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Financial Statement
18 Analysis
Learning Objectives
18-2
LEARNING Apply horizontal and vertical analysis to
1
OBJECTIVE financial statements.
Comparison Tools of
Characteristics
Bases Analysis
18-3 LO 1
Horizontal Analysis
balance sheet,
18-4 LO 1
Horizontal Analysis
Illustration 18-5
Horizontal analysis of
balance sheets
18-5 LO 1
Horizontal Analysis
Illustration 18-6
Horizontal analysis of
Income statements
18-6
LO 1
Horizontal Analysis
Illustration 18-7
Horizontal analysis of The ending retained earnings increased 38.6%. As
retained earnings
statements indicated earlier, the company retained a significant
portion of net income to finance additional plant facilities.
18-7 LO 1
Vertical Analysis
income statement.
18-8 LO 1
Vertical Analysis
Illustration 18-8
Vertical analysis of
balance sheets
Quality is choosing to
finance its growth
through retention of
earnings rather than
through issuing
additional debt.
18-9 LO 1
Vertical Analysis
Illustration 18-9
Vertical analysis of
Income statements
Quality appears
to be a profitable
enterprise that is
becoming even more
successful.
18-10 LO 1
Vertical Analysis
Illustration 18-10
Intercompany income statement comparison
18-11 LO 1
DO IT! 1 Horizontal Analysis
18-12 LO 1
LEARNING Analyze a companys performance using ratio
2
OBJECTIVE analysis.
18-13 LO 2
Ratio Analysis
18-14 LO 2
Ratio Analysis
Liquidity Ratios
18-15 LO 2
QUALITY DEPARTMENT STORE INC. QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Balance Sheet (partial)
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-16 LO 2
Ratio Analysis Liquidity Ratios
1. CURRENT RATIO
Illustration 18-12
2013 2012
1.52:1
Ratio of 2.96:1 means that for every dollar of current liabilities, Quality
has $2.96 of current assets.
18-17 LO 2
Investor Insight
How to Manage the Current Ratio
The apparent simplicity of the current ratio can have real-world limitations
because adding equal amounts to both the numerator and the denominator
causes the ratio to decrease.
2. ACID-TEST RATIO
Illustration 18-13
2013 2012
18-19 LO 2
QUALITY DEPARTMENT STORE INC. QUALITY DEPARTMENT STORE INC.
Balance Sheet (partial) Balance Sheet (partial)
Illustration 18-12
18-20 LO 2
Ratio Analysis Liquidity Ratios
2. ACID-TEST RATIO
Illustration 18-14
2013 2012
0.47:1
18-21 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Balance Sheet (partial)
For the Years Ended December 31
2013 2012 2013 2012
18-22 LO 2
Ratio Analysis Liquidity Ratios
2013 2012
69.1 times
$2,097,000
= 10.2 times
($180,000 + $230,000) / 2
18-24 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Balance Sheet (partial)
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-25 LO 2
Ratio Analysis Liquidity Ratios
4. INVENTORY TURNOVER
Illustration 18-16
2013 2012
3.1 times
4. INVENTORY TURNOVER
$1,281,000
= 2.3 times
($500,000 + $620,000) / 2
18-27 LO 2
Ratio Analysis
Profitability Ratios
18-28 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
18-29 LO 2
Ratio Analysis Profitability Ratios
5. PROFIT MARGIN
Illustration 18-17
2013 2012
5.3%
18-30 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-31 LO 2
Ratio Analysis Profitability Ratios
6. ASSET TURNOVER
Illustration 18-18
2013 2012
1.3 times
Illustration 18-12
18-33 LO 2
Ratio Analysis Profitability Ratios
7. RETURN ON ASSETS
Illustration 18-19
2013 2012
7.0%
18-34 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-35 LO 2
Ratio Analysis Profitability Ratios
2013 2012
24.2%
Shows how many dollars of net income the company earned for each
dollar invested by the owners.
18-36 LO 2
Ratio Analysis Profitability Ratios
Illustration 18-21
Return on common stockholders
equity with preferred stock
18-37 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-38 LO 2
Ratio Analysis Profitability Ratios
2013 2012
18-39 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-40 LO 2
Ratio Analysis Profitability Ratios
2013 2012
13.5 times
18-41 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-42 LO 2
Ratio Analysis Profitability Ratios
2013 2012
24.2%
Solvency Ratios
18-44 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-45 LO 2
Ratio Analysis Solvency Ratios
2013 2012
71.1%
18-46 LO 2
QUALITY DEPARTMENT STORE INC.
QUALITY DEPARTMENT STORE INC.
Condensed Income Statements
Condensed Balance Sheets
For the Years Ended December 31
2013 2012 2013 2012
Illustration 18-12
18-47 LO 2
Ratio Analysis Solvency Ratios
Summary of Ratios
Illustration 18-27
18-49 LO 2
Summary of Ratios
Illustration 18-27
18-50 LO 2
LEARNING
OBJECTIVE
3 Apply the concept of sustainable income.
18-51 LO 3
Discontinued Operations
18-52 LO 3
Discontinued Operations
18-53 LO 3
Discontinued Operations
Income Statement (in thousands)
Discontinued Operations Sales $ 285,000
are reported after Cost of goods sold 149,000
Income from continuing
operations. Other revenue (expense):
Interest revenue 17,000
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Previously labeled as Income tax expense 24,000
Income from continuing operations 55,000
Net Income.
Discontinued operations:
Loss from operations, net of tax 315
Loss on disposal, net of tax 189
Total loss on discontinued operations 504
Moved to
Net income $ 54,496
18-54 LO 3
Other Comprehensive Income
18-55 LO 3
Other Comprehensive Income
Illustration 18-30
Lower portion of statement of
comprehensive income
18-57 LO 3
Other Comprehensive Income
Illustration 18-31
Unrealized loss in stockholders equity section
18-58 LO 3
Illustration 18-32
Complete statement of
comprehensive income
18-59
LO 3
DO IT! 3 Unusual Items
18-60 LO 3
DO IT! 3 Unusual Items
18-61 LO 3
A Look at IFRS
Relevant Facts
The tools of financial statement analysis covered in this chapter are
universal and therefore no significant differences exist in the analysis
methods used.
The basic objectives of the income statement are the same under
both GAAP and IFRS. A very important objective is to ensure that
users of the income statement can evaluate the sustainable income
of the company.
18-62 LO 4
A Look at IFRS
Relevant Facts
The basic accounting for discontinued operations is the same
under IFRS and GAAP.
18-63 LO 4
A Look at IFRS
18-64 LO 4
A Look at IFRS
18-65 LO 4
A Look at IFRS
18-66 LO 4
A Look at IFRS
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18-68