University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

143

Pages:

35
Author:

diedesdemona1ny

Chapter 14 “How Well Am I Doing?” Financial Statement Analysis 14-2 Limitations of Financial Statement Analysis Differences in accounting methods between companies sometimes make comparisons difficult. We use the LIFO method to value inventory. We use the average cost method to value inventory. 14-3 Limitations of Financial Statement Analysis Analysts should look beyond the ratios. Industry trends Technological changes Changes within the company Consumer tastes Economic factors 14-4 Learning Objective 1 Prepare and interpret financial statements in comparative and common-size form. 14-5 Statements in Comparative and Common-Size Form  Dollar and percentage changes on statements An item on a financial statement has little meaning by itself. The meaning of the numbers can be enhanced by drawing comparisons.  Common-size statements  Ratios 14-6 Dollar and Percentage Changes on Statements Horizontal analysis (or trend analysis) shows the changes between years in the financial data in both dollar and percentage form. 14-7 Horizontal Analysis Example The following slides illustrate a horizontal analysis of Clover Corporation’s December 31, 2009 and 2008, comparative balance sheets and comparative income statements. 14-8 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets 2009 $ 12,000 60,000 80,000 3,000 155,000 40,000 120,000 160,000 $ 315,000 2008 $ 23,500 40,000 100,000 1,200 164,700 40,000 85,000 125,000 $ 289,700 Increase (Decrease) Amount % 14-9 Horizontal Analysis Calculating Change in Dollar Amounts Dollar Change = Current Year Figure – Base Year Figure The dollar amounts for 2008 become the “base” year figures. 14-10 Horizontal Analysis Calculating Change as a Percentage Percentage Change = Dollar Change Base Year Figure × 100% 14-11 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31 2009 2008 Increase (Decrease) Amount % Assets Current assets: Cash $ 12,000 $ 23,500 $ (11,500) (48.9) Accounts receivable, net 60,000 40,000 Inventory 80,000 100,000 Prepaid expenses 3,000 1,200 Total current assets 155,000 164,700 Property and equipment: $12,000 – $23,500 = $(11,500) Land 40,000 40,000 Buildings and equipment, net 120,000 85,000 ($11,500 ÷160,000 $23,500) × 100% = (48.9%) Total property and equipment 125,000 Total assets $ 315,000 $ 289,700 14-12 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31 Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets 2009 $ 12,000 60,000 80,000 3,000 155,000 40,000 120,000 160,000 $ 315,000 $ 2008 Increase (Decrease) Amount % 23,500 40,000 100,000 1,200 164,700 $ (11,500) 20,000 (20,000) 1,800 (9,700) (48.9) 50.0 (20.0) 150.0 (5.9) 35,000 35,000 $ 25,300 0.0 41.2 28.0 8.7 40,000 85,000 125,000 $ 289,700 14-13 Horizontal Analysis We could do this for the liabilities & stockholders’ equity, but now let’s look at the income statement accounts. 14-14 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 2009 2008 Sales $ 520,000 $ 480,000 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Operating expenses 128,600 126,000 Net operating income 31,400 39,000 Interest expense 6,400 7,000 Net income before taxes 25,000 32,000 Less income taxes (30%) 7,500 9,600 Net income $ 17,500 $ 22,400 Increase (Decrease) Amount % 14-15 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 2009 2008 Sales $ 520,000 $ 480,000 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Operating expenses 128,600 126,000 Net operating income 31,400 39,000 Interest expense 6,400 7,000 Net income before taxes 25,000 32,000 Less income taxes (30%) 7,500 9,600 Net income $ 17,500 $ 22,400 Increase (Decrease) Amount % $ 40,000 8.3 45,000 14.3 (5,000) (3.0) 2,600 2.1 (7,600) (19.5) (600) (8.6) (7,000) (21.9) (2,100) (21.9) $ (4,900) (21.9) 14-16 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Increase (Decrease) 2009 2008 Amount % Sales $ 520,000 $ 480,000 $ 40,000 8.3 Cost of goods sold 360,000 315,000 45,000 14.3 Gross margin 160,000 165,000 (5,000) (3.0) OperatingSales expenses 128,600 126,000 2,600 2.1 increased by 8.3%, yet Net operating income 31,400 net income decreased by 39,000 21.9%. (7,600) (19.5) Interest expense 6,400 7,000 (600) (8.6) Net income before taxes 25,000 32,000 (7,000) (21.9) Less income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income $ 17,500 $ 22,400 $ (4,900) (21.9) 14-17 Horizontal Analysis CLOVER CORPORATION There were increases in both cost of goods Comparative Income Statements sold (14.3%) and operating expenses (2.1%). For the Years Ended December 31 These increased costs more than offset theIncrease increase in sales, yielding an overall (Decrease) % 2008 2007 Amount decrease in net income. Sales $ 520,000 $ 480,000 $ 40,000 Cost of goods sold 360,000 315,000 45,000 Gross margin 160,000 165,000 (5,000) Operating expenses 128,600 126,000 2,600 Net operating income 31,400 39,000 (7,600) Interest expense 6,400 7,000 (600) Net income before taxes 25,000 32,000 (7,000) Less income taxes (30%) 7,500 9,600 (2,100) Net income $ 17,500 $ 22,400 $ (4,900) 8.3 14.3 (3.0) 2.1 (19.5) (8.6) (21.9) (21.9) (21.9) 14-18 Trend Percentages Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent. 14-19 Trend Analysis Trend = Percentage Current Year Amount Base Year Amount × 100% 14-20 Trend Analysis Example Look at the income information for Berry Products for the years 2005 through 2009. We will do a trend analysis on these amounts to see what we can learn about the company. 14-21 Trend Analysis Berry Products Income Information For the Years Ended December 31 Item Sales Cost of goods sold Gross margin 2009 $ 400,000 285,000 115,000 2008 $ 355,000 250,000 105,000 Year 2007 $ 320,000 225,000 95,000 The base year is 2005, and its amounts will equal 100%. 2006 $ 290,000 198,000 92,000 2005 $ 275,000 190,000 85,000 14-22 Trend Analysis Berry Products Income Information For the Years Ended December 31 Item Sales Cost of goods sold Gross margin 2009 2008 Year 2007 2006 Amount ÷ 2005 Amount × 100% ( $290,000 ÷ $275,000 ) × 100% = 105% ( $198,000 ÷ $190,000 ) × 100% = 104% ( $ 92,000 ÷ $ 85,000 ) × 100% = 108% 2006 105% 104% 108% 2005 100% 100% 100% 14-23 Trend Analysis Berry Products Income Information For the Years Ended December 31 Item Sales Cost of goods sold Gross margin 2009 145% 150% 135% 2008 129% 132% 124% Year 2007 116% 118% 112% 2006 105% 104% 108% By analyzing the trends for Berry Products, we can see that cost of goods sold is increasing faster than sales, which is slowing the increase in gross margin. 2005 100% 100% 100% 14-24 Trend Analysis 160 Percentage 150 140 We can use the trend percentages to construct a graph so we can see the trend over time. 130 Sales COGS GM 120 110 100 2005 2006 2007 Year 2008 2009 14-25 Common-Size Statements Vertical analysis focuses on the relationships among financial statement items at a given point in time. A common-size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage. 14-26 Common-Size Statements In income statements, all items usually are expressed as a percentage of sales. 14-27 Gross Margin Percentage Gross Margin = Gross Margin Percentage Sales This measure indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit. 14-28 Common-Size Statements In balance sheets, all items usually are expressed as a percentage of total assets. 14-29 Common-Size Statements Wendy's McDonald's (dollars in millions) Dollars Percentage Dollars Percentage 2007 Net income $ 88 3.60% $ 2,396 10.50% Common-size financial statements are particularly useful when comparing data from different companies. 14-30 Common-Size Statements Example Let’s take another look at the information from the comparative income statements of Clover Corporation for 2009 and 2008. This time, let’s prepare common-size statements. 14-31 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Common-Size Percentages 2009 2008 2009 2008 Sales $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 Gross margin 160,000 165,000 Sales is Operating expenses 128,600 126,000 usually the Net operating income 31,400 39,000 base and is Interest expense 6,400 7,000 expressed Net income before taxes 25,000 32,000 as 100%. Less income taxes (30%) 7,500 9,600 Net income $ 17,500 $ 22,400 14-32 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Common-Size Percentages 2009 2008 2009 2008 Sales $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6 Gross margin 160,000 165,000 Operating expenses 128,600 126,000 2009 Cost ÷ 2009 Sales Net operating income 31,400 × 100% 39,000 ( $360,000 Interest expense ÷ $520,000 6,400) × 100% 7,000 = 69.2% Net income before taxes 25,000 32,000 2008(30%) Cost ÷ 7,500 2008 Sales × 100% Less income taxes 9,600 $480,000 ) × 100% = 65.6% Net income ( $315,000$ ÷ 17,500 $ 22,400 14-33 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31 Common-Size What conclusions can we draw? Percentages 2009 2008 2009 2008 Sales $ 520,000 $ 480,000 100.0 100.0 Cost of goods sold 360,000 315,000 69.2 65.6 Gross margin 160,000 165,000 30.8 34.4 Operating expenses 128,600 126,000 24.8 26.2 Net operating income 31,400 39,000 6.0 8.2 Interest expense 6,400 7,000 1.2 1.5 Net income before taxes 25,000 32,000 4.8 6.7 Less income taxes (30%) 7,500 9,600 1.4 2.0 Net income $ 17,500 $ 22,400 3.4 4.7 14-34 Quick Check  Which of the following statements describes horizontal analysis? a. A statement that shows items appearing on it in percentage and dollar form. b. A side-by-side comparison of two or more years’ financial statements. c. A comparison of the account balances on the current year’s financial statements. d. None of the above. 14-35 Quick Check  Which of the following statements describes horizontal analysis? a. A statement that shows items appearing on it in percentage and dollar form. b. A side-by-side comparison of two or more years’ financial statements. c. A comparison of the account balances on Horizontal shows the changes the current analysis year’s financial statements. between years in the financial data in both d. None of the above. dollar and percentage form.