121_13 - CHAPTER 13 Financial Statement Analysis PURPOSE OF...

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CHAPTER 13 Financial Statement Analysis PURPOSE OF ANALYSIS ± Understand current financial condition ± Predict future performance PREDICTIONS ± All predictions are wrong ± Some predictions are useful COMPARISONS ± Previous years ± Competitors ± Companies of different size ± General economy FOR THIS CLASS Provide useful information to ± Investors ± Lenders INVESTOR PROFIT Two sources of gain Capital Gains Buy low Sell high Dividends
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INVESTOR QUESTIONS ± Current position of company ± Predict future performance Should I buy the stock? Should I sell the stock? INVESTOR QUESTIONS ± Will dividends increase? ± Will stock price go up? ± Best predictors ± Rising net income ± Rising earnings per share (EPS) INCREASING INCOME ± More earnings to pay dividends ± More earnings to reinvest ± Corporations grows larger ± More assets, more future sales ± Each share worth more LENDERS Lenders (creditors) loan money for a specific time, gain by charging interest Dana’s Diner Loan Interest Principal LENDOR PROFIT Two sources of gain Gain on sale Buy low Sell high Interest LENDOR QUESTIONS ± Current position of company ± Predict future performance How much interest earned? Will payments be made on time?
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LENDOR QUESTIONS Will corporation have enough cash ± To pay interest ± To pay principal ± On time ± In full HORIZONTAL ANALYSIS ± Compare this period, previous period ± Has business gotten better, worse? HORIZONTAL ANALYSIS ± Calculate across rows ± Change from previous period ± Divide change by previous amount Horizontal analysis Change from previous period Previous period = HORIZONTAL ANALYSIS Sales $18,284 $16,701 $1,583 9.5% Net income 3,141 3,205 (64) (2.0%) 1998 1997 Amount Percent Increase (Decrease) Current Previous Change $18,284 $16,701 $1,583 = SALES HORIZONTAL ANALYSIS Sales $18,284 $16,701 $1,583 9.5% Net income 3,141 3,205 (64) (2.0%) 1998 1997 Amount Percent Increase (Decrease) Percentage Change Dollar amount of change Base-year amount $1,583 $16,701 9.5% = = = TREND PERCENTAGE ± Form of horizontal analysis ± Examines many years ± Base year amounts set to 100% ± All other amount % of base year
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TREND PERCENTAGES Each amount for later years divided by base year amount (calculated across rows) Trend % Any year amount Base year amount = TREND PERCENTAGES 1998 1997 1996 1995 1994 1993 Net Sales 18,284 16,701 15,065 13,767 11,984 11,413 CGS 4,856 4,464 3,965 3,637 3,122 3,029 Gross profit 13,428 12,237 11,100 10,130 8,862 8,384 1998 1997 1996 1995 1994 1993 Net sales 160% 146% 132% 121% 105% 100% CGS 160 147 131 120 103 100 Gross profit 160 146 132 121 106 100 VERTICAL ANALYSIS ± Each item in column divided by base ±
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121_13 - CHAPTER 13 Financial Statement Analysis PURPOSE OF...

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