Chapter 17 Textbook PDF

1 WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 17 Financial Statement Analysis Prepared by:...

1 WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 17 Financial Statement Analysis Prepared by: Debbie Musil Kwantlen Polytechnic University 2  Learning Goals Let’s turn the following into students friendly learning goals…. analyse the financial status of a company by using horizontal and vertical analysis; analyse the financial status of a company, using financial ratios contrast the annual reports of comparable publicly traded corporations 3 Financial Statement Analysis Basics of financial statement analysis – Comparative analysis – Tools of analysis Horizontal analysis – Balance sheet – Income statement Vertical analysis – Balance sheet – Income statement Ratio analysis – Liquidity, solvency and profitability ratios Limitations of financial statement analysis Copyright John Wiley & Sons Canada, Ltd. 4  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 5  Basics of Financial Statement Analysis Comparing financial statement information of a company can be done: – On an intracompany basis: compare current year with prior years – On an intercompany basis: with other competing companies – Based on industry averages Important to also review other financial and non-financial information Copyright John Wiley & Sons Canada, Ltd. 6  Tools of Analysis Commonly used tools to evaluate financial data: – Horizontal analysis: evaluate a series of data over a period of time – Vertical analysis: evaluate data as a percentage of a total amount – Ratio analysis: expresses the relationship among selected financial data within the same period Copyright John Wiley & Sons Canada, Ltd. 7  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 8  Horizontal Analysis Mr Chris didn’t understand (Trend Analysis) this, so simply: Compares a series of financial data Work out difference between this and last year – To determine the increase or decrease over time figures, Divide that difference by last years figure for % Horizontal percentage of base-period amount change – Expresses specified amount as a percent of a base year Horizontal percentage change for period – Measures change in any one specific period 9 Copyright John Wiley & Sons Canada, Ltd.  Horizontal Analysis Balance Sheet 10 Copyright John Wiley & Sons Canada, Ltd.  Horizontal Analysis Income Statement Copyright John Wiley & Sons Canada, Ltd. 11  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 12 Mr Chris didn’t understand this equation. Vertical Analysis Basically: make percentages out of A, L, C, R, E – divide by total assets or net (Common Size Analysis) sales Expresses financial statement data as a percentage of a base amount (always equal to 100%) Commonly used base amounts are: – Balance sheet: total assets; total liabilities and shareholders’ equity – Income statement: net sales Useful for intracompany and intercompany comparisons Copyright John Wiley & Sons Canada, Ltd. 13  Vertical Analysis Balance Sheet Copyright John Wiley & Sons Canada, Ltd. 14  Vertical Analysis Income Statement Copyright John Wiley & Sons Canada, Ltd. 15  Textbook Questions Work on BE17-1. Corresponding Letter 1. 2. 3. 4. 5. Copyright John Wiley & Sons Canada, Ltd. 16  Textbook Questions Work on BE17-2. Basis of Comparison Tool of Analysis Analysis of a company’s dividend history Comparison of different-sized companies Comparison of gross profit to net sales among competitors Calculation of a company’s sales growth over time Copyright John Wiley & Sons Canada, Ltd. 17  Group 1 – BE17-3 (Kathy, Vanessa) Group 2 – BE17-4 (Stephanie, Hugo) Group 3 – BE17-5a) BE17-6 (Jimmy, Ansh Chris) Group 4 – BE17-5b) (Shun, Rudra) Copyright John Wiley & Sons Canada, Ltd. 18  Textbook Questions Work on BE17-3. 2014 2013 2012 Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets Copyright John Wiley & Sons Canada, Ltd. 19  Textbook Questions Work on BE17-4. 2014 2013 Cash Accounts Receivable Inventory Prepaid Expenses Total Current Assets Copyright John Wiley & Sons Canada, Ltd. 20  Textbook Questions Work on BE17-5 a). 2014 2013 2012 Current Assets Property, Plant and Equipment Goodwill Total Assets Copyright John Wiley & Sons Canada, Ltd. 21  Textbook Questions Work on BE17-6. Income Statement Amount Percentage Net Sales $1,934 Cost of Goods Sold 1,612 Gross Profit 322 Operating Expenses 218 Profit before 104 income tax Income Tax Expense 31 Profit $73 Copyright John Wiley & Sons Canada, Ltd. 22  Textbook Questions Work on BE17-5 b). 2014 2013 Amount Percentage Amount Percentage Current Assets $1,530,000 Current Assets $1,175,000 Property, Plant 3,130,000 Property, Plant 2,800,000 and Equipment and Equipment Goodwill 90,000 Goodwill 100,000 Total Assets $4,750,000 Total Assets $4,075,000 2012 Amount Percentage Current Assets $1,225,000 Property, Plant 2,850,000 and Equipment Goodwill 0 Total Assets $4,075,000 Copyright John Wiley & Sons Canada, Ltd. 23  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability Copyright John Wiley & Sons Canada, Ltd. 24  Ratio Analysis Expresses the relationship between selected financial statement items Classified into: – Liquidity ratios: measure short-term ability to meet obligations and unexpected cash needs – Solvency ratios: measure ability to survive over long periods of time – Profitability ratios: measure operating success for a specific time period Copyright John Wiley & Sons Canada, Ltd. 25  Group Activity You will be put into 3 groups each group will be responsible for a different type of financial ratio. Use pages 742 – 759 to help you with this activity. Group 1: Liquid Ratios (Elmeri , Famie) Group 2: Solvency Ratios (Ryan , Pritish) Group 3: Profitability Ratios (Anshu , Amy) Copyright John Wiley & Sons Canada, Ltd. 26  Group Activity (continued) Each group will be responsible for the following: A definition of your ratio type Discussion of the various ratios and what they mean The following Textbook Questions – Group 1: Liquid Ratios (P17-5A) – Group 2: Solvency Ratios (P17-5A) – Group 3: Profitability Ratios (P17-5A) Copyright John Wiley & Sons Canada, Ltd. 27  Group Activity (continued) Each group will be responsible for the following: Use Molson Coors and Waterloo Brewing annual reports and do the following: – Calculate 3-4 of the ratios from your section and compare the two companies Is one company doing better than the other? Does the number you’ve calculated indicate a healthy or unhealthy financial position. Why? Copyright John Wiley & Sons Canada, Ltd. 28  Ratio Analysis Liquidity Ratios Copyright John Wiley & Sons Canada, Ltd. 29  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 30  Ratio Analysis Solvency Ratios Copyright John Wiley & Sons Canada, Ltd. 31  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 32  Ratio Analysis Profitability Ratios Copyright John Wiley & Sons Canada, Ltd. 33  Chapter 17: Success Criteria I will be successful when I can…… 1. Identify the need for, and tools of, financial statement analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity. 5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability. Copyright John Wiley & Sons Canada, Ltd. 34  Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. Copyright John Wiley & Sons Canada, Ltd. 35  Limitations of Financial Analysis Alternative accounting principles: reduces intercompany comparability v – IFRS versus ASPE Other Comprehensive income: generally excluded from analysis, should be assessed if significant Quality of information: full and transparent reporting aids in accurate financial analysis Economic factors: – Irregular items (e.g. – discontinued operations) must be excluded – Losses make it difficult to calculate and interpret ratios Copyright John Wiley & Sons Canada, Ltd. 36