000
a.
Common stock $ 20,000
b.
Retained earnings
35,000
c. Total stockholders’ equity 55,000k. Total assets $205,000 d. Total liab. and stkhlds’ equity $205,000
Assets broken down into current assets and plant and equipment
Liabilities broken down into current and long-term
Total of current assets and plant and equipment.
(Total is double-ruled)
Total of all liabilities and stockholders’ equity.
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Vertical Analysis and the Balance Sheet
Step 2. Divide each liability and stockholders’ equity (the portions) as a percent of total liabilities and stockholders’ equity (the base). Round as indicated.
Step 1
.
Divide each asset (the portion) as a percent of total assets (the base). Round as indicated.
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Comparative Balance Sheet: Vertical Analysis (Figure 13.2)
ROGER COMPANY
Comparative Balance SheetDecember 31, 2013 and 2014 2014 2013
Amount Percent Amount Percent
Assets
Current Assets: Cash $22,000 25.88 $18,000 22.22
Accounts Receivable 8,000 9.41 9,000 11.11 Merchandise inventory 9,000 10.59 7,000 8.64 Prepaid rent 4,000
4.71 5,000 6.17 Total current assets
$43,000 50.59 $39,000 48.15*
Plant and equipment:
Building (net) $18,000 21.18 $18,000 22.22
Land
24,000
28.24
24,000
29.63
Total plant and equipment
$42,000
49.41
*
$42,000
51.85
Total assets
$
85,000
100.00
$81,000 100.00* Due to rounding13-8Slide9
Comparative Balance Sheet: Vertical Analysis (Figure 13.2)
ROGER COMPANY
Comparative Balance SheetDecember 31, 2013 and 2014 2014 2013
Amount Percent Amount Percent
Liabilities
Current liabilities:
Accounts payable $14,000 16.47 $ 8,000 9.88 Salaries payable 18,000 21.18 17,000 20.99
Total current liabilities $32,000 37.65 $25,000 30.86*Long-term liabilities: Mortgage note payable $12,000
14.12 $20,000 24.69 Total liabilities $44,000 51.76* $45,000 55.56*
Stockholders’ Equity
Common stock $20,000 23.53 $20,000 24.69
Retained earnings
21,000
24.71
16,000
19.75
Total stockholders’ equity
$41,000
48.24
$36,000
44.44
Total liabilities and stockholders’ equity
$85,000
100.00
$81,000 100.00* Due to rounding13-9Slide10
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.
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Comparative Balance Sheet: Horizontal Analysis (Figure 13.3)
ABBY ELLEN COMPANY
Comparative Balance SheetDecember 31, 2013 and 2014
Increase (decrease)
2014 2013
Amount Percent Assets
Current Assets: Cash $ 6,000 $ 4,000 $ 2,000 50.00* Accounts receivable 5,000 6,000 (1,000) -16.67 Merchandise inventory 9,000 4,000 5,000 125.00 Prepaid rent
5,000 7,000 (2,000)
-28.57 Total current assets $25,000 $21,000 $ 4,000
19.05
Plant and equipment:
Building (net) $12,000 $12,000 0 0
Land
18,000
18,000
0 0
Total plant and equipment
$30,000
$30,000
0
0
Total assets
$55,000
$51,000
$4,000
7.8413-11Slide12
Comparative Balance Sheet: Horizontal Analysis (Figure 13.3)
ABBY ELLEN COMPANY
Comparative Balance SheetDecember 31, 2013 and 2014
Increase (decrease)
2014 2013
Amount Percent Liabilities
Current liabilities: Accounts payable $ 3,200 $ 1,800 $1,400 77.78 Salaries payable 2,900 3,200
(300) -9.38 Total current liabilities $ 6,100 $ 5,000 $1,100 22.00
Long-term liabilities: Mortgage note payable 17,000 15,000
2,000
13.33
Total liabilities
$ 23,100 $20,000
$
3,100
15.50
Owner’s Equity
Abby Ellen, capital $31,900 $31,000 $ 900 2.90
Total liabilities and owner’s equity
$55,000
$
51,000
$4,000
7.84
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Income Statement – report for a specific period of time
Income Statement -- A financial report that tells how well a company is performing (its profitability or net profit) during a specific period of time (month, year, etc).
Service Business:
Net income = Revenues -- Operating expenses
Retail Business:
Revenues
(sales)
-- Cost of merchandise sold= Gross profit from sales
-- Operating expenses= Net income (profit)
Income
Statement
$
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Income statement
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MOOL COMPANY
Income Statement For Month Ended December 31, 2014
Revenues
a.
Gross Sales $22,080
b.
Less: Sales returns and allowances $ 1,082
c. Sales discounts
432 1,514d. Net Sales Cost of merchandise (goods) sold: $20,566
a. Merchandise Inventory 12/1/2014 $1,248
b. Purchases $10,512c. Less: Purchases returns and allowances $336
d.
Less: Purchase discounts
204
540
e.
Cost of net purchases
9,972
f.
Cost of merchandise (goods available for sale) $11,220
g.
Less: Merchandise inventory 12/31/2014
1,600
h.
Cost of merchandise (goods sold)
9,620
Gross profit from sales $10,946
Operating expenses:
a.
Salary $2,200
b.
Insurance 1,300
c.
Utilities 400
d. Plumbing 120e. Rent 410
f.
Depreciation 200g.
Total operating expenses 4,630 Net income $ 6,316
Income Statement(Figure 13.4)
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Key Calculations on Income Statement
Net sales = Gross sales -- Sales returns allowances -- Sales discounts
Net income
= Gross profit -- Operating expenses
Gross profit from sales
= Net sales -- Cost of merchandise (goods) sold
Cost
of Net purchasesmerchandise = Beginning + (purchase less -- Ending
(goods) sold inventory returns & discounts) inventory
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Income Statement
Vertical Analysis (Figure 13.5)
ROYAL COMPANY
Comparative Income Statement
For Years Ended December 31, 2013 and 2014
2014 Percent 2013 Percent
of net of net
Net Sales $45,000 100.00 $29,000 100.00*Cost of merchandise sold 19,000 42.22 12,000
41.38Gross profit from sales $26,000 57.78
$17,000 58.62Operating expenses: Depreciation $1,000 2.22 $ 500 1.72
Selling and Advertising 4,200 9.33 1,600 5.52
Research 2,900 6.44 2,000 6.90
Miscellaneous
500
1.11
200
.69
Total operating expenses
$8,600
19.11
* $
4,300
14.83
Income before interest and taxes $17,400 38.67 $12,700 43.79
Interest expense
6,000
13.33
3,000 10.34Income before taxes $11,400 25.33* $ 9,700 33.45Provision for taxes 5,500 12.22 3,000 10.34Net income $ 5,900 13.11 $ 6,700 23.10*
* Off due to rounding
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Horizontal Analysis Income Statement (Figure 13.6)
FLINT COMPANY
Comparative Income Statement
For Years Ended December 31,
2013
and
2014
2014 2013 Increase (decrease)
Amount PercentSale $ 90,000 $80,000 $10,000 Sales returns and allowances
2,000 2,000 0Net Sales
$88,000 $78,000 $10,000 + 12.82Cost of merchandise sold 45,000
40,000
5,000
+
12.50
Gross profit from sales
$
43,000 $
38,000
$ 5,000 + 13.16
Operating expenses:
Depreciation
$ 6,000 $
5,000
$ 1,000 + 20.00
Selling and
Administrative
16,000
12,000 4,000 + 33.33 Research 600 1,000 (400) - 40.00 Miscellaneous 1,200 500 700 + 140.00 Total operating expenses $23,800 $18,500 $ 5,300 + 28.65Income before interest and taxes $19,200 $19,500 $ (300) - 1.54Interest expense 4,000 4,000 0
Income before taxes $15,200 $15,500
$ (300) - 1.94
Provision for taxes 3,800 4,000 (200) -
5.00Net income $11,400 $11,500 $
(100) - .87
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Completing a Trend Analysis
Trend Analysis –
Analyzes the changes that occur by expressing each number as a percent of the base year.
Step 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).
Each Item
Base Amount
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Trend Analysis
Given (base year 2012)
2015 2014 2013 2012Sales $621,000 $460,000 $340,000 $420,000
Gross Profit 182,000 141,000 112,000 124,000
Net Income 48,000 41,000 22,000 38,000
Trend Analysis
2015 2014 2013 2012
Sales* 148% 110% 81% 100%Gross Profit 147 114 90 100Net Income 126 108 58 100
$340,000$420,000D
* Round to nearest whole percent13-
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Sales of 2013 were 81% of the sales of 2012Slide21
Ratio analysis
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