C16- 1 Learning Objectives 1.Basic Analytical Procedures 2.Solvency Analysis 3.Profitability...
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Transcript of C16- 1 Learning Objectives 1.Basic Analytical Procedures 2.Solvency Analysis 3.Profitability...
C16- 1
Learning Objectives
1. Basic Analytical Procedures
2. Solvency Analysis
3. Profitability Analysis
4. Summary of Analytical Measures
5. Corporate Annual Reports
Chapter 16 Chapter 16 Financial Statement Financial Statement
AnalysisAnalysis
C16- 2
Lincoln CompanyComparative Balance SheetDecember 31, 2003 and 2002
AssetsCurrent assets $ 550,000 $ 533,000 $ 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 —
$1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
$ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5%
$ 829,500 $ 787,500 $42,000 5.3% $1,139,500 $1230,500 $(91,000) (7.4%)
Increase (Decrease)2003 2002 Amount Percent
C16- 3
Lincoln CompanyComparative Balance SheetDecember 31, 2003 and 2002
AssetsCurrent assets $ 550,000 $ 533,000 $ 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 —
$1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
$ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5%
$ 829,500 $ 787,500 $42,000 5.3% $1,139,500 $1230,500 $(91,000) (7.4%)
Increase (Decrease)2003 2002 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2003) $550,000Base year (2002) $533,000
= 103.2%
Increase amount $17,000Base year (2002) $533,000
= 3.2%
C16- 4
Lincoln CompanyComparative Income Statement
December 31, 2003 and 2002
Sales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000) 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%Operating income $ 160,000 $ 135,600 $ 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) $ 168,500 $ 146,600 $ 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Increase (Decrease)2003 2002 Amount Percent
C16- 5
Lincoln CompanyComparative Income Statement
December 31, 2003 and 2002
Sales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000) 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%Operating income $ 160,000 $ 135,600 $ 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) $ 168,500 $ 146,600 $ 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Increase (Decrease)2003 2002 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2003) $1,498,000Base year (2002) $1,200,000
= 124.8%
Increase amount $298,000Base year (2002) $1,200,000
= 24.8%
C16- 6
Lincoln CompanyComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$ 310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$ 829,500 72.8% $ 787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2003 December 31, 2002 Amount Percent Amount Percent
C16- 7
Lincoln CompanyComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$829,500 72.8% $787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2003 December 31, 2002 Amount Percent Amount Percent
Vertical Analysis: Vertical Analysis:
Current liabilities $210,000Total assets $1,139,500
= 18.4%
C16- 8
Lincoln CompanyComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$829,500 72.8% $787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2003 December 31, 2002 Amount Percent Amount PercentCommon-Size StatementsCommon-Size Statements
C16- 9
Solvency AnalysisSolvency Analysis
Solvency is the ability of a business to meet its financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.
This ability is normally assessed by examining balance sheet relationships.
C16- 10
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capital $340,000 $290,000
Current ratioCurrent ratio 2.6 2.6 2.2 2.2
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
Divide current
assets by current
liabilities
Divide current
assets by current
liabilities
2003 2002
C16- 11
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Acid-Test RatioAcid-Test RatioAcid-Test RatioAcid-Test Ratio
Use: To indicate instant debt-paying ability.Use: To indicate instant debt-paying ability.
2003 2002Quick assets:
Cash $ 90,500 $ 64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total $280,500 $244,700
Current liabilities $210,000 $243,000Acid-test ratioAcid-test ratio 1.3 1.3 1.0 1.0
C16- 12
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Net sales on account $1,498,000 $1,200,000Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts. receivable turnoverAccts. receivable turnover 12.7 12.7 9.2 9.2
2003 2002
C16- 13
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
2003 2002Accounts receivable (net)
end of year $ 115,000 $ 120,000Net sales on account $1,498,000 $1,200,000Average daily sales on
on account (sales 365) $ 4,104 $ 3,288
Number of days’ sales in Number of days’ sales in
receivablesreceivables 28 28 36.5 36.5
C16- 14
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2003 2002Cost of goods sold $1,043,000 $ 820,000Inventories:
Beginning of year $ 283,000 $ 311,000End of year 264,000 283,000Total $ 547,000 $ 594,000
Average $ 273,500 $ 297,000
Inventory turnoverInventory turnover 3.8 3.8 2.8 2.8
C16- 15
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2003 2002Inventories, end of year $ 264,000 $283,000Cost of goods sold $1,043,000 $820,000Average daily cost of
goods sold (COGS 365) $ 2,858 $ 2,247
Number of days’ sales Number of days’ sales
in inventoryin inventory 92.4 92.4 125.9 125.9
C16- 16
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Use: To indicate the margin of safety to long-term creditors.
Use: To indicate the margin of safety to long-term creditors.
2003 2002
Fixed assets (net) $444,500 $470,000Long-term liabilities $100,000 $200,000
Ratio of fixed assets toRatio of fixed assets to
long-term liabilitieslong-term liabilities 4.4 4.4 2.4 2.4
Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities
C16- 17
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to creditors.Use: To indicate the margin of safety to creditors.
2003 2002
Total liabilities $310,000 $443,000Total stockholders’ equity $829,500 $787,500Ratio of liabilities toRatio of liabilities to
stockholders’ equitystockholders’ equity 0.37 0.37 0.56 0.56
C16- 18
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
2003 2002
Income before income tax $ 900,000 $ 800,000Add interest expense 300,000 250,000Amount available for interest $1,200,000 $1,050,000
Number of times earnedNumber of times earned 4.0 4.0 4.2 4.2
C16- 19
Profitability AnalysisProfitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.
C16- 20
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
2003 2002Net sales $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500 Excludes long-term investmentsExcludes long-term investments
C16- 21
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Use: To assess the effectiveness of the use of assets.
Use: To assess the effectiveness of the use of assets.
2003 2002Net sales on account $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assetsRatio of net sales to assets 1.4 1.4 1.2 1.2
C16- 22
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Use: To assess the profitability of the assets.Use: To assess the profitability of the assets.
2003 2002Net income $ 91,000 $ 76,500Plus interest expense 6,000 12,000
Total $ 97,000 $ 88,500Total assets:
Beginning of year $1,230,500 $1,187,500End of year 1,139,500 1,230,500Total $2,370,000 $2,418,000Average $1,185,000 $1,209,000
Rate earned on total assetsRate earned on total assets 8.2% 8.2% 7.3% 7.3%
C16- 23
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity
Use: To assess the profitability of the investment by stockholders.
Use: To assess the profitability of the investment by stockholders.
Net income $ 91,000 $ 76,500Stockholders’ equity:
Beginning of year $ 787,500 $ 750,000End of year 829,500 787,500Total $1,617,000 $1,537,500Average $ 808,500 $ 768,750
Rate earned on equityRate earned on equity 11.3% 11.3% 10.0% 10.0%
2003 2002
C16- 24
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
2003 2002Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000$ 82,000 $ 67,500$ 67,500Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000End of year 679,500 637,500Total $1,317,000 $1,237,500Average $ 658,500$ 658,500 $ 618,750$ 618,750
Rate earned on common equityRate earned on common equity 12.5% 12.5% 10.9% 10.9%
C16- 25
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock
2003 2002Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Shares of common stock 50,000 50,000
Earnings per share on commonEarnings per share on common $1.64 $1.64 $1.35 $1.35
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
C16- 26
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
2003 2002Market price per share of common $41.00 $27.00Earnings per share on common $ 1.64 $ 1.35
Price-earnings ratio on commonPrice-earnings ratio on common 25 25 20 20
C16- 27
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividend YieldDividend YieldDividend YieldDividend Yield
Use: To indicate the rate of return to common stockholders in terms of dividends.
Use: To indicate the rate of return to common stockholders in terms of dividends.
2003 2002Dividends per share of common $ 0.80 $ 0.60Market price per share of common $41.00 $27.00
Dividend yield on common stockDividend yield on common stock 1.95%1.95% 2.22%2.22%
C16- 28
Corporate Annual ReportsCorporate Annual Reports
1. Financial Highlights2. President’s Letter to the Stockholders3. Management Report4. Independent Auditors’ Report5. Historical Summary
In addition to financial statements, the annual report includes:
C16- 29
HOME WORK
READING:1. Illustrative problem2. Self- examination questions3. Multiple choice
Writing:1. Exercise: 2. Problem : 16-4B
Discussion:
C16- 30
This is the end of Chapter 16