chap. 2-analysis of financial stmt and cfs-1

8/20/2019 Chap. 2-Analysis of Financial Stmt and CFs-1

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TOPIC 2

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ANALYSIS OF FINANCIALSTATEMENTS AND CASH

FLOWS


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Part A1. The Income Statement

It is aso !no"n as Pro#t$Loss Statement

It meas%res the res%ts o& #rm's o(eration o)er a

s(eci#c (erio*.Income Statement for XYZ Co. for the period

ending 31st of August 21!

Income Statement for XYZ Co. for the "ear ended31st of August 21!

+1st Se(t 2,1- -1st A%/ 2,10

The ottom ine o& the income statement sho"s the#rm's pro#t or $oss &or a period.

Saes E3(enses 4 Pro#ts or %oss


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Income Statement Terms

&e'enue (Sa$es)Mone5 *eri)e* &rom sein/ the com(an5's (ro*%ct or ser)ice

Cost of *oods So$d (CO*S)

The cost o& (ro*%cin/ or ac6%irin/ the /oo*s or ser)ices toe so*

Operating +,pensesE3(enses reate* to mar!etin/ an* *istri%tin/ the (ro*%ct or

ser)ice an* a*ministerin/ the %siness

-inancing Costs The interest (ai* to cre*itors

Ta, +,pensesAmo%nt o& ta3es o"e*7 ase* %(on ta3ae income


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Fi/%re -81


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Fi/%re -81 +cont.


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Tae -81


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2. The


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Fi/%re -8-


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Current assets com(rise assets that arereati)e5 i6%i*7 or e3(ecte* to e con)erte* intocash "ithin 12 months. C%rrent assets t5(ica5

inc%*e=Cash

Acco%nts Becei)ae +(a5ments *%e &rom c%stomers "ho%5 on cre*it

In)entor5 +ra" materias7 "or! in (rocess7 an* #nishe*/oo*s he* &or e)ent%a sae

Other assets +e3.= Pre(ai* e3(enses are items (ai* &or ina*)ance

Balance Sheet Terms: Assets


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-i,ed Assets 0 Inc%*e assets that "i e %se*&or more than one 5ear. Fi3e* assets t5(ica5inc%*e=Machiner5 an* e6%i(ment


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et (%iai$ities) Mone5 that has een orro"e* &rom a cre*itor an* m%st e re(ai* at

some (re*etermine* *ate. Det co%* e current +m%st e re(ai* "ithin t"e)e months or long-

term +re(a5ment time e3cee*s one 5ear.

Current et=Acco%nts (a5ae +Cre*it e3ten*e* 5 s%((iers to a #rm "hen it

(%rchases in)entoriesAccr%e* e3(enses +Short term iaiities inc%rre* in the #rm's

o(erations %t not 5et (ai* &or

Short8term notes +


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+4uit"5 Shareho*er's in)estment in the #rm in the &orm o&(re&erre* stoc! an* common stoc!. Pre&erre* stoc!ho*erseno5 (re&erence "ith re/ar* to (a5ment o& *i)i*en* an*seniorit5 at settement o& an!r%(tc5 caims.

Treasur" Stoc65 Stoc! that ha)e een re8(%rchase* 5 thecom(an5.

&etained +arnings5 C%m%ati)e tota o& a the net income o)er the i&e o& the #rm7 ess common stoc! *i)i*en*s that

ha)e een (ai* o%t o)er the 5ears. Note retaine* earnin/sare not e6%a to har* cash

Balance Sheet Terms: Equity


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E

ASS+TS ( A)C%rrent Assets

Fi3e* Assets

Tota Assets

%IA/I%ITI+S (L)C%rrent LiaiitiesLon/8Term Liaiities

Tota Liaiities

O78+&9S +:;ITY(E)Pre&erre* Stoc!

Common Stoc!Betaine* earnin/s

Tota O"ner's E6%it5 Tota iaiities >

E6%it5


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Tae -8-


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Net Wor!in/ Ca(ita

8et 7or6ing Capita$

4 C%rrent assets c%rrent iaiities

Lar/er the net "or!in/ ca(ita7 etter the #rm's aiit5to re(a5 its *et

Net "or!in/ ca(ita can e (ositi)e or ero or ne/ati)e.It is /enera5 (ositi)e.

An increase in net "or!in/ ca(ita ma5 not a"a5s e/oo* ne"s. For e3am(e7 i& the e)e o& in)entor5 /oes%(7 c%rrent assets "i increase an* th%s net "or!in/ca(ita "i aso increase. Ho"e)er7 increasin/ in)entor5e)e ma5 "e e a si/n o& inaiit5 to se.


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Det Batio

Det ratio is the (ercenta/e o& assets that are#nance* 5 *et.

Det ratio is an in*ication o& #nancia ris!.Genera57 hi/her the ratio7 the more ris!5 the #rmis7 as #rms ha)e to (a5 interest on *et re/ar*esso& the earnin/s or cash o" sit%ation.


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What Is the Difference Between

"Source" & "se! of cash


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Source

Source is a term used to refer to the

receipt of an economic resource ina transaction.


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se

Use is a term used to refer to the

spending of an economic resourcein a transaction.


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• An increase in an asset a use of cash• An increase in liability a source of cash• An increase in equity a source of cash• A #ecrease in asset a source of cash

• A #ecrease in liability a use of cash• A #ecrease in equity a use of cash


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The $ash %low Statement

The ash !lo" Statement is the third

report in the !inancial Statement

pac#age


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-. Meas%rin/ Cash Fo"s

Pro#ts in the #nancia statements arecac%ate* on accr%a asisG rather thancash asisG +see ne3t si*e &or accr%aasis acco%ntin/.

Th%s (ro#ts are not e6%a to cash.


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Accrual Accountin

Definition: Accounting method

that records revenues and

expenses when they are incurred,regardless of when cash is

exchanged. The term "accrual"

refers to any individual entryrecording revenue or expense in

the absence of a cash transaction


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Accr%a


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Fi/%re -8: Ho" to meas%re a #rm's cash o"s


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Three sources of cash


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Income Statement Con'ersion5

-rom Accrua$ to Cash /asis T"o ste(s=A** ac! *e(reciation +as it is a non8cash

e3(ense to net income

S%tract an5 %ncoecte* saes +i.e.increase in acco%nts recei)ae an* cash(a5ment &or in)entories +i.e. increase inin)entories ess increase in acco%nts

(a5aes


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Fi/%re -8;


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Tae -89


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0. Income Ta3es an*Finance

Computing Ta,a$e Income forCorporation

*ross IncomeDoar saes &rom a (ro*%ct or ser)ice ess cost o&

(ro*%ction or ac6%isition

Ta,a$e Incomeross income ess ta3 *e*%ctie e3(enses7 (%s

interest income recei)e* an* *i)i*en* income recei)e*

Ta3 De*%ctie E3(ensesInc%*e O(eratin/ e3(enses +mar!etin/7 *e(reciation7

a*ministrati)e e3(enses an* interest e3(enseDi)i*en*s (ai* are not *e*%ctie


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Tae -8:Com(%tin/ Ta3ae Income +K,,,'s


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%iure '(


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Part


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ses o& Financia Batios=Within the Firm

I*enti&5 *e#ciencies in a #rm's (er&ormancean* ta!e correcti)e action.E)a%ate em(o5ee (er&ormance an*

*etermine incenti)e com(ensation.Com(are the #nancia (er&ormance o& *i?erent*i)isions "ithin the #rm.Pre(are7 at oth #rm an* *i)ision e)es7

#nancia (roections.

n*erstan* the #nancia (er&ormance o& the#rm's com(etitors.E)a%ate the #nancia con*ition o& a maor

s%((ier.


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ses o& Financia Batios=O%tsi*e the Firm

-inancia$ ratios are used "5

Len*ers in *eci*in/ "hether or not to ma!e aoan to a com(an5.

Cre*it8ratin/ a/encies in *eterminin/ a #rm'scre*it "orthiness.

In)estors +shareho*ers an* on*ho*ers in*eci*in/ "hether or not to in)est in a com(an5.

Maor s%((iers in *eci*in/ to "hether or not to/rant cre*it terms to a com(an5.


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The Limitations o& FinanciaBatio Ana5sis

It is sometimes *ic%t to i*enti&5 in*%str5cate/ories or com(arae (eers.

The (%ishe* (eer /ro%( or in*%str5 a)era/es

are on5 a((ro3imations. In*%str5 a)era/es ma5 not (ro)i*e a *esirae

tar/et ratio.

Acco%ntin/ (ractices *i?er "i*e5 amon/ #rms.

A hi/h or o" ratio *oes not a%tomatica5 ea* toa s(eci#c conc%sion.

Seasons ma5 ias the n%mers in the #nanciastatements.


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1Li6%i*it5 Batios=

1 C%rrent ratio 4 C%rrent assets$C%rrent iaiities This ratio meas%res the *e/ree o& i6%i*it5 5 com(arin/

its c%rrent assets to its c%rrent iaiities. Hi/her #/%re

means that the %siness #nancia con*ition is etter as ithas eno%/h i6%i* assets &or its o(eration.

2 %ic! ratio 4 +c%rrent assets8in)entor5$c%rrent iaiities

This ratio is a more strin/ent meas%re o& i6%i*it5 than the

c%rrent ratio. It e3c%*es in)entories an* other c%rrentassets that are east i6%i* &rom c%rrent assets. Hi/her ratiosho"s that the %siness has eno%/h 6%ic! assets or i6%i*assets to co)er its short term *et imme*iate5.

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2ASSETMANAEMENT$ACTIITY$EFFICIENCYBATIOS

1 A)era/e coection (erio*s +ACP4 Acco%nts recei)ae$+Ann%a cre*itsaes$-:9

ACP 4 Acco%nts recei)ae$Dai5 saes

The ratio meas%res ho" on/ a #rm ta!es to coect its cre*itacco%nts. The o"er the #/%re is etter.

2 Acco%nt recei)ae t%rno)er 4 saes$acco%nts recei)aes

This ratio meas%res ho" o&ten acco%nts recei)aes are roe* o)erG*%rin/ a 5ear. Hi/her ratio i%strates that the #rm can coect its*et more &re6%ent an* th%s has &e" a* *ets.

- In)entor5 t%rno)er 4 costs o& /oo* so*$in)entor5

It meas%res the n%mer o& times a #rm's in)entories are so* an*re(ace* *%rin/ the 5ear. Hi/her ratio in*icates that in)entor5 can eso* an* re(ace* more &re6%ent5.

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0 Fi3e* asset t%rno)er 4 saes$net #3e* assets

This ratio is an o)era meas%re o& assetecienc5 ase* on the reation et"een

#rm's saes an* the tota assets. Hi/herratio in*icates that #rm is mana/in/ itsassets more e?ecti)e5.

9 Tota asset t%rno)er 4 saes$tota assets

Hi/her ratio is &a)ore* eca%se it in*icatesthe e?ecti)eness o& the #rm in /eneratin/saes &rom its tota assets.

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-PBOFITA


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0 Bet%rn on assets +BOA 4 Net income$tota assets

This e)a%ates ho" e?ecti)e5 the com(an5em(o5s its assets to

/enerate a ret%rn. It meas%res ecienc5. Hi/herratio is etter.

9 Bet%rn on e6%it5 +BOE 4 Net income$ commone6%it5

Bet%rn on e6%it5 is the ottom ine meas%re &or the

shareho*ers7 meas%rin/ the (ro#ts earne* &or each*oar in)este* in the #rmQs stoc!. Hi/her ratio is&a)ore* eca%se the #rm can /enerate etter ret%rnto the o"ner o& the #rm.



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0LEEBAE BATIOS

1 Det ratio 4 tota *et$tota assets This ratio meas%res the e3tent to "hich a #rm has een #nance*"ith *et. More *et #nancin/ res%ts in more #nancia ris!.

2 Times interest earne*4 E


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9MABET ALE BATIOS

1 Earnin/ (er share +EPS 4 Net income$n%mer o& shares o%tstan*in/

It re(resents the (ortion o& a #rmQs earnin/s that is aocate* to eachshare o& common stoc!.

2 Price earnin/ ratio +PE 4 (rice (er share$earnin/s (er share

The ratio in*icates ho" m%ch in)estors are "iin/ to (a5 (er *oar o&

c%rrent earnin/s. As s%ch7 hi/h P$E Batios are associate* "ith /ro"thstoc!s. The most common meas%re o& ho" e3(ensi)e a stoc! is.

- Price +mar!et to oo! ratio4(rice (er share$oo! )a%e (er share

This ratio meas%res ho" m%ch a com(an5 "orth at (resent7 incom(arison "ith the amo%nt o& ca(ita in)este* 5 c%rrent an* (astshareho*ers into it.

0


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1 LIIDITY BATIO

&ATIO -O&>;%A A?I+S I8C. P++& *&O;P

1 C%rrent ratio C%rrentassets$c%rrent

iaiities

K10-m$K:0m42.2-

1.@,

2 %ic! ratio +c%rrent assets8in)entor5$c%rren

t iaiities

+K10-m8K@0m$K:0m 4,.2

,.@



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2ASSETMANAEMENT$ACTIITY$EFFICIENCYBATIOS


1 A)era/ecoection(erio*s +ACP

Acco%ntsrecei)ae$

+Ann%a cre*itsaes$-:9

K-:m$+K:,,m$-:94 21., *a5s

29 *a5s

2Acco%ntrecei)aet%rno)er

saes$acco%ntsrecei)aes

K:,,m$K-:m41:.:;3

10.:3

-In)entor5

t%rno)er

costs o& /oo*

so*$in)entor5

K0:,m$K@0m

49.0@3

;.,,3

0Fi3e* assett%rno)er

saes$net #3e*assets

K:,,m$K29m42.,-3

1.;93

9Tota asset saes$tota K:,,m$K0-@m4

1.193© 2011 Pearson Prentice Hall. All rights reserved.

0;


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-PBOFITA;%A A?I+S I8C. P++& *&O;P

1ross (ro#tmar/in

/ross(ro#t$saes

K10,m$K:,,m4,.2--42-.-

29

2Net (ro#t

mar/in

Net

income$saes

K02m$K:,,m

4,.,;4;

:.9

-O(eratin/Pro#tMar/in+OPM

O(eratin/(ro#t$Saes

K;9m$K:,,m4,.129412.9

19.9

0Bet%rn onassets +BOA

Netincome$tota

assets

K02m$K0-@m4,.,:4.:

1,

9Bet%rn one6%it5 +BOE

Net income$common e6%it5

K02m$K2,-m4,.2,;42,.;

1@

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0LEEBAE BATIOS



1Det ratio tota *et$totaassets

K2-9m$K0-@m4,.9-;49-.;

-9

2Timesinterest earne*

E


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9MABET ALE BATIOS


1Earnin/ (ershare +EPS

Netincome$n%mer

o& shareso%tstan*in/

K02m$2,m4K2.1,

K1.@

2 Price earnin/ratio +PE

(rice (ershare$earnin/s

(er share

+ass%me the

mar!et (rice &orDa)ies stoc!"as K-2 (er

share

K-2$K2.1,419.203

1.,3

-Price +mar!etto oo! ratio

(rice (ershare$oo!

K-2$K1,.194-.193

-.;3

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chap. 2-analysis of financial stmt and cfs-1

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