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Alternatively, we could express current year’s amount as a percentage of the base year.
Overall, gross profit and net income were up substantially. Gross profit increased17.1%, and net income, 26.5%. Quality’s profit trend appears favorable.Horizontal Analysis
Vertical analysis, also called common-size analysis, is a technique that expresses each financial statement item as a percent of a base amount. On an income statement, we might say that selling expenses are 16% of net sales.Vertical analysis is commonly applied to the►balance sheet and ►income statement.Vertical Analysis
Quality is choosing to finance its growth through retention of earnings rather than through issuing additional debt.Vertical Analysis
Vertical AnalysisQuality appearsto be a profitable enterprise that is becoming even more successful.
Enables a comparison of companies of different sizes.Vertical Analysis
Ratio analysis expresses the relationship among selected items of financial statement data.LiquidityProfitabilitySolvencyMeasures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.Financial Ratio ClassificationsMeasures the income or operating success of a company for a given period of time.Measures the ability of the company to survive over a long period of time.Analyze a company’s performance using ratio analysis.
FOUR CATEGORIES OF RATIOS(TEXTBOOK)•Short-term liquidity ratios•Long-term solvency ratios•Profitability ratios•Market tests
A WORD OF CAUTION BEFORE WE BEGIN•While some financial ratios have established formulas, others are quite fluid and can be computed in many different ways. For this reason, if you look for the formulas on the internet or in other textbooks, you may find slightly different formulas and obtain different results. •For this course, we will use the Financial Ratios formulas outlined in this PowerPoint. If you need to use formulas of ratios that are not discussed in PowerPoint slides, then please refer to your textbook. •In some cases (e.g., Inventory Turnover), the denominator requires the average of two years. IF only one year worth of data is available, you may simply use one year.
The discussion of ratios include the following types of comparisons.1.Intracompany comparisons for two years for Quality Department Store.2.Industry average comparisons based on median ratios for department stores.3.Intercompany comparisons based on Macy’s, Inc. as Quality Department Store’s principal competitor.A single ratioby itself is not very meaningful. Ratio Analysis
Liquidity RatiosMeasure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers are particularly interested in assessing liquidity.