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Financial Statements Analysis - Comprehensive
Financial Statements Analysis - Comprehensive
Chapter 14 Analysis
Learning Objectives
After studying this chapter, you should be able to:
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Preview of Chapter 14
Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
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Basics of Financial Statement Analysis
Comparison Tools of
Characteristics
Bases Analysis
Balance Sheet
These changes
suggest that the
company expanded its
asset base during
2009 and financed
this expansion
primarily by retaining
income rather than
assuming additional
long-term debt.
Illustration 14-5
Horizontal analysis of
balance sheets
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LO 3
Horizontal Analysis
Income
Statement
Overall, gross profit
and net income were
up substantially. Gross
profit increased
17.1%, and net
income, 26.5%.
Quality’s profit trend
appears favorable.
Illustration 14-6
Horizontal analysis of
Income statements
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LO 3
Vertical Analysis
Balance
Sheet
These results
reinforce the earlier
observations that
Quality is
choosing to
finance its growth
through retention
of earnings rather
than through
issuing additional
debt.
Illustration 14-8
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LO 4
Vertical Analysis
Income
Statement
Quality appears
to be a profitable
enterprise that is
becoming even
more successful.
Illustration 14-9
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LO 4
Vertical Analysis
Illustration 14-10
14-12
LO 4
Ratio Analysis
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis
14-14
LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis
Liquidity Ratios
14-15
LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios
1. Current Ratio
Illustration 14-12
The ratio of 2.96:1 means that for every dollar of current liabilities,
Quality has $2.96 of current assets.
14-16 LO 5
Ratio Analysis Liquidity Ratios
2. Acid-Test Ratio
Illustration 14-13
14-17 LO 5
Ratio Analysis Liquidity Ratios
2. Acid-Test Ratio
Illustration 14-14
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
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Ratio Analysis Liquidity Ratios
3. Receivables Turnover
Illustration 14-15
14-20 LO 5
Ratio Analysis Liquidity Ratios
Receivables Turnover
$2,097,000
= 10.2 times
($180,000 + $230,000) ÷ 2
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis Liquidity Ratios
4. Inventory Turnover
Illustration 14-16
Inventory Turnover
$1,281,000
= 2.3 times
($500,000 + $620,000) ÷ 2
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis
Profitability Ratios
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis Profitability Ratios
14-26 LO 5
Ratio Analysis Profitability Ratios
14-27 LO 5
Ratio Analysis Profitability Ratios
Dollars of net income earned for each dollar invested by the owners.
14-28 LO 5
Ratio Analysis Profitability Ratios
14-29 LO 5
Ratio Analysis Profitability Ratios
Solvency Ratios
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LO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
Ratio Analysis Solvency Ratios
14-35 LO 5
Summary of Ratios
Illustration 14-26
14-36 LO 5
Summary of Ratios
Illustration 14-26
14-37 LO 5
Earning Power and Irregular Items
1. Discontinued operations.
2. Extraordinary items.
14-38
LO 6 Understand the concept of earning power,
and how irregular items are presented.
Earning Power and Irregular Items
Discontinued Operations
(a) Refers to the disposal of a significant component of a
business.
14-39
LO 6 Understand the concept of earning power,
and how irregular items are presented.
Earning Power and Irregular Items
Illustration: During 2014 Acro Energy Inc. has income before
income taxes of $800,000. During 2014, Acro discontinued and sold its
unprofitable chemical division. The loss in 2014 from chemical operations
(net of $60,000 taxes) was $140,000. The loss on disposal of the chemical
division (net of $30,000 taxes) was $70,000. Assuming a 30% tax rate on
income. Illustration 14-27
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LO 6
Earning Power and Irregular Items
Income Statement (in thousands)
Discontinued
Sales $ 285,000
Operations are reported Cost of goods sold 149,000
after “Income from Gross profit 136,000
continuing operations.”
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000
Previously labeled as
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
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LO 6
Earning Power and Irregular Items
Occur Infrequently
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LO 6
Earning Power and Irregular Items
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LO 6
Earning Power and Irregular Items
14-45 LO 6
Earning Power and Irregular Items
operations.”
Other revenue (expense):
Interest revenue 17,000
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000
Previously labeled as
Income from continuing operations 55,000
“Net Income”.
Extraordinary loss, net of tax 539
Net income $ 54,461
Moved to
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LO 6
Earning Power and Irregular Items
Extraordinary Items
Income before taxes 79,000
are present. Income tax expense 24,000
Income from continuing operations 55,000
Discontinued operations:
Discontinued Loss from operations, net of tax 315
Operations Loss on disposal, net of tax 189
Total loss on discontinued operations 504
Income before extraordinary item 54,496
Extraordinary Items Extraordinary loss, net of tax 539
Net income $ 54,496
14-47
LO 6
14-48
Earning Power and Irregular Items
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LO 6
Comprehensive Income
14-52
LO 6
Comprehensive Income
2. yet informs the financial statement user of the gain or loss that
would be incurred if the securities were sold at fair value.
Improper Recognition
Some managers have felt pressure to continually increase
earnings and have manipulated the earnings numbers to meet
these expectations. Abuses include:
Improper recognition of revenue (channel stuffing).
Improper capitalization of operating expenses (WorldCom).
Failure to report all liabilities (Enron).
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