Download Financial Statement Analysis: Tools and Techniques for Understanding Company Performance and more Assignments Financial Statement Analysis in PDF only on Docsity! 1 ACCT 102 - Professor Johnson Lecture Notes – Chapter 13: ANALYZING FINANCIAL STATEMENTS BASICS OF ANALYSIS Purpose of Analysis Who analyzes financial statements? 1. Internal users, such as management, internal auditors, and consultants use financial statement analysis to improve company efficiency and effectiveness in providing products and services. 2. External users, such as stockbrokers and lenders, to make better and more informed investing and lending decisions. 3. Others, such as suppliers, to establish credit terms, or analyst services such as Standard & Poor’s, in making buy-sell ratings on stocks and in setting credit ratings. Information for Analysis External users rely on the financial statements (the income statement, balance sheet, statement of retained earnings, statement cash flows, and the notes to the financial statements), for the data needed to perform financial analyses. Internal users receive special reports not available to those outside the company. Standards for Comparison Data derived from financial analysis is not useful unless compared to a benchmark. Common benchmarks are: 1. Intracompany: Comparing data from the current year to the prior years for the company analyzed can indicate useful trends in performance. 2. Industry: Comparing financial analysis data from a company to its industry average lets us know how a company compares to its competitors. 3. Competitor: Comparing a company’s financial data to one of its competitors is especially useful in making investing decisions. Analysis Tools The three most common financial statement analysis tools are: 1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis Horizontal analysis Horizontal analysis compares changes in accounts across time. For example, assume Company A had the following data available: 2019 2018 Net sales $110,000 $100,000 Cost of goods sold 60,000 51,000 Gross profit 50,000 49,000 2 A horizontal analysis for this data would be: Dollar Percent 2019 2018 Change Change Net sales $110,000 $100,000 $10,000 10.0% (1) Cost of goods sold 60,000 51,000 9,000 17.6% Gross profit 50,000 49,000 1,000 2.0% (1) The percent change is calculated as: Dollar change / older period amount = Percent change. ($10,000 / $100,000 = 10%.) What does this tell us? Even though sales increased by 10% from 2018 to 2019, gross profit only increased by 2%. Why? We don’t know; financial analysis doesn’t give us answers to questions, but does highlight questions we would direct to management. A type of horizontal analysis which may also be performed is called trend analysis, or trend percents. Using 2018 as the base year, the trend percentages for the example above would be: 2019 2018 Net sales 110% 100% Cost of goods sold 118% 100% Gross profit 102% 100% This analysis tell us that net sales increased by 10%, but gross profit only by 2%. Here is a guided example illustrating the use of common size comparisons. http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1307/ex1307.html The following guided example focuses on computing trend percentages. http://lectures.mhhe.com/connect/0078025605/guided_ex/chapter13/ex1303/ex1303.html
