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welcome to my mini lecture on financial analysis and before we get started I wanted to give you a resource so in the future if you're away from college and you don't have access to your textbook and you come across any kind of financial accounting or economic term that you're you know you've had the past but you can't quite remember you can always google it and a lot of times you might see a good resource on the internet and here we have a Wikipedia entry for financial analysis this is very short just a couple of paragraphs but it does give you a lot of different methods and the goals of performing financial analysis and some of the tools that we use so just for the future reference that's a real good place to to review information we're going to talk about financial analysis and in general when we're performing a financial analysis we're comparing data to something in this case we've got two types of comparisons that we can make and we're gonna try and derive information out of data you all have had a lot of classwork and class time that you've spent on learning how to analyze financial transactions make the decision of whether it needs to record it in the books and then after you've recorded your journal entries created trial balances you've learned how to create generally accepted accounting principle financial statements well the next step is people are going to use those financial statements the data that you provide to produce meaningful information for them who's gonna need a beautiful information on a financial statement will stakeholders it could be some people within the company like managers or it could be people outside of the company like bankers who are lending the company money or could be Wall Street analysts if the company is a public company and they want to analyze this company and compared to other companies but we have a couple of different types of comparisons that we can make we can compare the data within a company by performing in truck company analysis and the word intra company I like to think of comparing to an intra state highway here in New Mexico we have highway 14 which runs between Albuquerque and Santa Fe is wholly contained within the borders of New Mexico that's an intrastate highway intercompany analysis is analyzing a company or comparing a company to other companies different companies think of an interstate highway that isn't only within New Mexico like US Highway 40 but it connects New Mexico to Texas and then going out the other side to Arizona also when we do an intercompany analysis we can use industry averages rather than just comparing to one company we can compare to a group of companies if we have the information so in looking at the financial statement analysis we have some basic tools that we're going to learn about today horizontal analysis vertical analysis and then ratio analysis we can use any combination of these as long as it's providing information for us in financial analysis never gives you a hard and fast answer I like to think of it as a is just a way a place to start your investigation only gives you a little bit of information and now you know where you want to go and dig further and deeper and you can use any combination of these analysis in order to derive information out of financial statements so the first thing we'll look at is horizontal analysis and I'm get a formula up here which you've got in the books as well now we're taking the current year amount less the base year amount divided by the base year and that gives us our percentage change let's take a look at an example of a financial statement and this is Lillian company their balance sheets for the period December 31st 2007 and two thousand six and we're analyzing the data here in yellow in 2007 comparing that to the base here in 2006 I only have two years up here but there's no reason why I couldn't have done five years in any case we have to define a base year because we're going to express all of the percentage changes as a percentage of the base year so in the case of cash where I have $100,000 increase I mixed Elling you that's a 25% increase over the base year I could have computed that hundred percent of fifty five hundred thousand dollars and so there was a 20 percent increase either one is a you know a fair statistic but I have to disclose and what's important is that when we're quoting information like we're saying sales went up or sales went down by a certain percentage were very clear of what the base year is so by doing this looking at the balance sheet we get little bits of information that we have they had a 25% increase in cash for example and our current liabilities went down by 58% maybe we used some of the cash to pay off some of the liabilities and that's a possibility it's certain certainly one place that we can start performing further and deeper analysis here's an example of using that verdict the horizontal analysis on an income statement you see where again I had a $500,000 in in sales in 2007 compared to four hundred thousand two thousand six it's a hundred thousand dollar increase that's a twenty five percent increase based on the base year of 2006 so I'm analyzing the tooth out 2007 data and using 2006 as a base year let me give you another example of how a company can use a horizontal analysis and this is using looking at the detail of an income statement so I'm only looking at expenses here and if I was only looking in total at the expenses you see that my 2007 expenses are 117 thousand whereas my 2006 expenses were one hundred sixteen thousand fifteen hundred dollar increase one percent increase that makes sense but if we go a little bit further into the information but further into the data I see that okay well my rent increased by ten thousand dollars look here at utilities doesn't look like I have any utilities recorded and last year I had twenty thousand dollars so since we're pretty sure that we needed utilities this year looks like I didn't record this so by using a horizontal analysis on a detailed financial statement like this expense statement here I'm able to see that probably made an error and I haven't included my utilities expense for the period next thing we're going to talk about after horizontal analysis is vertical analysis and vertical analysis allows us not to look across years but to look within a single year so in vertical analysis when we're talking about expressing something as a base amount we're only looking within that one financial statement so again let's look at a balance sheet where we're gonna do a vertical analysis and here's Lillian company for 2007 and we're gonna compare each line item on the balance sheet all assets all liabilities all stockholders equity items and we're going to use total assets as our base amount so cash is thirty eight percent of the base amount accounts receivable is fifteen percent of the base amount by doing this we can compare within years of Lillian company and see flux changes but that's very similar to do a horrid doing a horizontal analysis by expressing everything as a percentage we can now compare it to other companies so here I've got Lillian company which has a million three in assets and I'm going to compare it to Jack Joe company which has a billion and a half in assets you might see these companies are totally uncompelled but if they're in the same industry I may get some information by comparing the two so even though Jack Joe is much larger than Lillian company everything is expressed as a percentage so it's comparable and I see that Lily company has 38 percent assets are cash to total assets where Jack Joe is a little bit less and I also see that that current assets are eighty-one percent for Jack Joe company compared to 55 percent for loan company this just gives me a little bit of information that I can use to start delving a little bit further you know why is Lily company who's in the same industry have a lower amount of current assets why do they have more invested in in property plant and equipment just one place to start looking at information I can also do the same thing on the income statement except on the income statement I'm using net sales as the base amount for all of the different items on the income statements the cost of goods sold gross profit everything is expressed as a percentage of net sales and again I've common sized this financial statement for lilian company and now I can compare it to Jack Joe company which is is much much larger but by looking at them I see that Lily company their cost of goods sold is less why why is that I need to start delving in a little bit deeper and I can get maybe some useful information out of this I also see here the lillian company pays 15% in taxes jack shown company pays 1% why is that again it's a place to start our investigation so vertical analysis by expressing items on the financial statement as a percentage their common sized we can compare them to other companies and and other industries so that's it for the financial statement analysis get your homework done and look forward to seeing you in class