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19 - Benchmarking • Compares company results to set...

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Perform a horizontal analysis of a company’s financial statements Comparative Financial Statements Investors and creditors cannot based decisions on one year’s data Most financial statements cover at least two years so comparisons can be made Horizontal analysis Study of percent changes in accounts from year-to-year Horizontal Analysis Step 1: Compute dollar change in account Step 2: Compute percent change in account Learning Objective 2 Perform a vertical analysis of a company’s financial statements Vertical Analysis Shows relationship of each financial statement item and its base For the income statement, base is total revenue For the balance sheet, base is total assets Each account is divided by its base Expressed as a percent Common-Size Statements Financial statements expressed in percentages only No dollar amounts Percentages derived from vertical analysis
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Unformatted text preview: Benchmarking • Compares company results to set standard • Goal is improvement • Example: Company compares its common-size statements to an industry leader Learning Objective 4 Using the Statement of Cash Flows • Helpful for finding weaknesses than gauging strength • Cash flow signs of a healthy company Operations are the major source of cash Investing activities have more than purchases than sales of long-term assets Financing activities are not dominated by borrowing Other Measures • Economic Value Added ® (EVA) • Measures if operations have increased stockholder wealth Red Flags in Financial Statement Analysis • Earnings problems Decrease in net income over several years • Decreased cash flow Operating cash flow consistently less than net income...
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