1、LOGOAnalyzing Financial StatementsUnit 9Financial Accounting English(Second Edition)Financial Accounting English(Second Edition)ContentsSection 1 Purpose of Financial Statement AnalysisSection 2 Horizontal AnalysisSection 3 Vertical AnalysisSection 4 Ratio AnalysisFinancial Accounting English(Second
2、 Edition)Section 1Purpose of Financial Statement Analysis The internal users of accounting information are managing executives and administrators in the company.External users are those who are not directly involved in operating the company.Financial Accounting English(Second Edition)Section 2Horizo
3、ntal Analysis(水平分析水平分析)Horizontal analysis compares amounts for two or more successive periods.It involves the left-to-right movement of our eyes as we view comparative financial statements.Horizontal analysis begins with the computation of changes from the previous year to the current year in both
4、dollar amounts and percentages.Financial Accounting English(Second Edition)2.1 Computation of dollar changes and percent changes(计算金额及百分比的变化)We can compute the dollar change for a financial statement item as:Section 2Horizontal Analysis(水平分析水平分析)Financial Accounting English(Second Edition)In the for
5、mula,analysis period is the point of time under analysis,and base period is the point of time used for comparison.Often the previous year is used as the base period.Section 2Horizontal Analysis(水平分析水平分析)Financial Accounting English(Second Edition)We compute the percent change by dividing the dollar
6、change by the base period amount and then multiplying this quantity by 100:Section 2Horizontal Analysis(水平分析水平分析)Financial Accounting English(Second Edition)2.2 Example of dollar changes and percent changes An example of dollar and percent changes is given in the form of comparative financial statem
7、ents for Lott Law Firm.In Example 1.4 and 1.5,Unit One and Example 4.3,Unit Four,we showed two financial statements for Lott Law Firm for its January and February operations.Example 9.1Section 2Horizontal Analysis(水平分析水平分析)Financial Accounting English(Second Edition)Section 3Vertical Analysis(垂直分析垂直
8、分析)Vertical analysis involves the up-down movement of our eyes as we review common-size financial statements.In vertical analysis,percentages are also used.They are used to show the relationship of a part(individual or a group of financial statement items)to a total(base amount)in a single financial
9、 statement.Financial Accounting English(Second Edition)3.1 Common-size statements(百分比报表)Section 3Vertical Analysis(垂直分析垂直分析)Financial Accounting English(Second Edition)3.2 Example of common-size financial statements(百分比财务报表实例)Example of common-size balance sheet(百分比资产负债表实例)Example 9.2 shows a common
10、-size comparative balance sheet(百分比比较资 产负债表)for Lott Law Firm.Example 9.2Section 3Vertical Analysis(垂直分析垂直分析)Financial Accounting English(Second Edition)Example of common-size income statement(百分比利润表实例)Example 9.3 shows the common-size comparative income statement(百分比比较利润表)for Lott Law Firm.Section
11、3Vertical Analysis(垂直分析垂直分析)Financial Accounting English(Second Edition)Section 3Vertical Analysis(垂直分析垂直分析)Financial Accounting English(Second Edition)Exercises 9.1 Financial statement analysis helps users make _ business decisions.9.2 Financial statement analysis helps reduce _ and _.9.3 External
12、users rely on financial statement analysis to make better and more _ decisions to pursue their own goals.9.4 Horizontal analysis involves the _ movement of our eyes as we view comparative financial statements.betterguessesintuitioninformedleft-to-rightFinancial Accounting English(Second Edition)9.5
13、Vertical analysis involves the _ movement of our eyes as we review common size financial statements.9.6 Common-size statements show the of the _ parts to the total.A common-size percent is calculated by taking each individual financial statement amount under analysis and dividing it by its _ amount.
14、up-downpercentagesbaseExercisesFinancial Accounting English(Second Edition)9.7 Use horizontal analysis to compute the amount and percentage changes for the income statement below,with the year 2006as the analysis period.(Round the percentage changes to one decimal place.)ExercisesFinancial Accountin
15、g English(Second Edition)ExercisesFinancial Accounting English(Second Edition)ExercisesFinancial Accounting English(Second Edition)9.8 Use vertical analysis to express the comparative balance sheet.(Round computations to one decimal place.)ExercisesFinancial Accounting English(Second Edition)Exercis
16、esFinancial Accounting English(Second Edition)ExercisesFinancial Accounting English(Second Edition)Section 4Ratio Analysis(比率分析比率分析)4.1 Liquidity and efficiency ratios(流动比率和效率比率)Liquidity refers to a companys ability to meet short-term or unexpected cash needs.Efficiency refers to how productive a c
17、ompany is in using its assets.Financial Accounting English(Second Edition)Working capital and current ratio(营运资本比率和流动比率)Working capital is the amount of current assets less current liabilities.Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Taken from Example 9.1,the cur
18、rent ratios for Lott Law Firm are:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Referred to Example 8.1,Unit Eight,the current ratio for Whitman Company is:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Acid-test ratio(速动比率)Acid-test ratio
19、,also called quick ratio(速动比率)is used to measure short-term debt-paying ability.The acid-test ratio is computed as:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Quick assets(速动资产)include cash,short-term investments,accounts receivable,and notes receivable.These are the
20、 most liquid types of current assets.Taken from Example 9.1,the acid-test ratios for Lott Law Firm are:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Referred to Example 8.1,Unit Eight,the acid
21、-test ratio for Whitman Company is:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Accounts receivable turnover(应收账款周转率)Accounts receivable turnover measures how frequently a company turns its receivables into cash.This is computed as:Section 4Ratio Analysis(比率分析比率分析)Fin
22、ancial Accounting English(Second Edition)For Whitman Company there is only one accounting period,so we can get nowhere the average accounts receivable.Nor there are accounts receivable amounts for Lott Law Firm.So lets take MKs 2006 and 2007 financial data for illustration.See Exhibit 9-1Section 4Ra
23、tio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)With these data,MKs 2007 accounts receivable turnover is computed as:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Average days sales uncollected(应收账款平均回收天数)This ratio measures the average time taken to
24、collect receivables.It is computed as(using the information in Exhibit 9-1):Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Inventory turnover(存货周转率)It is calculated with the following formula:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)A
25、verage days inventory on hand(存货平均周转天数)This ratio measures the average days taken to sell inventory.Following the above-mentioned,average days inventory on hand for MK is calculated as follows:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)This formula estimates that MK
26、s inventory will be turned into receivables(or cash)in 76 days,which is not considered quite fast.Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Total assets turnover(总资产周转率)describes the ability of a company to use its assets to generate sales.It is calculated with:Sec
27、tion 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)The usual practice of averaging total assets is to add up both the beginning and ending assets of an accounting period and divide the total by two.Taking the information from the above Exhibit 9-1,this ratio is computed as:Sec
28、tion 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)4.2 Solvency ratios(偿债能力比率)Solvency refers to a companys long-run financial ability to cover long-term obligations.Analysis of capital structure is the key point in evaluating solvency.Debt ratio(负债比率)This ratio assesses the p
29、ortion of assets contributed by owners and the portion contributed by creditors.Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Taken the information from Example 8.1,the debt ratio for Whitman Company is calculated as:Section 4Ratio Analysis(比率分析比率分析)Financial Accountin
30、g English(Second Edition)Equity ratio(股东权益比率)The equity ratio expresses the total owners equity as a percent of total assets.Taken the information from Example 8.1,the equity ratio is calculated as follows:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Whitmans financia
31、l statements reflect less debt(17%)than equity(83%).Also,current liabilities($135,400)are less than long-term debt($324,000).Accompany is considered less risky if its capital structure(equity and long-term debt)is made up of more equity than debts.Section 4Ratio Analysis(比率分析比率分析)Financial Accountin
32、g English(Second Edition)4.3 Profitability ratios(盈利比率)Profitability refers to a companys ability to produce profits.Net profit margin(净利率)Net profit margin reflects a companys ability to earn a net income from sales.It is calculated in the formula as follows:Section 4Ratio Analysis(比率分析比率分析)Financi
33、al Accounting English(Second Edition)Taking the information from Example 8.2,we calculate Whitmans profit margin as follows:Considering the industry in which a company operates,profit margin ratio of 19.7%for a hardware store is very high,for in a retail supermarket a profit margin of 2%is quite nor
34、mal.Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Return on total assets(总资产收益率)This ratio measures the overall earning power or profitability of a company.It is calculated in the formula as below:Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edi
35、tion)Taken the information in Exhibit 9-1,MKs 2007 return on total assets is:The 17.1%return on total assets is favorable compared to most businesses.Section 4Ratio Analysis(比率分析比率分析)Financial Accounting English(Second Edition)Exercises 9.9 The usefulness of ratios depends on _,which is the most cha
36、llenging aspect of ratio analysis.9.10 Liquidity refers to a companys ability to meet _ or _ cash needs.9.11 Efficiency refers to how _ a company is in using its assets.skillful interpretationshort-termunexpectedproductiveFinancial Accounting English(Second Edition)9.12 Using the information in Exer
37、cise 9.8,calculate the current ratio for Longman Works,Inc.in year 2006.ExercisesFinancial Accounting English(Second Edition)9.13 Using the information in Exhibit 9-1,calculate the acid-test ratio for MK in the year 2007 and 2006.ExercisesFinancial Accounting English(Second Edition)9.14 Using the in
38、formation in Exhibit 9-1,calculate the debt ratio for MK in the year 1997.ExercisesFinancial Accounting English(Second Edition)9.15 Using the information in Example 9.1,calculate the profit margin for Lott Law Firm in February and January.ExercisesFinancial Accounting English(Second Edition)Relevant Terms relevant termsLOGOFinancial Accounting English(Second Edition)
