Accounting II: Tools for
Analysis
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Jan. 3, 2012
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Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
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James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas [email protected]
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Common Size Analysis A technique that turns all financial
statement entries into percentage of revenue
Then can look at percentage change and percentage point change
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Why Common Size Identify trends Identify what causes changes in totals
on financial statements Easier to compare percentages than
raw numbers Easier to compare companies Easier to compare company with
industry averages
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Doing Common Size For IS, divide Revenue into all entries. For BS, divide each total category into
its category items. For example, divide Total Assets into each category of assets.
For CF, divide each total category into its category items.
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Comparable Statements Often have to restructure Income
Statement to the In-the-Box format we have studied
Typical problems come from items we would consider Other Income/Expenses
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Trends in Margins How have Cost of Goods Sold (CGS)
and Sales, General and Administrative (SGA) changed?
What does that mean for Gross Profit Margin and Operating Profit Margin?
How does Net Profit Margin move? Importance of using Basis Points
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Common Size, Ratios These techniques let you drill below the
surface and start developing a more complete picture of the company’s performance Strengths Weaknesses Strategic effectiveness of the firm