{"id":4104,"date":"2020-10-25T15:44:36","date_gmt":"2020-10-25T15:44:36","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&p=4104"},"modified":"2020-11-12T22:23:28","modified_gmt":"2020-11-12T22:23:28","slug":"introduction-to-objectives-of-financial-statement-analysis","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/introduction-to-objectives-of-financial-statement-analysis\/","title":{"raw":"Introduction to Objectives of Financial Statement Analysis","rendered":"Introduction to Objectives of Financial Statement Analysis"},"content":{"raw":"

What you will learn to do: Describe how financial statements are used to analyze a business<\/h2>\r\nBusinesses publish financial statements to communicate information about their operating performance and economic health. The income statement shows the profitability of a business by presenting its revenue and expenses for a period of time and summarizes its profitability in one final result: net income. The retained earnings statement reports all of the profit a business has accumulated since it began operations. The balance sheet is a comprehensive summary report that lists a business\u2019s assets, liabilities, owner investments, and accumulated profit.\r\n\r\nOnce the financial statements are available, the next step is to analyze them to glean useful information about a corporation\u2019s performance over time and its current financial health. These insights help business managers and investors make decisions about future courses of action. Areas of weakness may be identified and followed up with appropriate measures for improvement. Elements of strength should be reinforced and continued.\r\n\r\nMuch of this financial statement analysis is accomplished using ratios that reveal how one amount relates to another. One or more amounts are divided by other amount(s), yielding a decimal or percentage amount. However, no ratio is particularly meaningful by itself; it needs to be compared to something else, such as desired or expected results, previous results, other companies\u2019 results, or industry standards. This comparison lets you know where you stand in terms of whether you are doing better, worse, or the same as what you have expected or hoped for.\r\n\r\nFor this module on financial statement analysis, we\u2019ll be using the following statements from a hypothetical company:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Jonick Company\r\nComparative Income Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n
Description<\/th>\r\n2019<\/th>\r\n2018<\/th>\r\n<\/tr>\r\n
Sales<\/td>\r\n$994,000<\/td>\r\n$828,000<\/td>\r\n<\/tr>\r\n
Cost of merchandise sold<\/td>\r\n414,000<\/td>\r\n393,000<\/td>\r\n<\/tr>\r\n
Gross Profit<\/td>\r\nSingle Line<\/span>$580,000<\/td>\r\nSingle Line<\/span>$435,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Operating Expenses:<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Salaries expense<\/td>\r\n$77,000<\/td>\r\n$64,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Rent expense<\/td>\r\n63,000<\/td>\r\n52,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Insurance expense<\/td>\r\n56,000<\/td>\r\n46,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Supplies expense<\/td>\r\n49,000<\/td>\r\n41,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Advertising expense<\/td>\r\n42,000<\/td>\r\n35,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Depreciation expense<\/td>\r\n35,000<\/td>\r\n29,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Utilities expense<\/td>\r\n28,000<\/td>\r\n23,000<\/td>\r\n<\/tr>\r\n
Total operating expense<\/td>\r\nSingle Line<\/span>348,000<\/td>\r\nSingle Line<\/span>290,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Net income from operations<\/td>\r\n$232,000<\/td>\r\n$145,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Other revenue and expenses<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Gain on sale of investments<\/td>\r\n$137,000<\/td>\r\n$186,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Interest expense<\/td>\r\n(55,000)<\/td>\r\n(50,000)<\/td>\r\n<\/tr>\r\n
<\/td>\r\nSingle Line<\/span><\/td>\r\n<\/tr>\r\n
Income before income tax<\/td>\r\n$314,000<\/td>\r\n$281,000<\/td>\r\n<\/tr>\r\n
Income tax expense<\/td>\r\n66,000<\/td>\r\n50,000<\/td>\r\n<\/tr>\r\n
Net income<\/strong><\/td>\r\nSingle Line<\/span>$248,000 Double Line<\/span><\/td>\r\nSingle Line<\/span>$231,000 Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Jonick Company\r\nComparative Balance Sheet\r\nDecember 31, 2019 and 2018<\/caption>\r\n
<\/th>\r\n2019<\/th>\r\n2018<\/th>\r\n<\/tr>\r\n
Assets<\/strong><\/span><\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Current assets:<\/strong><\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\n$373,000<\/td>\r\n$331,000<\/td>\r\n<\/tr>\r\n
Marketable securities<\/td>\r\n248,000<\/td>\r\n215,000<\/td>\r\n<\/tr>\r\n
Accounts receivable<\/td>\r\n108,000<\/td>\r\n91,000<\/td>\r\n<\/tr>\r\n
Merchandise Inventory<\/td>\r\n55,000<\/td>\r\n48,000<\/td>\r\n<\/tr>\r\n
Prepaid insurance<\/td>\r\n127,000<\/td>\r\n115,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Total current assets<\/strong><\/td>\r\nSingle Line<\/span>$911,000<\/td>\r\nSingle Line<\/span>$800,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Long-term investments:<\/strong><\/td>\r\n<\/tr>\r\n
Investment in equity securities<\/td>\r\n$1,946,000<\/td>\r\n$1,822,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Property, plant and equipment:<\/strong><\/td>\r\n<\/tr>\r\n
Equipment (net of accumulated depreciation)<\/td>\r\n$87,000<\/td>\r\n$42,000<\/td>\r\n<\/tr>\r\n
Building (net of accumulated depreciation)<\/td>\r\n645,000<\/td>\r\n581,000<\/td>\r\n<\/tr>\r\n
Land<\/td>\r\n361,000<\/td>\r\n361,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Total property, plant and equipment<\/strong><\/td>\r\n$1,093,000<\/td>\r\n$984,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Total assets<\/strong><\/td>\r\nSingle Line<\/span>$3,950,000Double Line<\/span><\/td>\r\nSingle Line<\/span>$3,606,000Double Line<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Liabilities<\/strong><\/span><\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Current liabilities:<\/strong><\/td>\r\n<\/tr>\r\n
Accounts payable<\/td>\r\n$120,000<\/td>\r\n$109,000<\/td>\r\n<\/tr>\r\n
Salaries payable<\/td>\r\n244,000<\/td>\r\n222,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Total current liabilities<\/strong><\/td>\r\nSingle Line<\/span>$364,000<\/td>\r\nSingle Line<\/span>$331,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Subcategory, <\/span>Long-term liabilities<\/strong><\/td>\r\n<\/tr>\r\n
Mortgage note payable<\/td>\r\n$83,000<\/td>\r\n$83,000<\/td>\r\n<\/tr>\r\n
Bonds payable<\/td>\r\n828,000<\/td>\r\n745,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Total long-term liabilities<\/strong><\/td>\r\nSingle Line<\/span>$911,000<\/td>\r\nSingle Line<\/span>$828,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Total liabilities<\/strong><\/td>\r\n$1,275,000Double Line<\/span><\/td>\r\n$1,159,000Double Line<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Stockholders' Equity<\/strong><\/span><\/td>\r\n<\/tr>\r\n
Preferred $1.50 stock, $20 par<\/td>\r\n$166,000<\/td>\r\n$166,000<\/td>\r\n<\/tr>\r\n
Common stock, $10 par<\/td>\r\n83,000<\/td>\r\n83,000<\/td>\r\n<\/tr>\r\n
Retained earnings<\/td>\r\n2,426,000<\/td>\r\n2,198,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Total stockholders' equity<\/strong><\/td>\r\nSingle Line<\/span>$2,675,000<\/td>\r\nSingle Line<\/span>$2,447,000<\/td>\r\n<\/tr>\r\n
Total liabilities and stockholders' equity<\/strong><\/td>\r\n$3,950,000Double Line<\/span><\/td>\r\n$3,606,000Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Jonick Company\r\nComparative Retained Earnings Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n
Description<\/th>\r\n2019<\/th>\r\n2018<\/th>\r\n<\/tr>\r\n
Retained earnings, beginning of year<\/td>\r\n$2,198,000<\/td>\r\n$1,987,000<\/td>\r\n<\/tr>\r\n
Net income<\/td>\r\n248,000<\/td>\r\n231,000<\/td>\r\n<\/tr>\r\n
Less: Preferred stock dividends<\/td>\r\n12,000<\/td>\r\n12,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\r\n8,000Double Line<\/span><\/td>\r\n8,000Double Line<\/span><\/td>\r\n<\/tr>\r\n
Increase in retained earnings<\/td>\r\n20,000<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
Gross Profit<\/td>\r\nSingle Line<\/span>$2,426,000Double Line<\/span><\/td>\r\nSingle Line<\/span>$2,198,000Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>","rendered":"

What you will learn to do: Describe how financial statements are used to analyze a business<\/h2>\n

Businesses publish financial statements to communicate information about their operating performance and economic health. The income statement shows the profitability of a business by presenting its revenue and expenses for a period of time and summarizes its profitability in one final result: net income. The retained earnings statement reports all of the profit a business has accumulated since it began operations. The balance sheet is a comprehensive summary report that lists a business\u2019s assets, liabilities, owner investments, and accumulated profit.<\/p>\n

Once the financial statements are available, the next step is to analyze them to glean useful information about a corporation\u2019s performance over time and its current financial health. These insights help business managers and investors make decisions about future courses of action. Areas of weakness may be identified and followed up with appropriate measures for improvement. Elements of strength should be reinforced and continued.<\/p>\n

Much of this financial statement analysis is accomplished using ratios that reveal how one amount relates to another. One or more amounts are divided by other amount(s), yielding a decimal or percentage amount. However, no ratio is particularly meaningful by itself; it needs to be compared to something else, such as desired or expected results, previous results, other companies\u2019 results, or industry standards. This comparison lets you know where you stand in terms of whether you are doing better, worse, or the same as what you have expected or hoped for.<\/p>\n

For this module on financial statement analysis, we\u2019ll be using the following statements from a hypothetical company:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Jonick Company
\nComparative Income Statement
\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n
Description<\/th>\n2019<\/th>\n2018<\/th>\n<\/tr>\n
Sales<\/td>\n$994,000<\/td>\n$828,000<\/td>\n<\/tr>\n
Cost of merchandise sold<\/td>\n414,000<\/td>\n393,000<\/td>\n<\/tr>\n
Gross Profit<\/td>\nSingle Line<\/span>$580,000<\/td>\nSingle Line<\/span>$435,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Operating Expenses:<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Salaries expense<\/td>\n$77,000<\/td>\n$64,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Rent expense<\/td>\n63,000<\/td>\n52,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Insurance expense<\/td>\n56,000<\/td>\n46,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Supplies expense<\/td>\n49,000<\/td>\n41,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Advertising expense<\/td>\n42,000<\/td>\n35,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Depreciation expense<\/td>\n35,000<\/td>\n29,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Utilities expense<\/td>\n28,000<\/td>\n23,000<\/td>\n<\/tr>\n
Total operating expense<\/td>\nSingle Line<\/span>348,000<\/td>\nSingle Line<\/span>290,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Net income from operations<\/td>\n$232,000<\/td>\n$145,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Other revenue and expenses<\/strong><\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Gain on sale of investments<\/td>\n$137,000<\/td>\n$186,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Interest expense<\/td>\n(55,000)<\/td>\n(50,000)<\/td>\n<\/tr>\n
<\/td>\nSingle Line<\/span><\/td>\n<\/tr>\n
Income before income tax<\/td>\n$314,000<\/td>\n$281,000<\/td>\n<\/tr>\n
Income tax expense<\/td>\n66,000<\/td>\n50,000<\/td>\n<\/tr>\n
Net income<\/strong><\/td>\nSingle Line<\/span>$248,000 Double Line<\/span><\/td>\nSingle Line<\/span>$231,000 Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Jonick Company
\nComparative Balance Sheet
\nDecember 31, 2019 and 2018<\/caption>\n
<\/th>\n2019<\/th>\n2018<\/th>\n<\/tr>\n
Assets<\/strong><\/span><\/td>\n<\/tr>\n
Subcategory, <\/span>Current assets:<\/strong><\/td>\n<\/tr>\n
Cash<\/td>\n$373,000<\/td>\n$331,000<\/td>\n<\/tr>\n
Marketable securities<\/td>\n248,000<\/td>\n215,000<\/td>\n<\/tr>\n
Accounts receivable<\/td>\n108,000<\/td>\n91,000<\/td>\n<\/tr>\n
Merchandise Inventory<\/td>\n55,000<\/td>\n48,000<\/td>\n<\/tr>\n
Prepaid insurance<\/td>\n127,000<\/td>\n115,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Total current assets<\/strong><\/td>\nSingle Line<\/span>$911,000<\/td>\nSingle Line<\/span>$800,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Long-term investments:<\/strong><\/td>\n<\/tr>\n
Investment in equity securities<\/td>\n$1,946,000<\/td>\n$1,822,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Property, plant and equipment:<\/strong><\/td>\n<\/tr>\n
Equipment (net of accumulated depreciation)<\/td>\n$87,000<\/td>\n$42,000<\/td>\n<\/tr>\n
Building (net of accumulated depreciation)<\/td>\n645,000<\/td>\n581,000<\/td>\n<\/tr>\n
Land<\/td>\n361,000<\/td>\n361,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Total property, plant and equipment<\/strong><\/td>\n$1,093,000<\/td>\n$984,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Total assets<\/strong><\/td>\nSingle Line<\/span>$3,950,000Double Line<\/span><\/td>\nSingle Line<\/span>$3,606,000Double Line<\/span><\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Liabilities<\/strong><\/span><\/td>\n<\/tr>\n
Subcategory, <\/span>Current liabilities:<\/strong><\/td>\n<\/tr>\n
Accounts payable<\/td>\n$120,000<\/td>\n$109,000<\/td>\n<\/tr>\n
Salaries payable<\/td>\n244,000<\/td>\n222,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Total current liabilities<\/strong><\/td>\nSingle Line<\/span>$364,000<\/td>\nSingle Line<\/span>$331,000<\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Subcategory, <\/span>Long-term liabilities<\/strong><\/td>\n<\/tr>\n
Mortgage note payable<\/td>\n$83,000<\/td>\n$83,000<\/td>\n<\/tr>\n
Bonds payable<\/td>\n828,000<\/td>\n745,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Total long-term liabilities<\/strong><\/td>\nSingle Line<\/span>$911,000<\/td>\nSingle Line<\/span>$828,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Total liabilities<\/strong><\/td>\n$1,275,000Double Line<\/span><\/td>\n$1,159,000Double Line<\/span><\/td>\n<\/tr>\n
<\/td>\n<\/tr>\n
Stockholders’ Equity<\/strong><\/span><\/td>\n<\/tr>\n
Preferred $1.50 stock, $20 par<\/td>\n$166,000<\/td>\n$166,000<\/td>\n<\/tr>\n
Common stock, $10 par<\/td>\n83,000<\/td>\n83,000<\/td>\n<\/tr>\n
Retained earnings<\/td>\n2,426,000<\/td>\n2,198,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Total stockholders’ equity<\/strong><\/td>\nSingle Line<\/span>$2,675,000<\/td>\nSingle Line<\/span>$2,447,000<\/td>\n<\/tr>\n
Total liabilities and stockholders’ equity<\/strong><\/td>\n$3,950,000Double Line<\/span><\/td>\n$3,606,000Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n\n\n\n\n\n\n\n\n\n
Jonick Company
\nComparative Retained Earnings Statement
\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n
Description<\/th>\n2019<\/th>\n2018<\/th>\n<\/tr>\n
Retained earnings, beginning of year<\/td>\n$2,198,000<\/td>\n$1,987,000<\/td>\n<\/tr>\n
Net income<\/td>\n248,000<\/td>\n231,000<\/td>\n<\/tr>\n
Less: Preferred stock dividends<\/td>\n12,000<\/td>\n12,000<\/td>\n<\/tr>\n
\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\n8,000Double Line<\/span><\/td>\n8,000Double Line<\/span><\/td>\n<\/tr>\n
Increase in retained earnings<\/td>\n20,000<\/td>\n20,000<\/td>\n<\/tr>\n
Gross Profit<\/td>\nSingle Line<\/span>$2,426,000Double Line<\/span><\/td>\nSingle Line<\/span>$2,198,000Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\t\t\t
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Candela Citations<\/h3>\n\t\t\t\t\t
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CC licensed content, Original<\/div>