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Lecture Managerial accounting - Chapter 12: Financial statement analysis

Chapter 12 - Financial statement analysis. After studying this chapter you will be able to understand: horizontal analysis of financial statements, common size financial statements, ratio analysis, industry analysis. | CHAPTER © jsnyderdesign / iStockphoto 12 FINANCIAL STATEMENT ANALYSIS HOW HEALTHY IS C&C? C&C’s cash balance has fallen dramatically, and George Douglas wonders why. Cedric Renn, a potential employee, wonders if C&C will be around for the long term. Meredith Lincoln wonders if she should increase C&C’s credit limit. Each can use C&C’s financial statements to help answer their question. HORIZONTAL ANALYSIS OF FINANCIAL STATEMENTS Unit 12.1 12 1 . Unit 12.2 Unit 12.3 © Tomwang112 / iStockphoto Unit 12.4 HORIZONTAL ANALYSIS Shows the percentage increase or decrease in a particular line item on the financial statements; may also be expressed in dollars Requires two years’ of information to calculate The earliest year is considered the “base year” HORIZONTAL ANALYSIS Current Year Amount – Base Year Amount Base Year Amount HORIZONTAL ANALYSIS: SALES REVENUE 12/31/13 12/31/12 $ Change % Change Sales revenue $5,237,000 $4,654,000 $583,000 12.5% Cost of goods sold 3,876,432 3,464,440 411,992 . | CHAPTER © jsnyderdesign / iStockphoto 12 FINANCIAL STATEMENT ANALYSIS HOW HEALTHY IS C&C? C&C’s cash balance has fallen dramatically, and George Douglas wonders why. Cedric Renn, a potential employee, wonders if C&C will be around for the long term. Meredith Lincoln wonders if she should increase C&C’s credit limit. Each can use C&C’s financial statements to help answer their question. HORIZONTAL ANALYSIS OF FINANCIAL STATEMENTS Unit 12.1 12 1 . Unit 12.2 Unit 12.3 © Tomwang112 / iStockphoto Unit 12.4 HORIZONTAL ANALYSIS Shows the percentage increase or decrease in a particular line item on the financial statements; may also be expressed in dollars Requires two years’ of information to calculate The earliest year is considered the “base year” HORIZONTAL ANALYSIS Current Year Amount – Base Year Amount Base Year Amount HORIZONTAL ANALYSIS: SALES REVENUE 12/31/13 12/31/12 $ Change % Change Sales revenue $5,237,000 $4,654,000 $583,000 12.5% Cost of goods sold 3,876,432 3,464,440 411,992 11.9% Gross margin 1,360,568 1,178,560 171,008 14.4% Selling and administrative expenses 1,160,566 1,067,721 92,845 8.7% Operating income 200,002 121,839 78,163 64.2% Interest expense 41,715 43,210 (1,492) (3.5%) Income before taxes 158,287 78,629 79,658 101.3% Income tax expense 47,486 23,589 23,897 101.3% Net income $ 110,801 $ 55,040 $ 55,761 101.3% HORIZONTAL ANALYSIS: SALES REVENUE 12/31/13 12/31/12 $ Change % Change Sales revenue $5,237,000 $4,654,000 $583,000 12.5% Cost of goods sold 3,876,432 3,464,440 411,992 11.9% Gross margin 1,360,568 1,178,560 171,008 14.4% Selling and administrative expenses 1,160,566 1,067,721 92,845 8.7% Operating income 200,002 121,839 78,163 64.2% Interest expense 41,715 43,210 (1,492) (3.5%) Income before taxes 158,287 78,629 79,658 101.3% Income tax expense 47,486 23,589 23,897 101.3% Net income $ 110,801 $ 55,040 $ 55,761 101.3% DO NOT add the % change column to get totals HORIZONTAL ANALYSIS ALLOWS US TO Identify trends and changes in account .