FINANCIAL STATEMENT
ANALYSIS
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
Purpose of Analysis
Financial statement analysis helps users
make better decisions.
Internal Users
Managers
Officers
Internal Auditors
McGraw-Hill/Irwin
External Users
Shareholders
Lenders
Customers
© The McGraw-Hill Companies, Inc., 2008
Need for Comparative Analysis

Intra-company analysis
 Compare
one item in the current year with same item
from previous year/s
(Detect Changes)

Industry Average
 Compare
item of a company against industry average
(Assess Relative Performance within Industry)

Inter-company analysis
 Compare
one item of a company with the same item in
one/more competing companies
(Determine Competitive Position)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
Tools of Analysis
Comparative
Horizontal
Analysis
Commonsize Vertical
Analysis
McGraw-Hill/Irwin
Trend
Percentages
Ratios
© The McGraw-Hill Companies, Inc., 2008
Comparative Horizontal Analysis
Dollar Change:
Dollar
Change
=
Analysis Period
Amount
–
Base Period
Amount
Percentage Change:
%
Percent
Change
McGraw-Hill/Irwin
=
Dollar Change
÷
Base Period
Amount
© The McGraw-Hill Companies, Inc., 2008
Comparative Horizontal Analysis
Let’s look at the asset
section of Clover, Inc.
comparative balance sheet
for 2013 and 2012.
Compute the dollar change
and the percentage change
for cash.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
Clover, Inc.
Comparative Balance Sheets
December 31,
2013
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
* Percent rounded to one decimal point.
McGraw-Hill/Irwin
2012
$ 23,500
40,000
100,000
1,200
$ 164,700
Dollar
Change
Percent
Change*
?
?
40,000
85,000
$ 125,000
$ 289,700
© The McGraw-Hill Companies, Inc., 2008
Clover, Inc.
Comparative Balance Sheets
December 31,
2013
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000–
$12,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment
$ 160,000
Total assets
$ 315,000
* Percent rounded to one decimal point.
McGraw-Hill/Irwin
Dollar
Change
2012
$ 23,500 $ (11,500)
40,000
100,000
1,200
$ 164,700 = $(11,500)
$23,500
Percent
Change*
?
40,000
85,000
$ 125,000
$ 289,700
© The McGraw-Hill Companies, Inc., 2008
Clover, Inc.
Comparative Balance Sheets
December 31,
2013
2012
Dollar
Change
Percent
Change*
Assets
Current assets:
Cash and equivalents
$ 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
($11,500
÷ $23,500)
× 100% = 48.94%
Total current assets
$ 155,000
$ 164,700
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment $ 160,000 $ 125,000
Total assets
$ 315,000 $ 289,700
* Percent rounded to one decimal point.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
Clover, Inc.
Comparative Balance Sheets
December 31,
2013
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
* Percent rounded to one decimal point.
McGraw-Hill/Irwin
Dollar
Change
2012
Percent
Change*
$ 23,500 $
40,000
100,000
1,200
$ 164,700
(11,500)
20,000
(20,000)
1,800
(9,700)
-48.9%
50.0%
-20.0%
150.0%
-5.9%
40,000
85,000
$ 125,000
$ 289,700 $
35,000
35,000
25,300
0.0%
41.2%
28.0%
8.7%
© The McGraw-Hill Companies, Inc., 2008
Common-size Vertical Analysis
Examine the relative size of each item in the
financial statements by computing component
(or common-sized) percentages.
Common-size
Percentage
=
Analysis Amount
Base Amount
Financial Statement
Balance Sheet
Income Statement
McGraw-Hill/Irwin
× 100%
Base Amount
Total Assets
Revenues
© The McGraw-Hill Companies, Inc., 2008
Clover, inc.
Comparative Balance Sheets
December 31,
Complete the common-size analysis for the other
assets.
2013
2012
Common-size
Percents*
2013
2012
Assets
Current assets:
Cash and equivalents
$ 12,000 $ 23,500
3.8%
8.1%
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
($12,000 ÷ $315,000)
= 3.8%
Total current assets
$ 155,000×$100%
164,700
Property and equipment:
($23,500 40,000
÷ $289,700)
× 100% = 8.1%
Land
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment $ 160,000 $ 125,000
Total assets
$ 315,000 $ 289,700
100.0% 100.0%
*McGraw-Hill/Irwin
Percent rounded to first decimal point.
© The McGraw-Hill Companies, Inc., 2008
Clover, Inc.
Comparative Balance Sheets
December 31,
2013
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
*McGraw-Hill/Irwin
Percent rounded to first decimal point.
2012
Common-size
Percents*
2013
2012
$ 23,500
40,000
100,000
1,200
$ 164,700
3.8%
19.0%
25.4%
1.0%
49.2%
8.1%
13.8%
34.6%
0.4%
56.9%
40,000
85,000
$ 125,000
$ 289,700
12.7%
38.1%
50.8%
100.0%
13.8%
29.3%
43.1%
100.0%
© The McGraw-Hill Companies, Inc., 2008
Trend Index Analysis
Trend analysis is used to reveal patterns in data
covering successive periods.
Trend
Index
McGraw-Hill/Irwin
=
Analysis Period Amount
Base Period Amount
× 100%
© The McGraw-Hill Companies, Inc., 2008
Trend Index
Berry Products
Income Information
For the Years Ended December 31,
Item
Revenues
Cost of sales
Gross profit
Item
Revenues
Cost of sales
Gross profit
2007
$ 400,000
285,000
115,000
2006
$ 355,000
250,000
105,000
2005
$ 320,000
225,000
95,000
2004
$ 290,000
198,000
92,000
2007
2006
2005
2004
2003
base period
its
145%is the129%
116% so 105%
150%
118%
amounts132%
will equal
100%.104%
135%
124%
112%
108%
(290,000  275,000)
(198,000  190,000)
(92,000  85,000)
McGraw-Hill/Irwin



100% = 105%
100% = 104%
100% = 108%
2003
$ 275,000
190,000
85,000
2003
100%
100%
100%
© The McGraw-Hill Companies, Inc., 2008
Trend Percentage
Analysis Period – Previous Period
(Base Period)
Trend =
100%
×
Previous
Period
Amount
Percentage
(Base Period)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
Trend Percentage
Berry Products
Income Information
For the Years Ended December 31,
Item
Revenues
Cost of sales
Gross profit
Item
Revenues
Cost of sales
Gross profit
2007
$ 400,000
285,000
115,000
2005
$ 320,000
225,000
95,000
2004
$ 290,000
198,000
92,000
2007
2006
2005
2004
2003
base period
its
12.68%is the
10.94%
10.34% so5.45%
14%
11.11%will 13.64%
amounts
equal 0. 4.21%
9.52%
10.53%
3.26%
8.24%
(290,000 - 275,000)
275,000
McGraw-Hill/Irwin
2006
$ 355,000
250,000
105,000

2003
$ 275,000
190,000
85,000
2003
-
100% = 5.45%
© The McGraw-Hill Companies, Inc., 2008