Nguyên lý kế toán - Chapter 13: Measuring and evaluating financial performance

Part I Vertical, or common size, analysis focuses on important relationships within financial statements. We usually pick a value on the financial statement and express all other values on that statement as a percent of the selected amount. Part II When preparing a common size income statement we normally let net sales equal 100 percent and express all other items on the income statement as a percent of net sales. When preparing a common size balance sheet we normally let total assets equal 100 percent and express all other balance sheet accounts as a percent of total assets. Let’s look at an example. Part III Here is the income statement of Lowe’s for the fiscal years 2008 and 2007. Notice, we have set Net Sales Revenue equal to 100 percent. Now, calculate Cost of Sales as a percent of Net Credit Sales. Part IV Here is the equation we will use to calculate the percentage. Part V Cost of Sales is equal to 65.8 percent of Net Sales Revenue in 2008, and 65.4 percent in 2007. There as been a slight increase in Cost of Sales as a percent of Net Sales Revenue. Part VI Why don’t you complete the common size income statements for the two years? Part VII How did you do? Can you explain why there was a fairly significant decrease in net income from 2007 (5.8 percent) to 2008 (4.6 percent)?

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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter 13Measuring and EvaluatingFinancial PerformancePowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, CAHorizontal, Vertical, and Ratio AnalysesHorizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time.Gross Profit in 2009Δ in Gross Profit $ and/or % from 200912/31/0912/31/10Gross Profit in 2010Trend AnalysisVertical analyses focus on important relationships between items on the same financial statement.SalesCost of Goods SoldGross Profit$200,000 100% 150,000 75%$ 50,000 25%AmountPercent201013-3Horizontal (Trend) ComputationsYear-to-YearChange (%)=Change This YearPrior Year’s Total × 100 Trend analyses are usually calculated in terms of year-to-year dollar and percentage changes.(Current Year’s Total – Prior Year’s Total)Let’s look at an example13-4Now let’s look at the remainder of the trend analysis of the Income Statement.Can you calculate the dollar and percentage change for Cost of Sales?Now let’s calculate the percentage change in Net Sales Revenue between 2009 and 2008.Horizontal (Trend) ComputationsCalculate the change in dollars for Net Sales Revenue between 2009 and 2008.$48,230 – $48,283$48,283× 10013-5Vertical (Common Size) ComputationsVertical, or common size, analysis focuses on important relationships within financial statements. Income StatementBalance SheetSales = 100%Total Assets = 100%Cost of SalesNet Sales Revenue× 10013-6Ratio ComputationsRatio analysis compares the amounts for one or more line items to the amounts for other line items in the same year.Ratios are classified into three categories . . .Profitability ratiosexamine a company’sability to generate income. Liquidity ratios help us determine if a company has sufficient current assets to repay liabilities when due. Solvency ratios examine a company’s ability to pay interest and repay debt when due.13-7Common Profitability Ratios13-8Common Liquidity Ratios13-9Common Solvency Ratios13-10Interpreting Horizontal and Vertical AnalysesLowe’s grew by 5.9% in fiscal 2009.With 60 new stores opened, Lowe’s had a 7.9% increase in inventory, and a 6.4% increase in Property and Equipment.13-11Interpreting Horizontal and Vertical AnalysesThe Company’s cash position weakened significantly between fiscal 2007 and 2008.There was a large increase in the inventory carried by the company. The accumulation of inventory is a sign of a weakening business outlook.13-12Interpreting Horizontal and Vertical AnalysesCost of sales and operating expenses are the most important determinant of the company’s profitability. Much of the decline in fiscal 2008 Net Income is explained by the increase in Cost of Sales and Operating Expenses.13-13Interpreting Horizontal and Vertical AnalysesLowe’s has experienced a 0.4% increase in its cost of goods sold from fiscal 2007 to 2008. Increasing cost of sales means lower gross profit.Lowe’s did not do a good job of controlling its operating expenses between 2007 and 2008. The company is faced with lower gross profit and poor operating expense control.13-14End of Chapter 13

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