The document discusses different types of financial statement analysis including horizontal analysis, vertical analysis, and calculations of profitability and liquidity ratios. Horizontal analysis calculates trends between years, vertical analysis shows the relationship between items on a statement as a percentage, and ratios analyze a company's profitability and ability to meet short-term obligations. Specific formulas and examples are provided for each type of analysis.
The document discusses different types of financial statement analysis including horizontal analysis, vertical analysis, and calculations of profitability and liquidity ratios. Horizontal analysis calculates trends between years, vertical analysis shows the relationship between items on a statement as a percentage, and ratios analyze a company's profitability and ability to meet short-term obligations. Specific formulas and examples are provided for each type of analysis.
The document discusses different types of financial statement analysis including horizontal analysis, vertical analysis, and calculations of profitability and liquidity ratios. Horizontal analysis calculates trends between years, vertical analysis shows the relationship between items on a statement as a percentage, and ratios analyze a company's profitability and ability to meet short-term obligations. Specific formulas and examples are provided for each type of analysis.
The document discusses different types of financial statement analysis including horizontal analysis, vertical analysis, and calculations of profitability and liquidity ratios. Horizontal analysis calculates trends between years, vertical analysis shows the relationship between items on a statement as a percentage, and ratios analyze a company's profitability and ability to meet short-term obligations. Specific formulas and examples are provided for each type of analysis.
STATEMENT ANALYSIS ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY JOEL SHAPIRO Horizontal Analysis
● Calculates the trend between one year and the next
● Identifies important trends and allows the owner to see the business as a whole and the direction it is heading in ● Calculation: [(current year – base year) / base year] * 100 o Always calculated using the same element / account over two different years ● In the examples below, 2015 is used as the base year
Horizontal Analysis of Income Statement – Example
ABC Company Year Ended December 31, 2019 2016 2015 Horizontal Analysis Net Sales 150,000 130,000 15.4% Cost of Goods Sold 30,000 25,000 20.0% Gross Profit 120,000 105,000 14.3% Operating Expenses 85,000 70,000 21.4% Interest Expense 3,000 2,500 20.0% Profit Before Income Taxes 35,000 32,500 7.69% Income Tax Expense 2,500 2,000 25.0% Profit 32,500 30,500 6.6%
Horizontal Analysis of Balance Sheet – Example
ABC Company At December 31, 2019 2016 2015 Horizontal Analysis Cash 17,000 15,000 13.3% Accounts Receivable 26,000 25,000 4.0% Inventory 40,000 30,000 33.3% Property, Plant & Equipment 60,000 60,000 0.0% Total Assets 143,000 130,000 10.0% Current Liabilities 20,000 15,000 33.3% Long-Term Liabilities 45,000 40,000 12.5% Retained Earnings 55,000 50,000 10.0% Owner’s Capital 23,000 25,000 -8.0% Total Liabilities and Equity 143,000 130,000 10.0%
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TRSM Academic Success Centre
TRS 2-168 | 416-979-5000, ext. 2435 trsm.academicsuccess@ryerson.ca | ryerson.ca/trsm-success ACC100: FINANCIAL STATEMENT ANALYSIS ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY JOEL SHAPIRO Vertical Analysis
● Shows the relationship between different items on the same financial statement ● Vertical analysis on the Income Statement o Calculates all accounts / elements as a percentage of Net Sales o Net Sales = 100% ● Vertical analysis on the Balance Sheet o Calculates all accounts / elements as a percentage of Total Assets or Total Liabilities and Equity o Total Assets = 100% o Total Liabilities and Equity = 100%
Vertical Analysis of Income Statement – Example
2016 Vertical Analysis
Net Sales 150,000 100.0% Cost of Goods Sold 30,000 20.0% Gross Profit 120,000 80.0% Operating Expenses 85,000 56.7% Interest Expense 3,000 2.0% Profit Before Income Taxes 35,000 23.3% Income Tax Expense 2,500 1.7% Profit 32,500 21.7%
Vertical Analysis of Balance Sheet – Example
2016 Vertical Analysis
Cash 17,000 11.9% Accounts Receivable 26,000 18.2% Inventory 40,000 28.0% Property, Plant & Equipment 60,000 42.0% Total Assets 143,000 100% Current Liabilities 20,000 14.0% Long-Term Liabilities 45,000 31.5% Retained Earnings 55,000 38.5% Owner’s Capital 23,000 16.1% Total Liabilities and Equity 143,000 100%
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TRSM Academic Success Centre
TRS 2-168 | 416-979-5000, ext. 2435 trsm.academicsuccess@ryerson.ca | ryerson.ca/trsm-success ACC100: FINANCIAL STATEMENT ANALYSIS ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY JOEL SHAPIRO Profitability Ratios Ratio Formula Example Notes Gross (Gross Profit / Net Sales) Net Sales = 150,000 What numbers are good for the Profit * 100 Gross Profit = 120,000 profitability ratios? Ratio - depends on the industry average Gross Profit Ratio - in general, high percentages are = (120,000 / 150,000) * 100 good = 80% - should be increasing or stable from year to year Net (Net Income / Net Sales) Net Sales = 150,000 Profit * 100 Net Profit = 32,500 Ratio Net Profit Ratio = (32,500 / 150,000) * 100 = 21.7%
Liquidity Ratios Liquidity: the ability of a company to pay its liabilities as they come due Ratio Formula Example Notes Working Current Assets – Current Current Assets = 83,000 Capital Liabilities Current Liabilities = 20,000 Working Capital = 63,000 Current Current Assets / Current Current Assets = 83,000 What numbers are good for this Ratio Liabilities Current Liabilities = 20,000 ratio? - depends on the industry average Current Ratio - higher is better to a certain point = 83,000 / 20,000 - it is possible for a company to = 4.15 to 1 have too much cash sitting in a bank account Quick (Cash + Accounts Cash = 17,000 What numbers are good for this Ratio Receivable) / Current Accounts Receivable = ratio? (also Liabilities 26,000 - depends on the industry average called Current Liabilities = 20,000 - it is often less than 1 to 1, so acid-test anything more is good ratio) Quick Ratio = (17,000 + 26,000) / 20,000 = 2.15 to 1
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TRSM Academic Success Centre
TRS 2-168 | 416-979-5000, ext. 2435 trsm.academicsuccess@ryerson.ca | ryerson.ca/trsm-success ACC100: FINANCIAL STATEMENT ANALYSIS ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY JOEL SHAPIRO Solvency Ratios Solvency: a company’s ability to pay its long-term debt (a measure of risk – more long-term debt means more risk in terms of ultimate survival) Ratio Formula Example Notes Debt to Total Liabilities / Total Equity Total Liabilities = 65,000 What are good numbers Equity Total Equity = 78,000 for the solvency ratios? Ratio - depends on the Debt to Equity Ratio industry average = 65,000 / 78,000 - in general, lower = 0.83 to 1 numbers are better Debt to Total Liabilities / Total Assets Total Liabilities = 65,000 Total Total Assets = 143,000 Assets Ratio Debt to Total Assets Ratio = 0.45 to 1
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TRSM Academic Success Centre
TRS 2-168 | 416-979-5000, ext. 2435 trsm.academicsuccess@ryerson.ca | ryerson.ca/trsm-success ACC100: FINANCIAL STATEMENT ANALYSIS ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY JOEL SHAPIRO Efficiency Ratios Efficiency: how well a company is managing its assets and liabilities Ratio Formula Example Notes Accounts Net Sales / Average Net Sales = 150,000 What numbers are good Receivable Accounts Receivable over A/R 2016 = 26,000 for efficiency ratios? (A/R) the past 2 years A/R 2015 = 25,000 - depends on the Turnover industry average and Accounts Receivable Turnover past years = 150,000 / [(26,000 + 25,000) / 2] - for A/R turnover, it also = 5.88 depends on the credit terms Accounts Receivable Turnover in - in general, lower days numbers are better = 365 / 5.88 = 62.07 days
Meaning of Example - the company’s Accounts Receivable were collected and replaced by new ones 5.88 times over the year (every 62.07 days) Inventory Cost of Goods Sold / COGS = 65,000 Turnover Average Inventory over the past 2 years Inventory 2016 = 40,000 Inventory 2015 = 30,000
