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13-1
13-1
Chapter 13
Financial Statement Analysis
13-2
Analysis of Financial Statements
 Dollar and percentage
changes on statements

Common-size
statements

Ratios
An item on a financial
statement has little
meaning by itself. The
meaning of the numbers
can be enhanced by
drawing comparisons.

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Limitations of Financial Statement Analysis
Economic
factors
Industry
trends
Technological
changes
Consumer
tastes
• Differences in accounting methods between companies
sometimes make comparisons difficult.
• Examples: FIFO v. LIFO; S/L v. Acel Deprec.; etc.
• Managers should look beyond ratios.
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Learning Objective 13-1
Prepare and interpret
financial statements in
comparative and
common-size form.

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CLOVER CORPORATION
Comparative Balance Sheets
December 31
Increase (Decrease)
This Year Last Year Amount %
Assets
Current assets:
Cash 12,000 $ 23,500 $ (11,500) $ (48.9)
Accounts receivable, net 60,000 40,000
Inventory 80,000 100,000
Prepaid expenses 3,000 1,200
Total current assets 155,000 164,700
Property and equipment:
Land 40,000 40,000
Buildings and equipment, net
Total property and equipment
Total assets 315,000 $ 289,700 $
Horizontal Analysis
(of Balance Sheet)
($11,500 ÷ $23,500) × 100% = (48.9%)
$12,000 – $23,500 = $(11,500)
We would do this for the liabilities and stockholders’ equity as well.
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Horizontal Analysis
(of Income Statement)
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Increase
(Decrease)
This Year Last Year Amount %
Sales 520,000 $ 480,000 $ 40,000 $ 8.3
Cost of goods sold 360,000 315,000 45,000 14.3
Gross margin 160,000 165,000 (5,000) (3.0)
Operating expenses 2.1
Net operating income 31,400 39,000 (7,600) (19.5)
Interest expense 6,400 7,000 (600) (8.6)
Net income before taxes
Less income taxes (30%) 7,500 9,600 (2,100) (21.9)
Net income 17,500 $ 22,400 $ (4,900) $ (21.9)
$40,000 ÷ $480,000 × 100% = 8.3%
$520,000 – $480,000 = $40,000
Sales increased by 8.3%, yet
net income decreased by 21.9%.

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Trend Percentages
100
110
120
130
140
150
160
2003 2004 2005 2006 2007
Year
Percentage
Sales
COGS
GM
Year
Item 2011 2010 2009 2008 2007
Sales 145% 129% 116% 105% 100%
Cost of goods sold 150% 132% 118% 104% 100%
Gross margin 135% 124% 112% 108% 100%
By analyzing trends, we see that cost of goods sold is increasing
faster than sales, which is slowing the increase in gross margin.
Year
Item 2011 2010 2009 2008 2007
Sales 400,000 $ 355,000 $ 320,000 $ 290,000 $ 275,000 $
Cost of goods sold 285,000 250,000 225,000 198,000 190,000
Gross margin 115,000 105,000 95,000 92,000 85,000
Trend percentages state several years’ financial data in terms of a base year,
which is set at 100%
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CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
Percentages
This Year Last Year This Year Last Year
Sales 520,000 $ 480,000 $ 100.0 100.0
Cost of goods sold 360,000 315,000 69.2 65.6
Gross margin 160,000 165,000 30.8 34.4
Operating expenses 128,600 126,000 24.8 26.2
Net operating income 31,400 39,000 6.0 8.2
Interest expense 6,400 7,000 1.2 1.5
Net income before taxes 25,000 32,000 4.8 6.7
Less income taxes (30%) 7,500 9,600 1.4 2.0
Net income 17,500 $ 22,400 $ 3.4 4.7
Vertical Analysis
(Common-Size Statements)
Common-size statements use percentages to express the relationship of
individual components to a total within a single period.