How does one get a handle on the financial performance of a huge company such as Johnson & Johnson ? Financial statements, including the balance sheet, income statement, and statement of cash flows, provide a wealth of information that is helpful in performing this significant task. Financial statement analysis involves taking key items from these financial statements and gleaning as much useful information as possible from them. For example, we can determine that the amount of Johnson & Johnson 's 2005 net income ($10,411 million) represented a return of almost 18 percent on the total assets used to generate that income ($58,025 million). Is a return on assets of 18 percent satisfactory or unsatisfactory? This is a difficult question to answer. To make this judgment we would need more information than we have at this point. For example, we would like to know the trend in various financial measures for Johnson & Johnson for several years. We would also like to know information about other companies with similar operating characteristics (i.e., in the same industry). We will study all of this and more in this chapter as we look at the interesting and challenging subject of financial statement analysis.
AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:
Explain the uses of dollar and percentage changes, trend percentages, component percentages, and ratios. |
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Discuss the quality of a company's earnings, assets, and working capital. |
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Explain the nature and purpose of classifications in financial statements. |
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Prepare a classified balance sheet and compute widely used measures of liquidity and credit risk. |
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Prepare a multiple-step and a single-step income statement and compute widely used measures of profitability. |
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Put a company's net income into perspective by relating it to sales, assets, and stockholders' equity. |
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Compute the ratios widely used in financial statement analysis and explain the significance of each. |
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Analyze financial statements from the viewpoints of common stockholders, creditors, and others. |