m中山大學管捏學院 经m00 BUSINESS SUN YAT-SEN UNIVERSIT Lesson 10 Understanding and Using Financial statements M Task team of HJADAWIENML ACOJANAA School of business, Sun Yat-sen University
Lesson 10 Understanding and Using Financial Statements Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University
Outline Q Demand and supply of financial analysis Q Basic analytical procedures ◆ Analysis methods Q Comprehensive analysis of financial ratios Q The limitations of financial analysis Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity
2 ⧫Demand and supply of financial analysis ⧫Basic analytical procedures ⧫Analysis methods ⧫Comprehensive analysis of financial ratios ⧫The limitations of financial analysis Outline
What's wrong with accounting information? WHEN ENRONG 分 KCRASHeD e LANDED ON AN ARIHVR ofF The BUILDING SMILING ANDERSEN ACCOUNTAN. WarpnGwANozoozxews-py Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity 3
3 What’s wrong with accounting information?
Demand and supply of financial analysis Demand Supply Investors Managers Employees Internal analysts Customers Intermediaries auditors Financial analysts Bond rating agencies Government/regulatory agencies Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity
4 Demand and supply of financial analysis Investors Managers Employees Customers auditors Government/regulatory agencies Demand Internal analysts Intermediaries Financial analysts Bond rating agencies Supply
Basic analytical procedures Contrive Determine Collect analysis Analyze Conclude objective scheme data data Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity 5
5 Basic analytical procedures Conclude Contrive analysis scheme Analyze data Determine objective Collect data
Techniques of Financial Statement Analysis ◆ Horizontal analysis n Comparative financial statements are presented side by side ◆ Trend analysis ◆ Vertical analysis D Common-size financial statement ◆ Ratio analysis Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity
6 Techniques of Financial Statement Analysis ⧫Horizontal analysis Comparative financial statements are presented side by side ⧫Trend analysis ⧫Vertical analysis Common-size financial statement ⧫Ratio analysis
Horizontal analysis X Company Comparative Balance sheet December 31, 2004 and 2005 December Increase or decrease 31 2004 2005 Amount Percentage Liabilities and Stockholders equi Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity 7
7 Horizontal analysis X Company Comparative Balance Sheet December 31, 2004 and 2005 December 31 Increase or Decrease 2004 2005 Amount Percentage Asset Liabilities and Stockholders Equity - - - -
Trend Analysis Comparing a company's financial condition and performance across time Cash 1000000000 800000000 600000000 ◆Cash 400000000 200000000 19992000200120022003 Ye ear Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity 8
8 Comparing a company’s financial condition and performance across time Trend Analysis Cash 0 200000000 400000000 600000000 800000000 1000000000 1999 2000 2001 2002 2003 Year Cash
Vertical analysis Q Vertical analysis is used to show the relationship of the component parts to the total in a single statement n In the vertical analysis of the balance sheet, each asset or equity item is stated as a percent of total assets: n In the vertical analysis of the income statement, each item is stated as a percent of net sales Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity
9 Vertical analysis ⧫Vertical analysis is used to show the relationship of the component parts to the total in a single statement In the vertical analysis of the balance sheet, each asset or equity item is stated as a percent of total assets; In the vertical analysis of the income statement, each item is stated as a percent of net sales;
A example of vertical analysis Year ended 2003 2002 2001 Net sales 100.00 100.00 100.00 ess: Cost of goods sold 854.96 85.61 87.88 Gross profit on sales 15.01 14.39 11.40 Selling expenses 11.29 11.01 11.41 Administrative expenses 2.71 2.59 2.40 Interest expenses 0.20 0.15 0.81 Totalexpenses 14.20 13.75 13.00 Income before taxes 0.810.641.40 Income taxes 0.02 0.03 06 Net income 0.89 0.61 1.34 Task Team of FUndaMientalactoUntING Business Sehool. Sun Yatsen niversity 0
10 A example of vertical analysis Year ended 2003 2002 2001 Net Sales 100.00 100.00 100.00 Less: Cost of goods sold 854.96 85.61 87.88 Gross profit on sales 15.01 14.39 11.40 Selling expenses 11.29 11.01 11.41 Administrative expenses 2.71 2.59 2.40 Interest expenses 0.20 0.15 -0.81 Total expenses 14.20 13.75 13.00 Income before taxes 0.81 0.64 1.40 Income taxes 0.02 0.03 0.06 Net income 0.89 0.61 1.34