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Lecture Introduction to managerial accounting: Chapter 14 - Folk, Garrison, Noreen

After studying Chapter 14, you should be able to: Prepare and interpret financial statements in comparative and common-size form, compute and interpret the financial ratios used to measure the well-being of the common stockholder, compute and interpret the financial ratios used to measure the well-being of the short-term creditor, compute and interpret the financial ratios used to measure the well-being of the long-term creditor. | Chapter14 “How Well Am I Doing?” Financial Statement Analysis Limitations of Financial Statement Analysis Differences in accounting methods between companies sometimes make comparisons difficult. We use LIFO to value inventory. We use FIFO to value inventory. Limitations of Financial Statement Analysis Analysts should look beyond the ratios. Economic factors Consumer tastes Industry trends Technological changes Changes within the firm Statements in Comparative and Common-Size Form Dollar and percentage changes on statements Common-size statements Ratios Analytical techniques used to examine relationships among financial statement items Horizontal Analysis Horizontal analysis shows the changes between years in the financial data in both dollar and percentage form. Horizontal Analysis Calculating Change in Dollar Amounts Dollar Change Current Year Figure Base Year Figure = – Percentage Change Dollar Change Base Year Figure 100% = × Calculating Change as a Percentage 2001 is the base year. Horizontal Analysis Information on the following slides illustrate a horizontal analysis of Clover, Co’s December 31, 2002 and 2001, comparative balance sheets and income statements. Horizontal Analysis Horizontal Analysis ($11,500 ÷ $23,500) × 100% = 48.9% $12,000 – $23,500 = $(11,500) Horizontal Analysis Horizontal Analysis Let’s move from the Balance Sheet to the Income Statement of Clover Co. Horizontal Analysis Horizontal Analysis Sales increased by 8.3% yet net income decreased by 21.9%. Horizontal Analysis There were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income. Trend Analysis Trend Percentage Current Year Amount Base Year Amount 100% = × Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent. Trend Analysis Look at the income information for Berry, Inc. for the years 2002 through 2006. We will | Chapter14 “How Well Am I Doing?” Financial Statement Analysis Limitations of Financial Statement Analysis Differences in accounting methods between companies sometimes make comparisons difficult. We use LIFO to value inventory. We use FIFO to value inventory. Limitations of Financial Statement Analysis Analysts should look beyond the ratios. Economic factors Consumer tastes Industry trends Technological changes Changes within the firm Statements in Comparative and Common-Size Form Dollar and percentage changes on statements Common-size statements Ratios Analytical techniques used to examine relationships among financial statement items Horizontal Analysis Horizontal analysis shows the changes between years in the financial data in both dollar and percentage form. Horizontal Analysis Calculating Change in Dollar Amounts Dollar Change Current Year Figure Base Year Figure = – Percentage Change Dollar Change Base Year Figure 100% = × Calculating Change as a Percentage 2001 is the base .