Unit 12Analyzing & InterpretingFinancial Statements
Unit 12 Analyzing & Interpreting Financial Statements
Why?The basic financial statements provide muchinformation the users need, but what thy giveisonlyan overall viewComparison, analysis and study are neededto enable their users to understand thefinancial position and performance of acompany.Analyzing and interpreting financial statementsare critical in disclosing relationships amongfigures in the financial statements andpredicting the future changes of the accountingelements.2
2 Why? ⚫ The basic financial statements provide much information the users need, but what thy give is only an overall view. ⚫ Comparison, analysis and study are needed to enable their users to understand the financial position and performance of a company. ⚫ Analyzing and interpreting financial statements are critical in disclosing relationships among figures in the financial statements and predicting the future changes of the accounting elements
Financialanalysis is a process ofreclassification and summarization ofthe financial information through theestablishment of ratios and trends inorder to interpret the company'sactivities and to understand thecompany's financial situation
3 ⚫Financial analysis is a process of reclassification and summarization of the financial information through the establishment of ratios and trends in order to interpret the company’s activities and to understand the company’s financial situation
RatioHorizontalVerticalAnalysisAnalysisAnalysisBasic approaches ofanalysis
4 Horizontal Analysis Vertical Analysis Ratio Analysis Basic approaches of analysis
I . Horizontal AnalysisHorizontal Analysis, also called trendanalysis, compares a series of financialstatement data over a period of time.Firstly, the base year that carry a weight of 100 foreach item is selected.Then, the amount of same item in prior orsubsequent years is expressed as the percentage ofthe base year amount.ICurrent year amount - Base year amountBase year amount
5 Ⅰ. Horizontal Analysis ⚫ Horizontal Analysis, also called trend analysis, compares a series of financial statement data over a period of time. ⚫ Firstly, the base year that carry a weight of 100 for each item is selected. ⚫ Then, the amount of same item in prior or subsequent years is expressed as the percentage of the base year amount. Current year amount – Base year amount Base year amount
For example, when you hear someone sayingthat revenues increased by 10% this past quarter,that person is using horizontal analysisHorizontal analysis can be used on any item in acompany's financials (from revenues to earningsper share), and is useful when comparingthe performance ofvarious companies.6
6 ⚫ For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using horizontal analysis. ⚫ Horizontal analysis can be used on any item in a company's financials (from revenues to earnings per share), and is useful when comparing the performance of various companies
Value CityBalance SheetDecember 31.200920092008AssetsCash77,00083,800Supplies208,600140,000Accounts10,8007,100ReceivablePPE222,200192.700423,600Totalassets518.600
7 Value City Balance Sheet December 31,2009 2009 2008 Assets Cash 77,000 83,800 Supplies 208,600 140,000 Accounts Receivable 10,800 7,100 PPE 222,200 192,700 Total assets 518,600 423,600
20082009Assetswhy?Cash100%-8.11%49%100%Supplieswhy?100%52.11%AccountsReceivablePPE100%15.31%100%22.43%Total assets8
8 2009 2008 Assets Cash -8.11% 100% Supplies 49% 100% Accounts Receivable 52.11% 100% PPE 15.31% 100% Total assets 22.43% 100% why? why?
20092008Liabilities and Owner's EquityLiabilities233,600287,200AccountsPayable59,80038,800Notes Payable11.80012.100Long-term liability284,500Total Liabilities358,800EquityPaid-in Capital27,50027,500Retained Earnings132.300111.600159.800139.100Total EquityTotal Liabilities and518.600423.600Owner'sEquity9
9 2009 2008 Liabilities and Owner’s Equity Liabilities Accounts Payable 287,200 233,600 Notes Payable 59,800 38,800 Long-term liability 11,800 12,100 Total Liabilities 358,800 284,500 Equity Paid-in Capital 27,500 27,500 Retained Earnings 132,300 111,600 Total Equity 159,800 139,100 Total Liabilities and Owner’s Equity 518,600 423,600
20092008Liabilities and Owner's EquityLiabilities100%22.95%Accounts Payable100%54.12%Notes Payable??-2.48%100%Long-term liability100%26.12%Total LiabilitiesEquity0100%Paid-in Capital??100%RetainedEarnings18.55%14.88%100%Total Equity22.43%100%Liabilitiesand Owner'sEquity10
10 2009 2008 Liabilities and Owner’s Equity Liabilities Accounts Payable 22.95% 100% Notes Payable 54.12% 100% Long-term liability -2.48% 100% Total Liabilities 26.12% 100% Equity Paid-in Capital 0 100% Retained Earnings 18.55% 100% Total Equity 14.88% 100% Liabilities and Owner’s Equity 22.43% 100% ?? ??