W2020 ACC100 Financial Statement Analysis

ACC100: FINANCIAL

STATEMENT ANALYSIS
ACC100 ONLINE TEXTBOOK, WRITTEN BY ELSE GRECH AND CHERYL DYSON WITH EDITS BY
JOEL SHAPIRO
Horizontal Analysis

● Calculates the trend between one year and the next

● Identifies important trends and allows the owner to see the business as a whole and the direction it is
heading in
● Calculation: [(current year – base year) / base year] * 100
o Always calculated using the same element / account over two different years
● In the examples below, 2015 is used as the base year
Horizontal Analysis of Income Statement – Example
ABC Company
Year Ended December 31, 2019
2016 2015 Horizontal Analysis
Net Sales 150,000 130,000 15.4%
Cost of Goods Sold 30,000 25,000 20.0%
Gross Profit 120,000 105,000 14.3%
Operating Expenses 85,000 70,000 21.4%
Interest Expense 3,000 2,500 20.0%
Profit Before Income Taxes 35,000 32,500 7.69%
Income Tax Expense 2,500 2,000 25.0%
Profit 32,500 30,500 6.6%
Horizontal Analysis of Balance Sheet – Example
ABC Company
At December 31, 2019
2016 2015 Horizontal Analysis
Cash 17,000 15,000 13.3%
Accounts Receivable 26,000 25,000 4.0%
Inventory 40,000 30,000 33.3%
Property, Plant & Equipment 60,000 60,000 0.0%
Total Assets 143,000 130,000 10.0%
Current Liabilities 20,000 15,000 33.3%
Long-Term Liabilities 45,000 40,000 12.5%
Retained Earnings 55,000 50,000 10.0%
Owner’s Capital 23,000 25,000 -8.0%
Total Liabilities and Equity 143,000 130,000 10.0%
Page 1 of 5
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ACC100: FINANCIAL
STATEMENT ANALYSIS
JOEL SHAPIRO
Vertical Analysis
● Shows the relationship between different items on the same financial statement
● Vertical analysis on the Income Statement
o Calculates all accounts / elements as a percentage of Net Sales
o Net Sales = 100%
● Vertical analysis on the Balance Sheet
o Calculates all accounts / elements as a percentage of Total Assets or Total Liabilities and Equity
o Total Assets = 100%
o Total Liabilities and Equity = 100%
Vertical Analysis of Income Statement – Example
2016 Vertical Analysis

Net Sales 150,000 100.0%
Cost of Goods Sold 30,000 20.0%
Gross Profit 120,000 80.0%
Operating Expenses 85,000 56.7%
Interest Expense 3,000 2.0%
Profit Before Income Taxes 35,000 23.3%
Income Tax Expense 2,500 1.7%
Profit 32,500 21.7%
Vertical Analysis of Balance Sheet – Example
2016 Vertical Analysis

Cash 17,000 11.9%
Accounts Receivable 26,000 18.2%
Inventory 40,000 28.0%
Property, Plant & Equipment 60,000 42.0%
Total Assets 143,000 100%
Current Liabilities 20,000 14.0%
Long-Term Liabilities 45,000 31.5%
Retained Earnings 55,000 38.5%
Owner’s Capital 23,000 16.1%
Total Liabilities and Equity 143,000 100%
Page 2 of 5

TRS 2-168 | 416-979-5000, ext. 2435
ACC100: FINANCIAL
STATEMENT ANALYSIS
JOEL SHAPIRO
Profitability Ratios
Ratio Formula Example Notes
Gross (Gross Profit / Net Sales) Net Sales = 150,000 What numbers are good for the
Profit * 100 Gross Profit = 120,000 profitability ratios?
Ratio - depends on the industry average
Gross Profit Ratio - in general, high percentages are
= (120,000 / 150,000) * 100 good
= 80% - should be increasing or stable from
year to year
Net (Net Income / Net Sales) Net Sales = 150,000
Profit * 100 Net Profit = 32,500
Ratio
Net Profit Ratio
= (32,500 / 150,000) * 100
= 21.7%
Liquidity Ratios
Liquidity: the ability of a company to pay its liabilities as they come due
Working Current Assets – Current Current Assets = 83,000
Capital Liabilities Current Liabilities = 20,000
Working Capital
= 63,000
Current Current Assets / Current Current Assets = 83,000 What numbers are good for this
Ratio Liabilities Current Liabilities = 20,000 ratio?
- depends on the industry average
Current Ratio - higher is better to a certain point
= 83,000 / 20,000 - it is possible for a company to
= 4.15 to 1 have too much cash sitting in a bank
account
Quick (Cash + Accounts Cash = 17,000 What numbers are good for this
Ratio Receivable) / Current Accounts Receivable = ratio?
(also Liabilities 26,000 - depends on the industry average
called Current Liabilities = 20,000 - it is often less than 1 to 1, so
acid-test anything more is good
ratio) Quick Ratio
= (17,000 + 26,000) / 20,000
= 2.15 to 1
Page 3 of 5

TRS 2-168 | 416-979-5000, ext. 2435
ACC100: FINANCIAL
STATEMENT ANALYSIS
JOEL SHAPIRO
Solvency Ratios
Solvency: a company’s ability to pay its long-term debt (a measure of risk – more long-term debt means more
risk in terms of ultimate survival)
Debt to Total Liabilities / Total Equity Total Liabilities = 65,000 What are good numbers
Equity Total Equity = 78,000 for the solvency ratios?
Ratio - depends on the
Debt to Equity Ratio industry average
= 65,000 / 78,000 - in general, lower
= 0.83 to 1 numbers are better
Debt to Total Liabilities / Total Assets Total Liabilities = 65,000
Total Total Assets = 143,000
Assets
Ratio Debt to Total Assets Ratio
= 0.45 to 1
Page 4 of 5

TRS 2-168 | 416-979-5000, ext. 2435
ACC100: FINANCIAL
STATEMENT ANALYSIS
JOEL SHAPIRO
Efficiency Ratios
Efficiency: how well a company is managing its assets and liabilities
Accounts Net Sales / Average Net Sales = 150,000 What numbers are good
Receivable Accounts Receivable over A/R 2016 = 26,000 for efficiency ratios?
(A/R) the past 2 years A/R 2015 = 25,000 - depends on the
Turnover industry average and
Accounts Receivable Turnover past years
= 150,000 / [(26,000 + 25,000) / 2] - for A/R turnover, it also
= 5.88 depends on the credit
terms
Accounts Receivable Turnover in - in general, lower
days numbers are better
= 365 / 5.88
= 62.07 days
Meaning of Example
- the company’s Accounts Receivable
were collected and replaced by new
ones 5.88 times over the year (every
62.07 days)
Inventory Cost of Goods Sold / COGS = 65,000
Turnover Average Inventory over
the past 2 years Inventory 2016 = 40,000
Inventory 2015 = 30,000
Inventory Turnover
= 65,000 / [(40,000 + 30,000) / 2]
= 1.86 times
Inventory Turnover in days

= 365 / 1.86
= 196.24 days
Meaning of Example
- the company’s inventory is sold and
replaced by new items 1.86 times
over the year (every 196.24 days)
Page 5 of 5

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ACC100: FINANCIAL

● Calculates the trend between one year and the next

Horizontal Analysis of Income Statement – Example

Horizontal Analysis of Balance Sheet – Example

TRSM Academic Success Centre

Vertical Analysis of Income Statement – Example

2016 Vertical Analysis

Vertical Analysis of Balance Sheet – Example

2016 Vertical Analysis

TRSM Academic Success Centre

TRSM Academic Success Centre

TRSM Academic Success Centre

Inventory Turnover in days

TRSM Academic Success Centre

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