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PRDV201: Accounting Principles I

Unit 10: Financial Statement Analysis   In this unit, you will learn how to analyze financial statements and financial ratios.  In the last unit, you examined the information necessary for calculating financial ratios related to a company’s profitability, solvency, and liquidity.  Now, you will learn how investors draw conclusions from these ratios, as well as the factors that influence a company’s financial ratios.  For example, the ROA of one technology company may be 10%, whereas the ROA of a similarly sized technology company may be 25%.  Comparing companies based on company size or industry is one way for analysts to decipher qualitative findings in quantitative information.  In this unit, you will learn about different financial statement analyses and the information that can be surmised from each method.

Publicly traded companies release financial statements every quarter.  Once per year these statements may be used by investors to analyze the current financial profitability and operations of companies within their investment portfolio.  In some cases, these financial statements can be the basis for projecting a company’s growth or profitability, based on past performance.

While working through this unit, be sure to focus on the ways in which financial ratio values, as well as qualitative data, can be portrayed with each ratio calculation, and the ways company operations affect these values.

Unit 10 Time Advisory
This unit should take approximately 3 hours to complete.

☐    Subunit 10.1: 0.5 hours

☐    Subunit 10.2: 0.5 hours

☐    Subunit 10.3: 1.5 hours

☐    Subunit 10.4: 0.5 hours

Unit10 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Distinguish between different types of financial statement analyses. - Identify financial ratios that can be calculated to determine a company’s profitability. - Analyze a company’s financial viability given its financial statements. - Discuss factors that may be influencing a company’s financial ratios. - Describe the process of financial statement forecasting.

10.1 What Is Financial Statement Analysis?   - Lecture: YouTube: Susan Crosson’s “Final Performance Overview” Link: YouTube: Susan Crosson’s “Final Performance Overview” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how a company’s financial performance can be
determined using the financial statements.  By the completion of
this lecture, you should be able to explain how each financial
statement can be used to provide a financial overview of the
company’s performance.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

10.1.1 Vertical Analysis   - Lecture: YouTube: Susan Crosson’s “Vertical Analysis” Link: YouTube: Susan Crosson’s “Vertical Analysis” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how to conduct a vertical analysis of a company’s
financial statements.  By the completion of this lecture, you should
be able to explain how to do a vertical analysis and how this
analysis can be important in viewing the company’s financial
health.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

10.1.2 Horizontal Analysis   - Lecture: YouTube: Susan Crosson’s “Horizontal Analysis” Link: YouTube: Susan Crosson’s “Horizontal Analysis” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how to conduct a horizontal analysis of a company’s
financial statements.  By the completion of this lecture, you should
be able to explain how to do a horizontal analysis and how this
analysis can be important in viewing the company’s financial
health.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

10.2 What Are Profitability Ratios?   - Lecture: YouTube: Money Week’s “What Is Profit?” Link: YouTube: Money Week’s “What Is Profit?” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines what profit is and how it is calculated.  As you
watch the lecture, you should be able to identify what financial
statements provide vital information about a company’s profit.  By
the end of this lecture, you should have a very firm understanding
of profit.  

 Watching this lecture and taking notes should take approximately 20
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: YouTube: Susan Crosson’s “Final Performance Profitability Ratios” Link: YouTube: Susan Crosson’s “Final Performance Profitability Ratios” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which outlines the qualitative information that profitability ratios provide.  As you view this lecture, be sure to review the profitability ratios that are discussed and pay close attention to what these ratios may reveal about a company’s financial health.  By the end of this lecture, you should be able to explain what profitability ratios can be used to calculate the profitability of a company when given a company’s financial statements.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

10.3 Company Factors Affecting Profitability   10.3.1 Internal Versus External Growth   - Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 13: Financial Analysis and Statement of Cash Flows: Cash Flow Analysis Practice Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 13: Financial Analysis and Statement of Cash Flows: Cash Flow Analysis Practice Worksheet” (PDF)

 Instructions: Please click on the link above and carefully read the
directions before completing the worksheet.  If you have difficulty
completing the worksheet, refer back to the reading and lectures
assigned in this subunit as well as in subunit 3.2.  

 Reviewing your previous readings and completing this worksheet
should take approximately 20 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

10.3.2 Recurring and Transitory Items   - Reading: Boundless: “Using Financial Statements to Understand a Business” Link: Boundless: “Using Financial Statements to Understand a Business” (PDF)

 Instructions: Read this section of Boundless’s *Accounting*
textbook. Earnings on the income statement may be divided into
recurring items and transitory (non-recurring) items. Normal
earnings are “more permanent, and therefore more relevant for
prediction and valuation.”  

 Reading this section should take approximately 20 minutes to
complete.  

 Terms of Use: This resource is licensed under [Creative Commons
Attribution-ShareAlike 3.0 Unported
License](http://creativecommons.org/licenses/by-sa/3.0/). It is
attributed to Boundless and the original version can be found
[here](https://www.boundless.com/accounting/analyzing-financial-statements/overview-financial-statements-analysis/using-financial-statements-to-understand-business/).

10.3.3 Operating Efficiencies & Liquidity   - Lecture: YouTube: Econo McCall’s “Ratios: Efficiency” Link: YouTube: Econo McCall’s “Ratios: Efficiency” (YouTube)

 Instructions: Please click on the link above and watch the lecture,
which outlines how mathematical ratios discussed in Unit 9 can be
used to make qualitative conclusions about a company’s operating
efficiencies.  By the end of this lecture, you should be able to
identify at least 2 ratios that can be used to determine a company’s
operating efficiencies and what insight these ratios provide.  

 Watching this lecture and taking notes should take approximately 20
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: YouTube: Econo McCall’s “Ratios: Liquidity” Link: YouTube: Econo McCall’s “Ratios: Liquidity” (YouTube)

    Instructions: Please click on the link above and watch the lecture, which outlines how mathematical ratios discussed in Unit 9 can be used to make qualitative conclusions about a company’s liquidity.  By the end of this lecture, you should be able to identify at least 2 ratios that can be used to determine a company’s liquidity and what insight these ratios provide.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

10.4 Financial Statement Forecasting   - Reading: Boundless: “Forecasting the Income Statement” Link: Boundless: “Forecasting the Income Statement” (PDF) 

 Instructions: Please read this section of Boundless’s *Finance*
textbook to learn about various types of forecasts, such as sales,
production schedules, and cost of goods sold (COGS).  

 Reading this section and note taking should take you approximately
45 minutes to complete.  

 Terms of Use: This resource is licensed under [Creative Commons
Attribution-ShareAlike 3.0 Unported
License](http://creativecommons.org/licenses/by-sa/3.0/). It is
attributed to Boundless and the original version can be found
[here](https://www.boundless.com/finance/forecasting-financial-statements/forecasting-income-statement/).