Chapter 02
Financial Statements
and Analysis
The Four Key Financial Statements
The Four Key Financial Statements are:
(a)
(b)
(c)
(d)
The Income Statement
The Balance Sheet
The Statement Of Retained earnings
The Statement Of Cash Flows
Balance sheet

Current assets
Short term assets, expected to be converted into cash within 1 year or
less

Current Liabilities
Short term liabilities expected to be paid within 1 year or less

Long term debt
Debt for which payment is not due in the current year

Paid in capital in excess of par
The amount of proceeds in excess of the par value received from the
original sale of the common stock

Retained earnings
The cumulative total of all earnings, net of dividends that have retained
and reinvested in the firm since its inception
Statement of Retained Earnings

Statement of stockholder equity
Shows all equity account transaction that occurred during the given
year

Statement of retained earnings
Reconciled the net income earned during a given year, and any cash
dividends paid, with the change in retained earnings between the start
and the end of that year.
Barlett company statement of retained Earnings ($000)
For the year ended December 31,2006
Retained earnings Balance (January1,2006)
Plus: Net profits after taxes (for 2006)
less : Cash dividends (paid during the 2006)
Preferred stock
10
Common stock
98
Total dividends paid
Retained earnings balance (Dec. 31, 2006)
$1012
231
108
1135
Exercises
2.1: Nowras began 2006 with a retained earnings balance of
928,000 OR. During 2006, the firm earned RO 377,000 after
taxes. From this amount, preferred and common stock holders
were paid RO 47,000 and RO 210,000 respectively in dividends.
Required: prepared a statement of retained earning for the year
ended 2006, for Nowras.
2.2: Lulu Hypermarket began 2008 with a retained earning balance
of 900,000 OR. during 2008, the firm earned RO 377,000 after
taxes. From this amount preferred and common stock holders
are paid RO 50,000 and 150,000 respectively in dividends.
Required: Prepared a statement of retained earning for the year
ended 2006, for Lulu Hypermarket.
Question# 03; In year 2008, income statement of Omantel mention
earning available to common stock holders is 600,000 OR and
the number of shares outstanding is 320,000.
Required: Calculate Earning per share to common
stockholders
Statement of Cash Flow

Provides a summary of the firm’s operating,
investment and financing cash flows and reconciles
them with the changes in its cash and marketable
securities during the period.
Ratio Analysis (Financial)
• Ratio are used much in our daily life. We buys cars
based o miles per gallon, we evaluate baseball
players by earned run averages and batting
averages. These all ratios are constructed to judge
comparative performance.
• The analysis of financial statements based on the
use of ratios or relative values.
• The basic inputs to ratio analysis are the firm’s
income statement and the balance sheet.
Ratio Classification
A. Profitability Ratio
1. Gross Margin C
2. Return on Equity C
3. Return on Total Asset
B. Liquidity Ratio
C. Assets Utilization Ratio
D. Debt Utilization ratio
10. Debt to total Assets
11.Book value ratio C
12. Price earning ratio
13. Times interest earn ratio
6. Average Collection period
7. Average payment period C
8. Inventory turnover.
9. Total Asset turnover
4. Current ratio C
5. Quick Ratio .
A.
Profitability Ratios
1. Gross Profit margin = Sales – Cost of goods sold / Sales
= Gross profits / sales
= 3074,000 – 2088,000 / 3074,000
= 32.1%
It represent the pure profits earned on each sales dollar
2. Return on common equity (ROE) =
Earning available for common stockholders / Common
stock equity
= 250,000 / 391,000
= 63.5 %
Higher this return, the better off are the owners.
3. Return on Total Asset =
Earning Available for Common stockholders / Total assets
= 221,000 / 4,653,000
= 4.74 %
This Value indicates that the company earned 6.1 cents on each
dollar.
B.
Liquidity Ratio

The liquidity of a firm is measured by its ability to satisfy its short
term obligation as they come due.

1. Current ratio:
Current ratio = Current assets / current liabilities
= 1,223,000 / 620,000 = 1.97

2. Quick ratio:
Quick ratio = Current assets – inventory / current liabilities
= 1223,000 – 289,000 / 620,000
= 934,000 / 620,000 = 1.51

Activity ratio
A measure the speed with which various accounts are converted into
sales or cash inflows or out flows.
1.Inventory turnover = cost of goods sold / Inventory
= 2,088,000 / 289,000 = 7.2
2. Average collection period = Accounts receivable / Average sales per day
= Accounts receivable / Annual sales / 365
= 503,000 / 3074,000 / 365
=
59.7 days
Ratio continue…….
3. Average payment period = Accounts payable / Average
purchases per day
= Accounts payable / Annual
Purchases / 365
= 382,000 / 0.70 × 2088,000/365
= 382,000 / $4,004
= 95.4 days
4. Total Assets turnover = Sales / total Assets
= 3074,000 / 4,653,000
= 0.67 times
The total asset turnover indicates the efficiency with which firm uses its
assets to generate sales.
Question # 01: The GMC financial statement shows annual sales of
OR 1,200,000 account receivables of OR 250,000
Required: Calculate Average Collection Period
Question# 02: The Suzuki company income statement shows cost
of goods sold to 2050,000 and inventory RO.370,000
Required: Calculate inventory turnover ratio
Question # 03: The Carrefour income statement shows accounts
payable of RO.250,000, the cost of goods is RO.1,050,000 and
the purchases are 75% of the cost of the goods sold.
Required: Calculate the Average payment period
Question# 04: The GMC financial statement shows sales amounted
to RO 2,050,000 and the total assets are RO 2,687,000.
Required: Calculate total Asset turnover.
D. Debt Utilization Ratios
The debt ratio measures the proportion of total assets financed by
the firm’s creditors.
1.Debt ratio = Total liabilities / Total assets
=1643,000 / 4,653,000
= 0.35 = 35 %
This value indicates that the company has financed close to half of
its assets with debt.
2. Time Interest Earned Ratio
= Earning before interest and taxes / Interest
= 453,000 / 93,000
= 4.87 times
Measure the firm’s ability to make contractual interest payment. The
higher its value, the better the firm is to fulfill its interest obligation
Market Ratios
3.Return on Common equity =
Earnings Available for common stock holders / Common stock
equity
= 250,000 / 391,000
= 63.6%
4. Price / earning ratio =
Market price per share of common stock / Earning per
share
= 32.25 / 3.34
= $ 9.65
This figure indicates that investor were paying $11.10 for each $1.00 of
earning
Question#01:The Hayak shopping center financial statement
shows Total Assets to RO 4,700,000 and total liabilities are RO
2,700,000
Required: Calculate Debt Ratio for Hayak shopping Center
Question # 02: The Kia Motors financial Statement shows Sales
amounted to RO 3,500,000 and cost of goods sold is RO
2,756,000
Required: Calculate Gross profit Margin
Question# 03: The Al Safeer financial statement shows operating
profit amount to R0 5,894,500 and sales shows RO 98,679,000
Required: Calculate the operating profit margin
Question# 04: The Toyota financial statement shows earning
available to common stock holders to RO 1,572,000 and total
assets are RO 9,654,000
Required: Calculate the Return on total Assets.
Question # 05: The Sultan center financial statement shows Earning
available to common stock holders to RO 560,000 and common
stock equity is RO 3,578,000
Required: Calculate Return on Equity
Book value ratio =
Common stock equity / Number of shares of common stock
outstanding
= $391,000 / 75,000
= $ 5.21