Survey of accounting 6e chapter 9

Financial Statement Analysis

Chapter
9

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Learning Objectives
After studying this chapter, you should be able to:
•Describe basic financial statement analytical
methods.
•Use financial statement analysis to assess the
liquidity and solvency of a business.
•Use financial statement analysis to assess the
profitability of a business.
•Describe the contents of corporate annual reports.
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Learning
Objective 1
Describe basic financial statement
analytical procedures

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Horizontal Analysis
• The __________ analysis of _________ and
_________ in related items in _________

financial statements
Exhibit 1: Comparative Balance Sheet— Horizontal Analysis

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Vertical Analysis
• A __________ analysis used to show the
relationship of each __________ to the
________ within __________ statement
Exhibit 5: Comparative Balance Sheet— Vertical Analysis

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Benefits of Analysis
• ________ and ________analysis are useful
in assessing relationships and trends in
financial conditions and operations of a
business
• ________analysis is useful for comparing
one company with another or with industry
averages
• ________ is made easier with commonsized financial statements

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Common-Sized Statements
Exhibit 7: Common- Sized Income Statement

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Learning
Objective 2
Use financial statement analysis to
assess the liquidity and solvency of
a business

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Liquidity and Solvency
• _________ – the ability of a business to
pay its debts
• _________ – the ability of a business to
convert assets into cash.
_________, _______, and __________
are interrelated!

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Solvency Analysis
• Normally assessed by examining _________
relationships, using the following major
analyses:
•
•

•
•
•
•

Current position analysis
Accounts receivable analysis
Inventory analysis
Ratio of fixed assets to long-term liabilities
Ratio of liabilities to stockholders’ equity
Number of times interest charges are earned

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Current Position Analysis
• Using measures to assess a business’s
ability to ______________
• __________– current assets less current
liabilities
• ________ – current assets divided by current
liabilities
• _________ – total “quick” assets divided by
current liabilities

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Current Position Analysis – Working Capital
and Current Ratio

Mooney Company

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Current Position Analysis – Quick Ratio
Quick Ratio

Quick Assets
Current Liabilities

=

Quick Assets
$280,500

Quick Assets
$160,000

Quick Ratio:
Mooney

$__________÷ $______= ______

Wendt

$__________÷ $______= ______

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Accounts Receivable Analysis
• Measures efficiency of collection
• Reflects liquidity
Accounts Receivable Turnover =

Number of Days’ Sales in
Receivables

=

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Accounts Receivable Turnover

The company _______ its accounts receivable turnover by _____
measured in terms of the number of times receivables are collected
within the year.

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Days’ Sales in Receivables

The company improved its collections of
accounts receivable by 10.9 days in 2012
measured in days receivables have been
outstanding.

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Inventory Analysis
• Measures inventory ________
• Avoid tying up funds in _________
• Avoid _________

• Reflects liquidity
Inventory Turnover

=

Number of Days’ Sales =
in Inventory
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Inventory Turnover

The company turned its inventory 1 time more in
2012, measured in terms of the number of times
inventory turns over within the year.

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Days’ Sales in Inventory

The company reduced the time it held inventory by

nearly 28% in 2012 measured in days the inventory
was held in warehouses.

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Ratio of Fixed Assets to LongTerm Liabilities
• Indicates the ___________ for note-holders
or bondholders
• Indicates the ability to ___________ on a
long-term basis
Fixed Assets to Long-Term
=
Liabilities

Fixed Assets (net)
Long-Term Liabilities

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Ratio of Fixed Assets to LongTerm Liabilities

The company increased its margin of safety in
financing fixed assets mainly by lowering longterm debt.
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Ratio of Liabilities to Stockholders’
Equity

• Indicates the margin of ___________.
• Indicates the ability to __________________.

Liabilities to Stockholders’
=
Equity

Total Liabilities
Total Stockholders’ Equity

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Ratio of Liabilities to Stockholders’
Equity

The ratio shows an increasing margin of
safety for creditors.

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Number of Times Interest
Charges Earned
• Indicates the general ___________________
of the business
• Indicates the ability to __________ adverse
business conditions
Times Interest Charges
Earned

=

Income before Taxes + Interest Expense
Interest Expense

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Number of Times Interest
Charges Earned

The number of times interest charges are
earned improved from 12.2 to 28.1, a significant
measure of safety for creditors.

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