parative financial Statement Analysis:

to year change analysis

sents changes in absolute dollar amount and as well in perce

are some few clarifying rules for year to year change

ative amount appears in the base or vice versa.

n there is no figure for the base year
n an item has value in the base year and none in the next pe
 Change analysis
Scenari Year 1 Year 2 Amount Percent
o Item age

Net (4500) 1500 6000 ----------

income
Tax 2000 (1000) (3000) ______
Notes _________ 8000 8000 ----------
payable
Notes 10,000 ________ (10,000 (100%)
receiva )
ble
x-Number Trend Analysis:

cellent procedure to effect longer-term trend comparisons is

number trend series analysis.

ds a choosing a base year, for all items with a pre-selected

number usually set at 100.

se a normal base year with regards to business condition.

of the earliest years in the series serves this purpose.

xample
ury technologies cash balance (in thousands) at December 3
1(the base year) is 12,000. The cash balance at December 31
2, is 18,000. So the index number is
nt years balance/Base years balance *100
n Size Statements:
size financial statements came from the problem in comparin
ial statements of firms that differ in size.

ompany A has long term debt of 95 million and

B has a debt of 70 million .
er that company A is highly leveraged than B ?

of controlling for size differences is to express the com

ce sheet as a percentage of total assets (liabilities and
components of income statements as a percentage of

As total asset is 530.301million (liabilities +equities) while B

sset of 243.915.
r respective common size Balance sheet shows
pany A has = long-term-debt of 17.91%
pany B has = long-term-debt of 28.7%

tion issues in calculating ratios

tion or interpretation problems can arise with financia

ety of context. Here we are concerned with problems a

ive denominators
me observations (outliers.)
Ratios Highe Secon Third Mean Mode
st d highe
Highe st
st

Curren 1129.5 31.41 31.39 1.30 .28

t ratio 0
Debt 273.31 27 26 .91 .40
to
equity
TIE 2863.5 2713. 1350 8.55 1.43
ROE 1975 1787.5 1650 19.20 10.79
denominators:
the observation from the sample.
e the reasons for the negative denominators and ma
uent adjustment .

alternative ratio that captures some aspects of the sa

eristics.

bservations (outliers):
ation which appears to be inconsistent with the remai
t of data. It is a matter of subjective judgment on the
erver.

he reasons
xtreme value due to recording error?
xtreme value due to denominator of the ratio approa
nting methods: may be due to off balance sheet items.
mic: All other firms ca be capital intensive while the firm with
e ratio can be relatively cheap labor intensive in area.
ural Change: A merger can cause outlier observations.

ternatives available to an analysts when faced with ex

vations(not due to recording errors)
e the extreme observation
ning the extreme on the grounds that it represents an
me state of the underlying economy.
g adjustments for economic factors and accounting fa
ed to cause the extreme observation.
orizing the sample
ming the sample by deleting the top N and bottom N
vations
The distribution of Financial Statement numbers:

Focus on normality

Aspects of distribution:

Central Tendency:

Mean
Dispersion

Measures of shape: Skewness and Kurtosis,

describe departures from the symmetry of a
distribution and its relative flatness (peakedness)
respectively.

Kurtosis: it measures the distributions flatness

entized Range: Another measure of the dispersion is t
entized range.

X max -X min /S.D