ACCT 1020
Lesson 5 - Chapter 17
Analysis of Financial Statements

Learning Objectives
Click each objective to learn more about that item.

1. Explain the purpose and importance of financial statement analysis
   • Financial statement analysis helps users including management, shareholders and lenders make business decisions.  By performing financial statement analysis, deeper meaning can be gleaned from data presented in the financial statements.

2. Identify users of accounting information

   • Managers

   • Internal Auditors

   • Market Researchers

   • Shareholders

   • Lenders

   • Suppliers

   • Regulators

   • Brokers

   • The Press

3. Identify and describe the four areas (building blocks) of financial statement analysis

   • Liquidity and efficiency - ability to meet short-term obligations and efficiently generate revenues

   • Solvency - ability to generate future revenues and meet long-term obligations

   • Profitability - ability to generate a profit sufficient to attract and retain financing

   • Market Prospects - measures of market expectations of a publicly traded company's risk and potential return

4. Identify and describe the four standards of comparison in financial analysis

   • Intracompany-comparison of a company's performance to its own performance from prior periods or comparison between financial items in a given period. 

   • Competitor-comparison to a direct competitor

   • Industry-comparison to industry statistics

   • Guidelines-comparison to general standards for measuring certain financial items

5. Define, perform, and interpret Horizontal Analysis
   • Comparative Statements
   • Trend Analysis
6. Define, perform, and interpret Vertical Analysis
   • Common-Size Statements
7. Perform and interpret Ratio Analysis
   • Current Ratio
   • Acid-test ratio
   • Accounts receivable turnover
   • Inventory turnover
   • Days’ sales uncollected
   • Days’ sales in inventory
   • Total asset turnover
   • Debt ratio
   • Equity ratio
   • Pledged assets to secured liabilities
   • Times interest earned
   • Profit margin ratio
   • Return on total assets
   • Return on common stockholders’ equity
   • Book value per common share
   • Basic earnings per share
   • Price-earnings ratio
   • Dividend yield
   • See Financial Ratios handout

Assignments
Achieve the learning objectives by completing each item listed below.

• Read Chapter 17 of your accounting text.
• View the Financial Analysis Presentation.
• Print and review the Financial Ratios handout.
• Complete the homework assigned in Connect.
• P17-4A
  HINTS for P17-4A
  HINT 1: Any time a ratio formula uses an "average", calculate the simple average as follows: 
  (beginning balance + ending balance)/2
  For instance beginning A/R is $50,000; ending A/R is $38,000.  Average A/R is $44,000 [($50,000+$38,000)/2]
  HINT 2: Add the Trade Receivables to Accounts Receivable and use the total amount as Accounts Receivable for any formula referencing Accounts Receivable.
  HINT 3: Recall from Chapter 13 that Stockholder's Equity is Common Stock & Paid-in Capital + Preferred Stock & Paid-in Capital + Retained Earnings - Treasury Stock. (Use what you need).
• Project Help - Review Exercise 17-6.  Click the following link for an example of liquidity analysis:  Exercise 17-6 Solution
  Note:  This is not a complete analysis for your project but should give you a nice idea of how to proceed for the analysis portion of the project.  You can also look over Problem 17-5B and see the solution from your B Problem Solutions.
  
  Be sure to include references to numbers/calculations that influenced your analysis in your project write-up.  Unfortunately, this is not well-addressed in the examples.