Financial Statement Analysis

Chapter 17 Financial Statement Analysis Accounting, 21st Edition Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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Some Some of of the the action action has has been been automated, automated, so so click click the themouse mouse when when you you see see this this lightning lightning bolt bolt in in the thelower lower right-hand right-hand corner corner of of the the screen. screen. You You can can point point and and click click anywhere anywhere on on the the screen. screen.

Objectives Objectives 1. List the basic financial statement analytical procedures. After After studying studying this this 2. Apply financial statement chapter, you should chapter, youanalysis shouldto assess the solvency of a business. be be able able to: to: 3. Apply financial statement analysis to assess the profitability of a business. 4. Summarize the uses and limitations of analytical measures. 5. Describe the contents of corporate annual reports.

Horizontal Horizontal Analysis Analysis What What isis horizontal horizontal analysis? analysis?

Horizontal Horizontal Analysis Analysis It’s It’s an an analysis analysis of of the the percentage percentage increases increases and and decreases decreases of of related related items items in in comparative comparative financial financial statements. statements.

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005

Balance Balance Sheet Sheet

Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%)

2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab. & SE $1,139,500 $1230,500 $(91,000)

(13.6%) (50.0%) (30.0%)

30.5% 5.3% (7.4%)

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005

Increase (Decrease) 2006 2005 Amount Percent $ 550,000 $ 533,000 $ 17,000 3.2% 95,000 177,500 (82,500) (46.5%) 444,500 Analysis: 470,000 (25,500) (5.4%) Horizontal 50,000 50,000 — Difference $1,139,500 $1,230,500$17,000 $ (91,000) (7.4%)

Assets Current assets Long-term investments Fixed assets (net) Intangible assets Total assets = Liabilities Base year (2005) $533,000 Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab. & SE $1,139,500 $1230,500 $(91,000)

3.2%

(13.6%) (50.0%) (30.0%)

30.5% 5.3% (7.4%)

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005

Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%)

2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Horizontal Analysis: Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%) Difference $(82,500) Long-term liabilities 100,000 200,000 (100,000) (50.0%) = (46.5%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%) Base year (2005) $177,500 Stockholders’ Equity Preferred stock, $100 par $ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5% Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3% Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005

Okay, Okay, go go to to the the next next slide slideIncrease (Decrease) 2006 2005 and the Assets and calculate calculate the Amount Percent Current assets $ 550,000 $ 533,000 $ 17,000 3.2% percentage change for percentage for (82,500) (46.5%) Long-term investments 95,000change 177,500 Fixed assets (net) 444,500 470,000 (25,500) (5.4%) fixed assets. fixed assets. Intangible assets 50,000 50,000 — Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%) Liabilities Current liabilities Horizontal $ 210,000 Analysis: $ 243,000 $ (33,000) (13.6%) Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ Difference 310,000 $ 443,000 ?$(133,000) (30.0%) = ? Stockholders’ Equity Base year (2005) ? Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 30.5% Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3% Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)

Lincoln Company Comparative Balance Sheet December 31, 2006 and 2005

Increase (Decrease) Amount Percent $ 17,000 3.2% (82,500) (46.5%) (25,500) (5.4%) — $ (91,000) (7.4%)

2006 2005 Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Fixed assets (net) 444,500 470,000 Intangible assets 50,000 50,000 Total assets $1,139,500 $1,230,500 Liabilities Current liabilities $ 210,000 $ 243,000 $ (33,000) Long-term liabilities 100,000 200,000 (100,000) Total liabilities $ 310,000 $ 443,000 $(133,000) Stockholders’ Equity Preferred 6% stock, $100 par$ 150,000 $ 150,000 — Common stock, $10 par 500,000 500,000 — Retained earnings 179,500 137,500 $42,000 Total stockholders’ equity $ 829,500 $ 787,500 $42,000 Total liab. & SE $1,139,500 $1230,500 $(91,000)

(5.4%) (5.4%) (13.6%) (50.0%) (30.0%)

30.5% 5.3% (7.4%)

Lincoln Company Comparative Income Statement December 31, 2006 and 2005

Income Income Statement Statement

Increase (Decrease) 2006 2005 Amount Percent Sales $1,530,500$1,234,000$296,500 24.0% Sales returns 32,50034,000(1,500) (4.4%) Net sales $1,498,000$1,200,000$298,000 24.8% Cost of goods sold 1,043,000820,000223,000 27.2% Gross profit $ 455,000$ 380,000$ 75,000 19.7% Selling expenses $ 191,000$ 147,000$ 44,000 29.9% Administrative expenses 104,00097,4006,600 6.8% Total operating expenses $ 295,000$ 244,400$ 50,600 20.7% Operating income $ 160,000$ 135,600$ 24,400 18.0% Other income 8,50011,000(2,500) (22.7%) $ 168,500 $ 146,600$ 21,900 14.9% Other expense 6,00012,000(6,000) (50.0%) Income before income tax $ 162,500$ 134,600$ 27,900 20.7% Income tax 71,50058,10013,400 23.1% Net income $ 91,000$ 76,500$ 14,500 19.0%

Lincoln Company Comparative Income Statement December 31, 2006 and 2005

Increase (Decrease) 2006 2005 Amount Percent Sales $1,530,500$1,234,000$296,500 24.0% 24.0% Sales returns 32,50034,000(1,500) (4.4%) Net sales $1,498,000$1,200,000$298,000 24.8% Cost of goods sold 1,043,000820,000223,000 27.2% Gross profit $ 455,000$ 380,000$ 75,000 19.7% Horizontal Analysis: Selling expenses $ 191,000$ 147,000$ 44,000 29.9% Administrative expenses 104,00097,4006,600 6.8% Total Increase amount $296,500 operating expenses $ 295,000$ 244,400$ 50,600 20.7% = 18.0% 24.0% Operating income $ 160,000$ 135,600$ 24,400 Base year (2005) $1,234,000 Other income 8,50011,000(2,500) (22.7%) $ 168,500 $ 146,600$ 21,900 14.9% Other expense 6,00012,000(6,000) (50.0%) Income before income tax $ 162,500$ 134,600$ 27,900 20.7% Income tax 71,50058,10013,400 23.1% Net income $ 91,000$ 76,500$ 14,500 19.0%

Lincoln Company Comparative Income Statement December 31, 2006 and 2005

Increase (Decrease) 2006 2005 Amount Percent Sales $1,530,500$1,234,000$296,500 24.0% Sales returns 32,50034,000(1,500) (4.4%) Net sales $1,498,000$1,200,000$298,000 24.8% 24.8% Cost of goods sold 1,043,000820,000223,000 27.2% Gross profit $ 455,000$ 380,000$ 75,000 19.7% Selling expenses $ 191,000$ 147,000$ 44,000 29.9% Administrative expenses 104,00097,4006,600 6.8% Total operating expenses $ 295,000$ 244,400$ 50,600 20.7% Horizontal Analysis: Operating income $ 160,000$ 135,600$ 24,400 18.0% Other income 8,50011,000(2,500) (22.7%) Increase amount $298,000 $ 168,500 $ 146,600$ 21,900 14.9% = 24.8% Other expense 6,00012,000(6,000) Base year (2005) $1,200,000 (50.0%) Income before income tax $ 162,500$ 134,600$ 27,900 20.7% Income tax 71,50058,10013,400 23.1% Net income $ 91,000$ 76,500$ 14,500 19.0%

Vertical Vertical Analysis Analysis A A percentage percentage analysis analysis can can be be used used to to show show the the relationship relationship of of each each component component to to aa total total within within aa single single statement. statement.

Vertical Vertical Analysis Analysis The The total, total, or or 100% 100% item, item, on on the the balance balance sheet sheet isis “total “total assets.” assets.”

Lincoln Company Comparative Balance Sheet December 31, 2006 Amount Percent

Assets Current assets $ 550,000 Long-term investments 95,000 Property, plant, & equip. (net) 444,500 Intangible assets 50,000 Total assets $1,139,500 Liabilities Current liabilities $ 210,000 Long-term liabilities 100,000 Vertical Analysis: Total liabilities $ 310,000 Stockholders’ Equity Current assets $550,000 Preferred stock, 6%, $100 par $ 150,000 = Common Totalstock, assets $10 par $1,139,500 500,000 Retained earnings 179,500 Total stockholders’ equity $ 829,500 Total liab. & SE $1,139,500

Balance Balance Sheet Sheet December 31, 2005 Amount

Percent

48.3% 8.3 39.0 4.4 100.0%

$ 533,000 177,500 470,000 50,000 $1,230,500

43.3% 14.4 38.2 4.1 100.0%

18.4% 8.8 27.2%

$ 243,000 200,000 $ 443,000

19.7% 16.3 36.0%

13.2% 48.3%

$ 150,000 500,000 137,500 $ 787,500 $1,230,500

12.2% 40.6 11.2 64.0% 100.0%

43.9 15.7 72.8% 100.0%

Lincoln Company Comparative Balance Sheet December 31, 2006 Amount Percent

December 31, 2005 Amount Percent

Assets Current assets $ 550,000 48.3% $ 533,000 43.3% 43.3% Long-term investments 95,000 8.3 177,500 14.4 Property, plant, & equip. (net) 444,500 39.0 470,000 38.2 Intangible assets 50,000 4.4 50,000 4.1 Total assets $1,139,500 100.0% $1,230,500 100.0% Liabilities Current liabilities $ 210,000 18.4% $ 243,000 19.7% Long-term liabilities 100,000 8.8 200,000 16.3 Vertical Analysis: Total liabilities $ 310,000 27.2% $ 443,000 36.0% Stockholders’ Equity Current assets $533,000 Preferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2% = 43.3% Common stock, $10 par Total assets 500,000 43.9 $1,230,500500,000 40.6 Retained earnings 179,500 15.7 137,500 11.2 Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0% Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%

Lincoln Company Comparative Balance Sheet December 31, 2006 Amount Percent

Assets Current assets $ 550,000 Long-term investments 95,000 Property, plant, & equip. (net) 444,500 Intangible assets 50,000 Total assets $1,139,500 Liabilities Current liabilities $ 210,000 Long-term liabilities 100,000 Total liabilities $ 310,000 Stockholders’ Equity Preferred 6% stock, $100 par $ 150,000 Common stock, $10 par 500,000 Retained earnings 179,500 Total stockholders’ equity $ 829,500 Total liab. & SE $1,139,500

December 31, 2005 Amount Percent

48.3% 8.3 39.0 4.4 100.0%

$ 533,000 177,500 470,000 50,000 $1,230,500

43.3% 14.4 38.2 4.1 100.0%

18.4% 8.8 27.2%

$ 243,000 200,000 $ 443,000

19.7% 16.3 36.0%

13.2% 43.9 15.7 72.8% 100.0%

$ 150,000 500,000 137,500 $ 787,500 $1,230,500

12.2% 40.6 11.2 64.0% 100.0%

Lincoln Company Income Income Comparative Income Statement Statement For the Years Ended December 31, 2006 and 2005 Statement 2006 2005 Amount Percent Amount Percent Sales $1,530,500102.2% $1,234,000102.8% Sales returns 32,5002.234,000 2.8 Net sales $1,498,000100.0% $1,200,000100.0% Cost of goods sold 1,043,00069.6820,000 68.3 Gross profit $ 455,00030.4%$ 380,000 31.7% Selling expenses $ 191,00012.8%$ 147,000 12.3% Net sales Net sales Administrative expenses 104,0006.997,400 8.1 Total operating expenses $ 295,00019.7%$ 244,400 20.4% isis 100.0% 100.0% Income from operations $ 160,00010.7$ 135,600 11.3% Other income 8,5000.611,000 0.9 $ 168,500 11.3%$ 146,600 12.2% Other expense 6,0000.412,000 1.0 Income before income tax $ 162,50010.9%$ 134,600 11.2% Income tax expense 71,5004.858,100 4.8 Net income $ 91,0006.1%$ 76,500 6.4%

Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and 2005 2006 2005 Amount Percent Amount Percent Sales $1,530,500102.2% $1,234,000102.8% Sales returns 32,5002.234,000 2.8 Net sales $1,498,000100.0% $1,200,000100.0% Cost of goods sold 1,043,00069.6820,000 68.3 Gross profit $ 455,00030.4%$ 380,000 31.7% Selling expenses $ 191,00012.8%$ 147,000 12.3% 191,000 12.8% Administrative expenses 104,0006.997,400 8.1 Total operating expenses $ 295,00019.7%$ 244,400 20.4% Income from operations $ 160,00010.7$ 135,600 11.3% Other income 8,5000.611,000 0.9 $ Vertical 168,500 Analysis: 11.3%$ 146,600 12.2% Other expense 6,0000.412,000 1.0 Selling Income beforeexpenses income tax $191,000 $ 162,50010.9%$ 134,600 11.2% = 12.8% Income tax expense 71,5004.858,100 4.8 Net sales $1,498,000 Net income $ 91,0006.1%$ 76,500 6.4%

Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and 2005 2006 2005 Amount Percent Amount Percent Sales $1,530,500102.2% $1,234,000102.8% Sales returns 32,5002.234,000 2.8 Net sales $1,498,000100.0% $1,200,000100.0% Cost of goods sold 1,043,00069.6820,000 68.3 Gross profit $ 455,00030.4%$ 380,000 31.7% Selling expenses $ 191,00012.8%$ 147,000 12.3% Administrative expenses 104,0006.997,400 8.1 Total operating expenses $ 295,00019.7%$ 244,400 20.4% Income from operations $ 160,00010.7$ 135,600 11.3% Other income 8,5000.611,000 0.9 $ 168,500 11.3%$ 146,600 12.2% Other expense 6,0000.412,000 1.0 Income before income tax $ 162,50010.9%$ 134,600 11.2% Income tax expense 71,5004.858,100 4.8 Net income $ 91,0006.1%$ 76,500 6.4%

Lincoln Company Comparative Income Statement For the Years Ended December 31, 2006 and 2005 2006 2005 Amount Percent Amount Percent Sales $1,530,500102.2% $1,234,000102.8% Sales returns 32,5002.234,000 2.8 Net sales $1,498,000100.0% $1,200,000100.0% Cost of goods sold 1,043,00069.6820,000 68.3 Gross profit $ 455,00030.4%$ 380,000 31.7% Selling expenses $ 191,00012.8%$ 147,000 12.3% Administrative expenses 104,0006.997,400 8.1 Total operating expenses $ 295,00019.7%$ 244,400 20.4% Income from operations $ 160,00010.7$ 135,600 11.3% Other income 8,5000.611,000 0.9 $ 168,500 11.3%$ 146,600 12.2% Other expense 6,0000.412,000 1.0 Income before income tax $ 162,50010.9%$ 134,600 11.2% Income tax expense 71,5004.858,100 4.8 Net income $ 91,0006.1%$ 76,500 6.4%

Common Common Size Size Statements Statements Vertical Vertical analysis analysis with with both both dollar dollar and and percentage percentage amounts amounts isis also also useful useful in in comparing comparing one one company company with with another another or or with with industry industry averages. averages. Such Such comparisons comparisons are are easier easier to to make make with with the the use use of of common-size common-size statements statements in in which which all all items items are are expressed expressed in in percentages. percentages.

Common-Size Common-Size Income Income Statement Statement

Solvency Solvency Analysis Analysis  Solvency is the ability of a business to meet its financial obligations (debts) as they are due.  Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.  This ability is normally assessed by examining balance sheet relationships.

Current Position Analysis Working Working Capital Capital and and Current Current Ratio Ratio Current assets Current liabilities Working capital Current ratio

2006 $550,000 210,000 $340,000 2.6

2005 $533,000 243,000 $290,000 2.2

Use: to meet Use: To To indicate indicate the the ability abilityDivide to meet Divide currently current currently maturing maturing obligations. obligations. current assets assetsby by current current liabilities liabilities

Current Position Analysis Quick Quick Ratio Ratio Quick assets: Cash Marketable securities Accounts receivable (net) Total Current liabilities Quick ratio

2006

2005

$ 90,500 75,000 115,000 $280,500 $210,000 1.3

$ 64,700 60,000 120,000 $244,700 $243,000 1.0

Use: Use: To To indicate indicate instant instant debt-paying debt-paying ability. ability.

Accounts Receivable Analysis Accounts Accounts Receivable Receivable Turnover Turnover Net sales on account Accounts receivable (net): Beginning of year End of year Total Average (Total ÷ 2)

2006 $1,498,000

2005 $1,200,000

$ 120,000 115,500 $ 235,000 $ 117,500

$ 140,000 120,000 $ 260,000 $ 130,000

Net Net sales sales on on account account Average Average accounts accounts receivable receivable

Accounts Receivable Analysis Accounts Accounts Receivable Receivable Turnover Turnover Net sales on account Accounts receivable (net): Beginning of year End of year Total Average Accounts receivable turnover

2006 $1,498,000

2005 $1,200,000

$ 120,000 115,500 $ 235,000 $ 117,500 12.7

$ 140,000 120,000 $ 260,000 $ 130,000 9.2

Use: Use: To To assess assess the the efficiency efficiency in in collecting collecting receivables receivables and and in in the the management management of of credit. credit.

Accounts Receivable Analysis Number Number of of Days’ Days’ Sales Sales in in Receivables Receivables 2006 Accounts receivable (net), end of year Net sales on account Average daily sales on account (sales ÷ 365)

2005

$ 115,000 $1,498,000

$ 120,000 $1,200,000

$

$

4,104

Accounts Accounts receivable, receivable, end end of of year year Average Average daily daily sales sales on on account account

3,288

Accounts Receivable Analysis Number Number of of Days’ Days’ Sales Sales in in Receivables Receivables 2006 Accounts receivable (net), end of year Net sales on account Average daily sales on account (sales ÷ 365) Number of days’ sales in receivables

2005

$ 115,000 $1,498,000

$ 120,000 $1,200,000

$

$

4,104 28.0

3,288 36.5

Use: Use: To To assess assess the the efficiency efficiency in in collecting collecting receivables receivables and and in in the the management management of of credit. credit.

Inventory Analysis Inventory Inventory Turnover Turnover Cost of goods sold Inventories: Beginning of year End of year Total Average (Total ÷ 2)

Inventory turnover =

2006 $1,043,000

2005 $ 820,000

$ 283,000 264,000 $ 547,000 $ 273,500

$ 311,000 283,000 $ 594,000 $ 297,000

Cost Cost of of goods goods sold sold Average Average inventory inventory

Inventory Analysis Inventory Inventory Turnover Turnover Cost of goods sold Inventories: Beginning of year End of year Total Average (Total ÷ 2) Inventory turnover

2006 $1,043,000

2005 $ 820,000

$ 283,000 264,000 $ 547,000 $ 273,500 3.8

$ 311,000 283,000 $ 594,000 $ 297,000 2.8

Use: Use: To To assess assess the the efficiency efficiency in in the the management management of of inventory. inventory.

Inventory Analysis Number Numberof ofDays’ Days’Sales Salesin inInventory Inventory Inventories, end of year Cost of goods sold Average daily cost of goods sold (COGS ÷ 365)

Number of Days’ Sales = in Inventory

2006 $ 264,000 $1,043,000

2005 $283,000 $820,000

$

$

2,858

2,247

Inventories, Inventories, end end of of year year Average Average daily daily cost cost of of goods goods sold sold

Inventory Analysis Number Numberof ofDays’ Days’Sales Salesin inInventory Inventory Inventories, end of year Cost of goods sold Average daily cost of goods sold (COGS ÷ 365) Number of days’ sales in inventory

2006 $ 264,000 $1,043,000

2005 $283,000 $820,000

$

$

2,858 92.4

Use: Use:To To assess assess the the efficiency efficiency in in the the management management of of inventory. inventory.

2,247 125.9

Long-Term Creditors Ratio Ratioof ofFixed FixedAssets Assetsto toLong-Term Long-TermLiabilities Liabilities Fixed assets (net) Long-term liabilities Ratio of fixed assets to long-term liabilities

2006 $444,500 $100,000 4.4

2005 $470,000 $200,000 2.4

Use: Use: To To indicate indicate the the margin margin of of safety safety to to long-term long-term creditors. creditors.

Long-Term Creditors Ratio Ratio of of Liabilities Liabilities to to Stockholders’ Stockholders’ Equity Equity Total liabilities Total stockholders’ equity Ratio of liabilities to stockholders’ equity

2006 $310,000 $829,500

2005 $443,000 $787,500

0.37

0.56

Use: Use: To To indicate indicate the the margin margin of of safety safety to to creditors. creditors.

Long-Term Creditors Number Number of of Times Times Interest Interest Charges Charges Earned Earned Income before income tax Add interest expense Amount available for interest

Number of Times Interest = Charges Earned

2006 2005 $ 900,000 $ 800,000 300,000 250,000 $1,200,000 $1,050,000

Income Income before before income income tax tax ++ interest interest expense expense Interest Interest expense expense

Long-Term Creditors Number Number of of Times Times Interest Interest Charges Charges Earned Earned Income before income tax Add interest expense Amount available for interest Number of times earned

2006 2005 $ 900,000 $ 800,000 300,000 250,000 $1,200,000 $1,050,000 4.0

Use: Use: To To assess assess the the risk risk to to debtholders debtholders in in terms terms of of number number of of times times interest interest charges charges were were earned. earned.

4.2

Profitability Profitability Analysis Analysis  Profitability is the ability of an entity to earn profits.  This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.  Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

The Common Stockholder Ratio Ratio of of Net Net Sales Sales to to Assets Assets Net sales Total assets: Beginning of year End of year Total Average (Total ÷ 2)

2006 $1,498,000

2005 $1,200,000

$1,053,000 1,044,500 $2,097,500 $1,048,750

$1,010,000 1,053,000 $2,063,000 $1,031,500

Excludes Excludes long-term long-term investments investments

The Common Stockholder Ratio Ratio of of Net Net Sales Sales to to Assets Assets Net sales Total assets: Beginning of year End of year Total Average (Total ÷ 2) Ratio of net sales to assets

2006 $1,498,000

2005 $1,200,000

$1,053,000 1,044,500 $2,097,500 $1,048,750

$1,010,000 1,053,000 $2,063,000 $1,031,500

1.4

Use: Use: To To assess assess the the effectiveness effectiveness of of the the use use of of assets. assets.

1.2

The Common Stockholder Rate RateEarned Earned on on Total Total Assets Assets Net income Plus interest expense Total Total assets: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on total assets

2006 $ 91,000 6,000 $ 97,000

2005 $ 76,500 12,000 $ 88,500

$1,230,500 1,139,500 $2,370,000 $1,185,000 8.2%

$1,187,500 1,230,500 $2,418,000 $1,209,000 7.3%

Use: Use: To To assess assess the the profitability profitability of of the the assets. assets.

The Common Stockholder Rate Rate Earned Earned on on Stockholders’ Stockholders’ Equity Equity Net income Stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on stockholders’ equity

2006 $ 91,000

2005 $ 76,500

$ 787,500 829,500 $1,617,000 $ 808,500

$ 750,000 787,500 $1,537,500 $ 768,750

11.3%

10.0%

Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by stockholders. stockholders.

The Common Stockholder Rate Rate Earned Earned on on Common Common Stockholders’ Stockholders’ Equity Equity Net income Less preferred dividends Remainder—common stock Common stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2)

$ $

2006 91,000 9,000 82,000

$ 637,500 679,500 $1,317,000 $ 658,500

$ $

2005 76,500 9,000 67,500

$ 600,000 637,500 $1,237,500 $ 618,750

The Common Stockholder Rate Rate Earned Earned on on Common Common Stockholders’ Stockholders’ Equity Equity Net income Less preferred dividends Remainder—common stock Common stockholders’ equity: Beginning of year End of year Total Average (Total ÷ 2) Rate earned on common stockholders’ equity

$ $

2006 91,000 9,000 82,000

$ $

2005 76,500 9,000 67,500

$ 637,500 $ 600,000 679,500 637,500 $1,317,000 $1,237,500 $ 658,500 $ 618,750 12.5%

10.9%

Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by common common stockholders. stockholders.

The Common Stockholder Earnings Earnings Per Per Share Share on on Common Common Stock Stock Net income Less preferred dividends Remainder—common stock Shares of common stock

2006 $ 91,000 9,000 $ 82,000 50,000

Earnings per share on common stock

$1.64

2005 $ 76,500 9,000 $ 67,500 50,000 $1.35

Use: Use: To To assess assess the the profitability profitability of of the the investment investment by by common common stockholders. stockholders.

The Common Stockholder Price-Earnings Price-Earnings Ratio Ratio 2006 Market price per share of common $41.00 Earnings per share on common ÷ 1.64 Price-earnings ratio on common stock 25

2005 $27.00 ÷ 1.35 20

Use: Use: To To indicate indicate future future earnings earnings prospects, prospects, based based on on the the relationship relationship between between market market value value of of common common stock stock and and earnings. earnings.

The Common Stockholder Dividend Dividend Yield Yield on on Common Common Stock Stock Dividends per share of common Market price per share of common Dividend yield on common stock

2006 $ 0.80 ÷ 41.00

2005 $ 0.60 ÷ 27.00

1.95%

2.22%

Use: Use: To To indicate indicate the the rate rate of of return return to to common common stockholders stockholders in in terms terms of of dividends. dividends.

Corporate Corporate Annual Annual Reports Reports In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report. The MDA includes an analysis of the results of operations and discusses management’s opinion about future performance. It compares the prior year’s income statement with the current year’s. It also contains an analysis of the firm’s financial condition.

Corporate Corporate Annual Annual Reports Reports In addition to financial statements, the annual report includes a management discussion analysis (MDA) and an independent auditors’ report. Before issuing annual statements, all publicly held corporations are required to have an independent audit of their financial statements. The CPAs who conduct the audit render an opinion as to the fairness of the statements.

Chapter 17 The The End End