Accounting 102 Chp.18

Intracompany comparisons

Comparison of financial data made within a company

Intercompany basis

Compare one company to another

Tools of analysis

Horizontal analysis, Vertical analysis, and Ration analysis

Horizontal analysis

Evaluates a series of financial statement data over a period of time

Vertical analysis

Evaluates financial statement data by expressing each item in a financial statement as percentage of a base amount

Ratio analysis

Expresses the relationship among selected items of financial statement data

Comparing this year to previous years to see the change in key trends, like Sales year over year

(Current year - Base Year) divided by Base Year

Current ratio equation

Current assets/Current liabilities

Days in inventory equation

365 days/ (Cost of Goods Sold/Average Inventory)

Payout ratio equation

Cash dividend/Net income

Times interest earned equation

(Net income + Interest expense + Income tax expense)/Interest expense

Average receivable turnover

The amount of times a company collects its accounts receivable in a year. If receivables are collected every month then the receivables turnover roughly 12 times a year. It should not greatly exceed the credit term period

Inventory turnover

The number of times on average the inventory is old during a period

Profit margin equation

Net income/net sales

Return on common stockholder’s equity equation

Net income/average common stockholder’s equity