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© 2014 Pacific Crest
399
Step
Explanation
Watch it Work!
1.
Describe the
company
Identify the characteristics of
the company; what type of
company is it?
Google is an online service provider
2.
How is the data
measured?
Is the data scaled in any
way?
The dollar figures in the income statement
are in thousands of US dollars.
3.
Analyze assets
Compare assets for years
provided; want to determine
the growth in income over a
period of time to predict the
trend for the next year
Google’s current assets have increased
$20 billion from 2011 to 2013; $12 billion
between 2012 and 2013. With the addition
of long term assets, overall assets have
increased $38 billion between 2011 and
2013.
4.
Analyze liabilities
Compare liabilities for years
provided; want to identify
where the major set of
resources are expended
Liabilities have increased $9 billion from
2011 and 2013 with most of this increase
in current liabilities which increased $7
billion
5.
Determine size of
shareholders’ equity
What is the difference
between the value of the
assets and liabilities?
Shareholders’ equity increased from $58
to $83 billion from 2011 to 2013.
6.
Analysis of the
balance sheet
What is the value of the
retained earnings for the
company?
Google’s retained earnings increase $24
billion in this time. Google is growing and
increasing in value.
O
ops
! A
voiding
C
ommon
E
rrors
●
The balance sheet does not balance
Example
:
Assets
≠
Liabilities + Shareholder’s Equity
Why?
Likely caused by the
incorrect classification of an asset or liability. This can
dramatically impact a balance sheet and paint a misleading financial picture.
●
A business miscalculates its inventory which causes issues for both the income statement and
the balance sheet
Example
: A company does not take time to accurately count and record its inventory.
Why?
The following tables show the impact of an error in inventory on both the income
statement and the balance sheet.
Income Statement
Impact of Error on
Error in Inventory
Cost of Goods Sold
Gross Profit
Net Income
Ending Inventory
Understated
Overstated
Understated
Understated
Overstated
Understated
Overstated
Overstated
Beginning Inventory
Understated
Understated
Overstated
Overstated
Overstated
Overstated
Understated
Understated
8.5 Corporate Finance