Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.
Mark plans to begin his coaching with the following topics:
Making comparisons using standardized financial statements Calculating and understanding performance ratios Determining the company's profitability and growth Drawbacks associated with financial statement comparisons
Bob is pleased that the company's sales have increased to $2,650,000 this year from $2,240,000 last year. What suggestion should Mark make to Bob to keep the sales increase in perspective?
Make sure you also pay attention to the common-size statements. This will show what, if any changes in other items on the financial statements (compared to revenue) also occurred.
Bob should know that the increase could result from a decrease in the cost of good sold.
Mark should remind Bob that this increase in sales will also affect owner's equity.
Bob needs to understand that even if sales decrease next year, depreciation of the same amount will help retained earnings.