LECTURE # 2: MODULE # 1:
COMPARISON OF FINANCIAL
STATEMENTS
Lecture # 2: Module # 1: Comparison Of Financial Statements
Management to Corporate Finance
Market Value
Book Value
Lecture # 2: Module # 1: Comparison Of Financial Statements
Market Value



Negotiation or Dealing at Arm Length
Contrary to Market Value financial statements are prepared
on Book Value
Book Value is not reflective of worth of assets.
Book Value

Cost minus Accumulated Depreciation
Lecture # 2: Module # 1: Comparison Of Financial Statements
Income Statement


Work out Profit
Three Terminologies interchangeably used
Sales
Turnovers
Revenues


In Profit Statement line item vary Organization to
Organization , Industry to Industry, there is no Rule
of Thumb
Revenue – Expenses = Profit
Lecture # 2: Module # 1: Comparison Of Financial Statements
Cash Flow Statement
Generation of cash from different activities and its
application
Three Broad segments



Operating Cash Flows
Investing Cash Flows
Financing cash flows
CASH FLOW STATEMENT
FOR THE YEAR ENDED 30TH JUNE, 2003.
CASH FLOW FROM OPERATING ACTIVITIES
(Loss)/profit before taxation
Adjustment of non cash Items:
Depreciation
Deferred Cost amortized
Gain on sale of fixed assets
Amortization of deferred income
Gratuity / wppf payable
Financial charges
Operating profit before working capital changes
Change in Working Capital
(Increase)/Decrease in current assets
Stores and spares
Stocks
Trade debts
Advances, deposits, Prepayments and
other receivables
Increase/(Decrease) in current liabilities
Creditors, accruals and other liabilities
2003
RUPEES
2827137
2002
RUPEES
(2836406)
9290339
5860696
(3080793)
(846255)
148797
10028353
24228274
6627895
5860696
482408
382736
12557288
23074617
3868415
(3396406)
1062140
702074
(5332231)
(1917498)
(7763225)
(7049512)
Cash Generated from operations
(12310807)
(18539883)
5688391
8581075
(5016092)
18058525
Financial charges paid
Income Tax paid
Net cash flow from Operating Activities
(11672355)
(1464099)
(7448063)
(12067383)
(1003487)
4987655
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures
Proceeds from disposal of fixed assets
Deferred cost
Long Term Deposits Paid
Net cash used in investing activites
CASH FLOW FROM FINANCING ACTIVITIES
Liability subject to finance lease paid
Increase in share capital/deposit money
Increase in long term loans
Repayment of long term loans
Due to directors and relatives
Provident fund trust
Dealers & Distributor's securities
Increase/(decrease) in short term loans
Net cash (outflow)/ inflow from financing
activities
NET INCREASE/(DECREASE) IN CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT THE BEGINING
OF THE PERIOD
CASH AND CASH EQUIVALENTS AT THE END
OF THE PERIOD
(16716034)
16325792
(2102600)
(22566329)
540600
(4661444)
(101400)
(2492842)
(26788573)
(3355294)
19000000
(11668000)
15363115
4472750
(12510105)
(1351882)
3000000
7947147
6101152
6088294
11302466
1361561
(2897)
21784711
(16207)
110421
126628
1471982
110421
Lecture # 2: Module # 1: Comparison Of Financial Statements
COMPARING FINANCIAL STATEMENTS
Lecture # 2: Module # 1: Comparison Of Financial Statements
Comparing Financial Statements
Problem in Comparing


Size
Reporting Currency
Tools to compare Financial Statements


Common Size Analysis
Ratio Analysis
Lecture # 2: Module # 1: Comparison Of Financial Statements
Common Size Analysis
Balance sheet


All line items of Asset side can be expressed in
%age. Total Assets 100% then what is the weightage
of Current Asset, Fix Assets etc.
Same is the case of Liabilities
BALANCE SHEET
AS AT 30 JUNE 2003
2003
RUPEES
OPERATING ASSETS
Fixed assets (at cost less accumulated depreciation)
DEFERRED COST
LONG TERM DEPOSITS (against Lease)
CURRENT ASSETS
Stores & spares
Stocks
Trade debtors
Advances, deposits, prepayments & other receiveables
Cash and bank balances
Total Assets
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
2002
RUPEES
2003
125,138,737
109,101,363
62.87
12,653,681
2,930,337
140,722,755
18,514,377
827,737
128,443,477
6.36
1.47
7,347,476
22,628,137
2,149,858
26,089,950
107,524
58,322,945
199,045,700
11,215,891
19,231,731
3,211,998
17,450,008
110,421
51,220,049
179,663,526
3.69
11.37
1.08
13.11
0.05
(6,794,240)
(8,004,000)
(6,760,139)
(30,831,550)
(52,389,929)
(2,821,322)
(19,270,244)
(44,786,359)
(66,877,925)
100.00
3.41
4.02
3.40
15.49
20
1
2003
RUPEES
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT LIABILITIES
LONG TERM LIABILITIES
Deferred Income
Due to directors and relatives
Provident fund trust and gratuity payable
Long term loans
Dealers&Distributors securities
Long term portion of leasehold assets
TOTAL NET ASSETS
2002
RUPEES
(6,794,240)
(8,004,000)
(6,760,139)
(30,831,550)
(52,389,929)
(2,821,322)
(19,270,244)
(44,786,359)
(66,877,925)
5,933,016
(15,657,876)
146,655,771
112,785,601
(1,692,510)
(37,056,700)
(926,457)
(27,828,000)
(23,871,350)
(12,710,887)
(104,085,904)
(21,693,585)
(926,457)
(47,500,000)
(19,398,600)
(1,936,847)
(91,455,489)
42,569,867
21,330,112
2003
2002
3.41
4.02
3.40
15.49
1.57
0.00
10.73
24.93
0.85
18.62
0.47
13.98
11.99
6.39
0.00
12.07
0.52
26.44
10.80
1.08
NET ASSETS/ TOTAL EQUITY IS REPRESENTED BY :
Share capital
Profit & (loss) account
Surplus on revaluation of fixed assets
Share deposit money
2003
2002
2003
2002
RUPEES
RUPEES
59,800,000
39,800,000 30.04
22.15
-27,457,311 -29,697,066 13.79
16.53
8,227,178
8,227,178
4.13
4.58
2,000,000
3,000,000
1.00
1.67
42,569,867
21,330,112
Lecture # 2: Module # 1: Comparison Of Financial Statements
Common Size Analysis
Income Statement

All line items are expressed as sale %age i.e.
Sales = 100%
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES
Administrative
Selling, distribution and amortization
Financial charges
OPERATING PROFIT/(LOSS)
(60,117,579)
(58,812,941)
(51.47)
(53.94
56,694,253
50,217,560
48.53
46.06
(56,105,424)
(53,414,839)
(8,691,429)
(37,385,642)
(10,028,353)
(9,173,201)
(31,684,350)
(12,557,288)
(7.44)
(32.01)
(8.59)
(8.41
(29.06
(11.52
588,828
OTHER INCOME/(LOSS)
2,387,106
PROFIT/(LOSS) BEFORE TAXATION
2,975,934
WORKERS PROFIT PARTICIPATION
PROFIT/(L0SS) BEFORE TAXATION
PROVISION FOR TAXATION
PROFIT/(L0SS) AFTER TAXATION
(148,797)
2,827,137
(587,382)
2,239,755
(3,197,279)
360,873
2.04
0.33
(0.13)
0.00
2.42
(2.43
(0.50)
(0.50
(2,836,406)
(2,836,406)
(545,152)
(3,381,558)
PROFIT/(LOSS) BROUGHT FORWARD
(29,697,066)
(26,315,508)
PROFIT/(LOSS) CARRIED OVER TO
BALANCE SHEET
(27,457,311)
(29,697,066)
Lecture # 2: Module # 1: Comparison Of Financial Statements
Base Year Analysis or Horizontal Analysis
Common Size Analysis is also called Vertical
Analysis
BASE YEAR /HORIZONTAL ANALYSIS
BALANCE SHEET
EXAMPLE HORIZONTAL ANALYSIS
ASSETS
FIXED ASSETS
CURRENT ASSETS
TOTAL ASSETS
2006
2005
2004
2003
2002
BASE
YEAR
2001
160,000.00
160.00
70,000.00
140.00
230,000.00
153.33
155,000.00
155.00
65,000.00
130.00
220,000.00
146.67
145,000.00
145.00
56,000.00
112.00
201,000.00
134.00
145,000.00
145.00
58,000.00
116.00
203,000.00
135.33
125,000.00
125.00
55,000.00
110.00
180,000.00
120.00
100,000.00
100.00
50,000.00
100.00
150,000.00
100.00
22,000.00
146.67
15,000.00
150.00
193,000.00
154.40
230,000.00
153.33
21,500.00
143.33
13,000.00
130.00
185,500.00
148.40
220,000.00
146.67
19,000.00
126.67
12,000.00
120.00
170,000.00
136.00
201,000.00
134.00
17,000.00
113.33
11,500.00
115.00
174,500.00
139.60
203,000.00
135.33
16,000.00
106.67
10,500.00
105.00
153,500.00
122.80
180,000.00
120.00
15,000.00
100.00
10,000.00
100.00
125,000.00
100.00
150,000.00
100.00
CAPITAL & LIABILITIES
CURRENT LAIBILITIES
LONG TERM LIABILITIES
EQUITY
TOTAL CAPITAL & LBTIES
Lecture # 2: Module # 1: Comparison Of Financial Statements
Current Ratio or Short Term Solvency Ratio or
Working Capital Ratio
Current Ratio is a relationship between Current Asset &
Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Prudent Ratio is 2 : 1
Lecture # 2: Module # 1: Comparison Of Financial Statements
Ratio Analysis

Ratio is relationship between two or more different
figures or amounts
Different categories in Ratio Analysis




Current Ratio
Long Term Ratio
Profitability Ratio
Markup Ratio
CURRENT RATIO
BALANCE SHEET
AS AT 30 JUNE 2003
OPERATING ASSETS
Fixed assets (at cost less accumulated depreciation)
DEFERRED COST
LONG TERM DEPOSITS (against Lease)
CURRENT ASSETS
Stores & spares
Stocks
Trade debtors
Advances, deposits, prepayments and
other receiveables
Cash and bank balances
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
2003
1.11
2003
RUPEES
2002
0.77
2002
RUPEES
125,138,737
109,101,363
12,653,681
2,930,337
140,722,755
18,514,377
827,737
128,443,477
7,347,476
22,628,137
2,149,858
11,215,891
19,231,731
3,211,998
26,089,950
107,524
58,322,945
17,450,008
110,421
51,220,049
(6,794,240)
(8,004,000)
(6,760,139)
(30,831,550)
(52,389,929)
(2,821,322)
(19,270,244)
(44,786,359)
(66,877,925)
Lecture # 2: Module # 1: Comparison Of Financial Statements
Acid Test Ratio or Quick Ratio



Relation between Current Assets & Current
Liabilities
But we less Inventory Items from Current Assets
Formula
Q.R = C.A – Inventories / C.L
QUICK RATIO
BALANCE SHEET
AS AT 30 JUNE 2003
OPERATING ASSETS
Fixed assets (at cost less accumulated depreciation)
DEFERRED COST
LONG TERM DEPOSITS (against Lease)
CURRENT ASSETS
Stores & spares
Stocks
Trade debtors
Advances, deposits, prepayments and
other receiveables
Cash and bank balances
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
2003
0.54
2003
RUPEES
2002
0.31
2002
RUPEES
125,138,737
109,101,363
12,653,681
2,930,337
140,722,755
18,514,377
827,737
128,443,477
7,347,476
22,628,137
2,149,858
11,215,891
19,231,731
3,211,998
26,089,950
107,524
58,322,945
17,450,008
110,421
51,220,049
(6,794,240)
(8,004,000)
(6,760,139)
(30,831,550)
(52,389,929)
(2,821,322)
(19,270,244)
(44,786,359)
(66,877,925)
Lecture # 2: Module # 1: Comparison Of Financial Statements
Long Term Solvency Ratio
Basically Showing Financial Leverage & also show the abilities of
firm to pay its long term liabilities


Total Debt Ratio:
T.D.R = Total Debt / Total Asset
OR
= (Total Assets - Total Equity) / Total Assets
TOTAL DEBT RATIO
Total Debts / Total Assets
OR
(Total Assets - Equity) / Total Assets
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT LIABILITIES
LONG TERM LIABILITIES
Deferred Income
Due to directors and relatives
Provident fund trust and gratuity payable
Long term loans
Dealers&Distributors securities
Long term portion of leasehold assets
TOTAL LIABILITIES
2003
0.79
2002
0.88
0.79
0.88
RUPEES
RUPEES
(6,794,240)
(2,821,322)
(8,004,000) (6,760,139)
(19,270,244)
(30,831,550)
(44,786,359)
(52,389,929)
(66,877,925)
5,933,016
(15,657,876)
146,655,771
112,785,601
(1,692,510) (37,056,700)
(926,457)
(27,828,000)
(23,871,350)
(12,710,887)
(104,085,904)
(156,475,833)
(21,693,585)
(926,457)
(47,500,000)
(19,398,600)
(1,936,847)
(91,455,489)
(158,333,414)
LONG TERM DEPOSITS (against Lease)
CURRENT ASSETS
Stores & spares
Stocks
Trade debtors
Advances, deposits, prepayments and
other receiveables
Cash and bank balances
TOTAL ASSETS
TOTAL EQUITY
Share capital (5,980,000)
Profit & (loss) account
Surplus on revaluation of fixed assets
Share deposit money
2,930,337
140,722,755
827,737
128,443,477
7,347,476
22,628,137
2,149,858
11,215,891
19,231,731
3,211,998
26,089,950
107,524
58,322,945
199,045,700
17,450,008
110,421
51,220,049
179,663,526
59,800,000
(27,457,311)
8,227,178
2,000,000
42,569,867
39,800,000
(29,697,066)
8,227,178
3,000,000
21,330,112
Lecture # 2: Module # 1: Comparison Of Financial Statements
DEBT EQUITY RATIO
FORMULA
Debt Equity Ratio = Total Debt / Equity
DEBT EQUITY RATIO
Total Debts / Equity
CURRENT LIABILITIES
Current maturity portion of lease liability
Current maturity portion of Long Term Loans
Short term borrowings
Creditors, accruals and other liabilities
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT LIABILITIES
LONG TERM LIABILITIES
Deferred Income
Due to directors and relatives
Provident fund trust and gratuity payable
Long term loans
Dealers&Distributors securities
Long term portion of leasehold assets
TOTAL NET ASSETS
TOTAL EQUITY
Share capital (5,980,000)
Profit & (loss) account
Surplus on revaluation of fixed assets
Share deposit money
2003
3.68
RUPEES
(6,794,240)
(8,004,000) (6,760,139)
(30,831,550)
(52,389,929)
5,933,016
146,655,771
2002
7.42
RUPEES
(2,821,322)
(19,270,244)
(44,786,359)
(66,877,925)
(15,657,876)
112,785,601
(1,692,510) (37,056,700)
(926,457)
(27,828,000)
(23,871,350)
(12,710,887)
(104,085,904)
42,569,867
(21,693,585)
(926,457)
(47,500,000)
(19,398,600)
(1,936,847)
(91,455,489)
21,330,112
59,800,000
(27,457,311)
8,227,178
2,000,000
42,569,867
39,800,000
(29,697,066)
8,227,178
3,000,000
21,330,112
TIME INTEREST EARNED RATIO
FORMULA:
= Earning before Interest and Tax / Interest Expense
YEARS
TIME INTEREST EARNED
RATIO
2003
1.06
2002
0.75
INVENTORY TURNOVER RATIO
FORMULA:
=Cost of Goods Sold/Average Inventory
YEARS
INVENTORY TURNOVER RATIO
2003
2.66
2002
3.06
MARKET RATIOS
Earning Per Share
=Net Income / Total Shares (O/S)
YEARS
INVENTORY TURNOVER RATIO
2003
0.47
2002
(0.71)
PAYABLE TURNOVER RATIO
FORMULA:
=Cost of Goods Sold/Trade Creditors
YEARS
INVENTORY TURNOVER RATIO
2003
1.95
2002
1.31