TOPIC 8:
FINANCIAL STATEMENTS
ANALYSIS
1
INTRODUCTION
Interpretation is when users evaluate financial
information to make judgements
It is the key to any in-depth understanding of an
organisation’s performance.
Basically, the users evaluate an organisation’s
performance using the information from INCOME
STATEMENT and BALANCE SHEET.
The value of the analysis is depends on the value
of the financial statements.
2
TECHNIQUES (TYPES) OF ANALYSIS:…
1. Horizontal Analysis
 Comparing key figures in financial statement
 It evaluates a series of financial statement over a period of time.
2. Vertical Analysis
 It evaluates financial statement by expressing each item in a financial
statement as a percent of the base amount (key figure)
 Key-figure (such as sales in P&L and total assets on BS) are set to 100%
 Other items are then expressed as percentage of 100
3.
Trend analysis
Similar to horizontal analysis, except that the first set of account in the
series is given a base of 100
4.Ratio Analysis


It expresses the relationship among selected items of financial statement data.
3
HORIZONTAL ANALYSIS
It’s an analysis of the percentage increases
and decreases of related items in comparative
What is horizontal
financial statements.
analysis?
4
14-7
HOME DEPOT
COMPARATIVE BALANCE SHEETS (IN MILLIONS)
FEBRUARY 3, 2009 AND JANUARY 28, 2008
Increase (Decrease)
Feb. 3, 2009 Jan. 28, 2008 Amount Percent
Assets
Current assets
$10,361
$ 7,777
$2,584
33.2%
Property and equipment, net15,375 13,068
2,307
17.7
Other assets
658
540
118
21.9
Total assets
$26,394
$21,385
$5,009
23.4
Liabilities
Current liabilities
$
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities$
Total liabilities
$
6,501
$ 4,385
$2,116
48.3
1,250
372
189
1,811
8,312
1,545
256
195
$ 1,996
$ 6,381
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
The stockholders’ equity section is not displayed.
5
14-8
HOME DEPOT
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Increase (Decrease)
Feb. 3, 2009 Jan. 28, 2008 Amount
Percent
Assets
Current assets
$10,361
$ 7,777
Property and equipment, net
15,375
13,068
Other assets
658
540
Horizontal
Analysis:
Total assets
$26,394
$21,385
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
Difference
Base year
$ 6,501
$ 4,385
1,250
372
189
$ 1,811
$ 8,312
1,545
256
195
$ 1,996
$ 6,381
$2,584
2,307
118
$5,009
$2,584
$7,777
33.2%
33.2%
17.7
21.9
23.4
= 33.2%
$2,116
48.3
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
6
14-9
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Increase (Decrease)
Feb. 3, 2009 Jan. 28, 2008 Amount
Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
$10,361
15,375
658
$26,394
$ 7,777
13,068
540
$21,385
$2,584
2,307
118
$5,009
33.2%
33.2%
17.717.7
21.9
23.4
Horizontal Analysis:
$ 6,501
$ 4,385
$2,116
48.3
Difference
$2,307
= 17.7%
Base
$13,068(295)
1,250year
1,545
(19.1)
372
189
$ 1,811
$ 8,312
256
195
$ 1,996
$ 6,381
116
(6)
$ (185)
$1,931
45.3
(3.1)
(9.3)
30.3
7
14-10
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Increase (Decrease)
Feb. 3, 2009 Jan. 28, 2008 Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term debt, excluding
current installment
Other long-term liabilities
Deferred income taxes
Total long-term liabilities
Total liabilities
$10,361
15,375
658
$26,394
$ 7,777
13,068
540
$21,385
$2,584
2,307
118
$5,009
33.2%
17.7
21.9
23.4
$ 6,501
$ 4,385
$2,116
48.3
1,250
372
189
$ 1,811
$ 8,312
1,545
256
195
$ 1,996
$ 6,381
(295)
116
(6)
$ (185)
$1,931
(19.1)
45.3
(3.1)
(9.3)
30.3
8
14-11
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
2008
Increase (Decrease)
Amount Percent
Sales (net)
$53,553
$45,738
$7,815
Cost of merchandise sold
37,406
32,057
5,349
Gross profit
$16,147
$13,681
$2,466
Selling and store operating exp.
10,280
8,655
1,625
General and administrative exp.
935Analysis: 835
100
Horizontal
Total operating expenses
$11,215
$ 9,490
$1,725
Difference
Income from operations
$ 4,932
$ 4,191 $7,815
$ 741
= 17.1%
Other income and expenses:
Base year
$45,738
Interest and investment inc.
53
47
6
Interest expense
(28)
(21)
(7)
Income before income tax
$ 4,957
$ 4,217
$ 740
Income taxes
1,913
1,636
277
Net income
$ 3,044
$ 2,581
$ 463
17.1%
9
14-12
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
2008
Increase (Decrease)
Amount Percent
Sales (net)
$53,553
$45,738
$7,815
Cost of merchandise sold
37,406
32,057
5,349
Gross profit
$16,147
$13,681
$2,466
Selling and store operating exp.
10,280
8,655
1,625
General and administrative exp.
935
835
100
Total operating expenses
$11,215 Analysis:
$ 9,490
$1,725
Horizontal
Income from operations
$ 4,932
$ 4,191
$ 741
Other income and expenses:
Difference
$5,349
=6 16.7
Interest and investment inc.
53
47
Base
year
$32,057 (7)
Interest expense
(28)
(21)
Income before income tax
$ 4,957
$ 4,217
$ 740
Income taxes
1,913
1,636
277
Net income
$ 3,044
$ 2,581
$ 463
17.1%
16.7
10
14-13
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
2008
Increase (Decrease)
Amount Percent
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
$45,738
32,057
$13,681
8,655
835
$ 9,490
$ 4,191
$7,815
5,349
$2,466
1,625
100
$1,725
$ 741
17.1%
16.7
18.0
18.8
12.0
18.2
17.7
53
(28)
$ 4,957
1,913
$ 3,044
47
(21)
$ 4,217
1,636
$ 2,581
6
(7)
$ 740
277
$ 463
12.8
33.3
17.5
16.9
17.9
11
Vertical Analysis
A percentage analysis can be
used to show the relationship of
each component to a total within
a single statement.
12
Vertical Analysis
The total, or 100% item, on
the balance sheet is “total
assets.”
The total, or 100% item, on
the income statement is “total
sales.”
13
14-18
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Jan. 28, 2008
Amount Percent
$10,361
15,375
58
$26,394
$ 7,777
13,068
540
100.0% $21,385
$ 6,501
1,811
$ 8,312
Total assets$ 4,385
1,996
is 100.0%$ 6,381
$ 5,529
12,553
$18,082
$26,394
$ 4,926
10,078
$15,004
$21,385
14
14-19
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
$10,361
15,375
58
$26,394
Jan. 28, 2008
Amount Percent
39.3% $ 7,777
13,068
540
100.0% $21,385
Liabilities
Current
liabilities
$ 6,501
Vertical
Analysis:
Long-term liabilities
1,811
Current
$10,361
Total
liabilitiesassets
$ 8,312
= 39.3%
Stockholders’
Equity
Total assets
$26,394
Common stock/paid-in capital $ 5,529
RE & accumulated comp. loss 12,553
Total stockholders’ equity
$18,082
Total liabilities and SE
$26,394
$ 4,385
1,996
$ 6,381
$ 4,926
10,078
$15,004
$21,385
15
14-20
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Jan. 28, 2008
Amount Percent
$10,361
15,375
58
$26,394
39.3% $ 7,777
13,068
58.2
540
2.5
100.0% $21,385
$ 6,501
1,811
$ 8,312
24.6% $ 4,385
1,996
6.9
31.5% $ 6,381
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
$ 4,926
10,078
$15,004
$21,385
16
14-21
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Jan. 28, 2008
Amount Percent
$10,361
15,375
58
$26,394
39.3% $ 7,777
13,068
58.2
540
2.5
100.0% $21,385
$ 6,501
1,811
$ 8,312
24.6% $ 4,385
1,996
6.9
31.5% $ 6,381
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
$ 4,926
10,078
$15,004
$21,385
100.0%
Total assets
is 100.0%
17
14-22
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
$10,361
15,375
58
$26,394
Jan. 28, 2008
Amount Percent
39.3% $ 7,777
13,068
58.2
540
2.5
100.0% $21,385
36.4%
100.0%
Liabilities
Current liabilities
$ 6,501 Analysis:
24.6% $ 4,385
Vertical
Long-term liabilities
1,811
1,996
6.9
Current
$7,777
Total liabilities
$ 8,312assets 31.5%
$ 6,381
= 36.4%
Stockholders’ Equity
Total assets
$21,385
Common stock/paid-in capital $ 5,529
20.9% $ 4,926
RE & accumulated comp. loss 12,553
10,078
47.6
Total stockholders’ equity
$18,082
68.5% $15,004
Total liabilities and SE
$26,394
100.0% $21,385
18
14-23
HOME DEPOT
Condensed
Comparative Balance Sheets (in Millions)
February 3, 2009 and January 28, 2008
Feb. 3, 2009
Amount Percent
Assets
Current assets
Property and equipment, net
Other assets
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders’ Equity
Common stock/paid-in capital
RE & accumulated comp. loss
Total stockholders’ equity
Total liabilities and SE
Jan. 28, 2008
Amount Percent
$10,361
15,375
58
$26,394
39.3% $ 7,777
13,068
58.2
540
2.5
100.0% $21,385
36.4%
61.1
2.5
100.0%
$ 6,501
1,811
$ 8,312
24.6% $ 4,385
1,996
6.9
31.5% $ 6,381
20.5%
9.3
29.8%
$ 5,529
12,553
$18,082
$26,394
20.9%
47.6
68.5%
100.0%
$ 4,926
10,078
$15,004
$21,385
23.0%
47.1
70.2%19
100.0%
14-24
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
2008
Amount Percent
100.0%
$45,738 100.0%
32,057
$13,681
Net sales is8,655
Net sales is
835
100.0%
100.0%
$ 9,490
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
20
14-25
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Amount Percent
2008
Amount Percent
Sales (net)
$53,553 100.0% $45,738 100.0%
Cost of merchandise sold
37,406
32,057
70.1
Gross profit
$16,147
$13,681
Selling and store operating exp.
10,280
8,655
General and administrative exp.
935
835
Total operating expenses
$11,215
$ 9,490
Income from operations
$ 4,932
$ 4,191
2001
Vertical
Analysis:
Other income and expenses:
Cost of Merchandise
Sold 47
$32,057
Interest and investment inc.
53
Interest expense
(28)
(21)
Net
Sales
$45,738
Income before income tax
$ 4,957
$ 4,217
= 70.1%1,636
Income taxes
1,913
Net income
$ 3,044
$ 2,581
21
14-26
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Amount Percent
Sales (net)
$53,553 100.0%
Cost of merchandise sold
37,406
69.9
Gross profit
$16,147
Selling and store operating exp.
10,280
General and administrative exp.
935
Total operating expenses
$11,215
IncomeVertical
from operations
$ 4,932
2002
Analysis:
Other income and expenses:
Cost of
Merchandise
$37,406
Interest
and
investment inc.Sold
53
Interest expense
(28)
Net Sales
$53,553
Income before income tax
$ 4,957
= 69.9% 1,913
Income taxes
Net income
$ 3,044
2008
Amount Percent
$45,738 100.0%
32,057
70.1
$13,681
8,655
835
$ 9,490
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
22
14-27
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
2008
Amount Percent
100.0% $45,738 100.0%
69.9 32,057
70.1
29.9%
$13,681
18.9%
8,655
1.8
835
20.7%
$ 9,490
9.2%
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
0.1
(0.1)
9.2%
3.6
5.6%23
14-28
HOME DEPOT INC.
Income Statement (in millions)
For Periods Ended February 3, 2009 and January 28, 2008
2009
Amount Percent
Sales (net)
Cost of merchandise sold
Gross profit
Selling and store operating exp.
General and administrative exp.
Total operating expenses
Income from operations
Other income and expenses:
Interest and investment inc.
Interest expense
Income before income tax
Income taxes
Net income
$53,553
37,406
$16,147
10,280
935
$11,215
$ 4,932
53
(28)
$ 4,957
1,913
$ 3,044
100.0%
69.9
30.1%
19.2%
1.7
20.9%
9.2%
0.1
(0.0)
9.3%
3.6
5.7%
2008
Amount Percent
$45,738
32,057
$13,681
8,655
835
$ 9,490
$ 4,191
47
(21)
$ 4,217
1,636
$ 2,581
100.0%
70.1
29.9%
18.9%
1.8
20.7%
9.2%
0.1
(0.1)
9.2%
3.6
5.6%
24
RATIO ANALYSIS

Ratios simply means one number expressed in terms of
another. A ratio is a statistical yardstick by means of which
relationship between two or various figures can be compared
or measured.
Definition of Accounting Ratios:
 The term "accounting ratios" is used to describe significant
relationship between figures shown on a balance sheet, in a
profit and loss account, in a budgetary control system or in
any other part of accounting organization. Accounting
ratios thus shows the relationship between accounting data.
ADVANTAGES





Simplifies financial statements: It simplifies the comprehension
of financial statements. Ratios tell the whole story of changes in the
financial condition of the business
Facilitates inter-firm comparison: It provides data for interfirm comparison. Ratios highlight the factors associated with with
successful and unsuccessful firm. They also reveal strong firms and
weak firms, overvalued and undervalued firms.
Helps in planning: It helps in planning and forecasting. Ratios
can assist management, in its basic functions of forecasting.
Planning, co-ordination, control and communications.
Makes inter-firm comparison possible: Ratios analysis also
makes possible comparison of the performance of different divisions
of the firm. The ratios are helpful in deciding about their efficiency
or otherwise in the past and likely performance in the future.
Help in investment decisions: It helps in investment decisions
in the case of investors and lending decisions in the case of bankers
etc.
TYPES OF RATIO ANALYSIS
1.
2.
3.
4.
5.
6.
Profitability Ratio
Efficiency/activity/asset management Ratio
Liquidity Ratio
Solvency Ratio
Cash flow
Investment
27
3. Efficiency
1. Profitability
1. Debtors turnover
1. Return on capital
2. Debtors collection period
employed
3. Stock turnover ratio
2. Gross profit margin
4. Asset turnover ratio
3. Net profit margin
5. Working capital turnover
ratio
2. Liquidity
4. Solvency/financial
1. Current ratio
leverage management
2. Quick ratio
ratio
1. Debt to Equity ratio
2.Debt ratio
28
CONTINUE………..
5. Investment
1. Dividend yield
2. Earnings per share
3. Price/earnings ratio
29
PROFITABILITY RATIO
It measure the income or operating effectiveness of an organisation for
a given period of time.
 A low value of this ratio will affect the company ‘s ability to obtain
debt, equity financing and the ability to grow or expand.

i Return on capital employed/Return on common equity
• measures effective use of capital
• It measures the profitability from the shareholder view point.
 It shows how many ringgit of the net income were earned for each
ringgit invested by the owner.
=
Profit or earning after tax
x 100%
Average capital employed
30
CONTINUE…
ii.

iii.
Gross Profit Margin
It measures the percentage of one ringgit of sales that results
in gross income.
=
Sales – Cost of Goods Sold x 100%
Sales
=
Gross Profit x 100%
Sales
Net Profit Margin
It measures the percentage of one ringgit of sales that results
in net income.
= Profit or earning after tax
x
100%
Sales
31
LIQUIDITY RATIO
 It
measure the short term ability of the organisation
to pay debt and to meet unexpected need for cash.
i. Current Ratio

To measure the ability of current asset that the company have to
pay back the short term debt.
=
Current Asset
Current Liability
32
CONTINUE…
ii. Quick Ratio
• It measures the company’s immediate short term liquidity.
= Current Asset – Stock – Prepayment
Current Liability
This ratio indicates whether current liabilities could be paid
without having to sell the inventory
This ratio is useful for companies who cannot convert
inventory into cash quickly if necessary.
33
CONTINUE….







This ratio indicates whether the business has enough shortterm assets to cover its short-term liabilities.
A ratio above 1 indicates that working capital is positive
(Current assets exceed current liabilities)
A ratio below 1 indicates that working capital is negative.
Many large companies regularly operate with current ratio
closer to 1 and 2
Generally the higher the ratio, the greater the financial
stability and the lower the risk for both creditors and owners.
However, the ratio should not be too high because that may
indicate that the business is not reinvesting in long-term
assets to maintain future productivity.
High current ratio can actually indicate problems if
inventories are getting larger than they should be or
34
collections of receivables are slowing down.
EFFICIENCY RATIO
(i) Debtors turnover
 Measures how many times it takes customers to pay
debts
=
Credit sales
Average debtors
35
CONTINUE…
(ii) Debtors collection period

Measures how long it takes customers to pay
=
Average debtors x 365 days OR
Credit sales



365 days
debtors turnover
This ratio indicates how many days it takes, on average to
collect a day’s sale revenue.
The quicker a business collects and bank the money, the
better it is to the company
Large numbers of days is a negative signal, raising questions
about the company’s policies of granting credit such as;
 Unstricted credit policies
 Longer credit limit
 Collection attempts is not very strength
36
CONTINUE…
(iii) Stock turnover ratio
 measures how quickly stock moves through business
 This ratio means that the average length of time that
the stocks are held before being sold.
= Cost of goods sold
Average stock

It can also be calculated in days
=
Average stock x 365 days
Cost of sales
turnover
OR
365 days
stock
37
CONTINUE…
(iv) Asset turnover ratio


compares sales to total assets employed
Measure how efficient the assets in
generating sales
=
Sales
x 100%
Average total assets
38
CONTINUE…
(v) Working capital turnover ratio
=
Cost of sales
Net working capital
*Working capital = current assets –current liabilities
measure the efficiency with which the working capital is
being used by a firm.
 A high ratio indicates efficient utilization of working
capital and a low ratio indicates otherwise.
 But a very high working capital turnover ratio may
also mean lack of sufficient working capital which is
not a good situation.

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SOLVENCY/FINANCIAL LEVERAGE
MANAGEMENT RATIO
-
This is to measure the ability of the
company to survive over a long period of
time
-
The ability to pay interest as it comes
due/mature
40
CONTINUE…
(i) Debt to Equity ratio
= Total liabilities
Total Equity
 Debt to equity ratio indicates the proportionate
claims of owners and the outsiders against the
firms assets.
(ii) Debt ratio/debt to assets ratio
=
Total liabilities
Total Asset
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INVESTMENT
(i)


Dividend yield
= dividend per share
market value per share
to evaluate the relationship between dividends per
share paid and the market value of the shares
helps as intending investor is knowing the effective
return he is going to get on the proposed investment.
(ii) Earning per share (EPS)
= Profit after tax – preference dividend
No. of common shares

Measures net income earned on each share of common
42
stock
CONTINUE…
(iii) Price/earnings ratio
= Market price per share of stock
EPS
 Measures
the ratio of market price per share to
earnings per share
 helps the investor in deciding whether to buy or
not to buy the shares of a particular company at
a particular market price.
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Limitations of the Accounting Information
1.
2.
3.
4.
Estimates
The financial statement contains numerous estimates. Ex. Provision
for doubtful debt, depreciation and contingent loss.
Cost
The traditional financial statements are based on historical cost, it is
not adjusted for price-level change. Ex. Inflation affects the sales
growth.
Alternative Accounting Method
A comparison may be misleading as different companies use
different accounting method. Ex. FIFO and LIFO.
Diversification of firms
This diversification of activities of companies limit the usefulness of
44
financial analysis. (no specific industry).
CONCLUSION
 Ratio
analysis is a good way to overview an
organisation’s activities
 Ratio analysis must be compared with past
result or industry norms, not in isolation
 Things to be taken into account in using ratio
analysis:
 size of the organisation
 Method used in accounting
 Same
 Same
treatment
industry
country
45
Exercise:
INCOME STATEMENT FOR THE YEAR ENDED 31 DEC 2010
Sales
Less: Cost of sales
Gross profits
Less expenses
General
40
Interest
10
Profit before tax
Less: Taxation
Profits after tax
Less: Dividends
Retained profits
200
(100)
100
(50)
50
(15)
35
(15)
20
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BALANCE SHEET AS AT 31 DEC 2010
Fixed Assets
Current Assets
Stock
Debtors
Cash
Current Liabilities
Creditors
Proposed dividends and tax
Net Current assets
Total assets less current liabilities
$m
$m
60
40
20
120
(50)
(10)
(60)
$m
275
60
335
Financed by/ capital employed:
Long-term liabilities
Loan
Preference share capital (50m, $1)
70
50
Owners Equity
Ordinary Share capital (150m.$1)
Other reserves
Retained Earning
150
65
120
215
335
47
ASSIGNMENT
Refer to the following website
 http://www.accountingformanagement.com/financial_
statement_analysis_accounting_ratios.htm
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