GRADE 10
LESSON
111
ANALYSIS OF FINANCIAL STATEMENTS
WORKSHEET 1
It is important for a business to measure its performance
A business has to assess whether they have been successful or not and to determine the
areas in which they can approve.
A business has to answer the following questions:
● How profitable is the business?
● How well does the business control its expenses?
● Should the owner be satisfied with the profit earned taking into account the amount he
invested in the business?
● Can the business pay off all its debts?
● Can the business pay off its debts without any problem in the short term?
● Did the business handle its working capital effectively?
It is essential for the owner to analyse the financial statements.
The aim of analysis and interpreting the financial statements of a business is to
determine the following:
Profitability
How profitable is the business?
How well does it control its expenses?
Return
Does the owner earn a good return on the capital he has invested in
the business?
Solvency
Can the business pay off all its debts?
Liquidity
Can the business pay off its short-term debts (current liabilities)
without any problems in the short term?
These current liabilities can be paid only from current assets that can
be converted to cash.
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111 Accounting Grade 10
WORKSHEET 2
How do we calculate these ratios?
PROFIBILITY RATIO’S (from the Income Statement)
Percentage gross profit on sales
Gross profit x 100
Turnover
=%
Percentage gross profit on cost of sales
(also the mark-up percentage)
Gross profit
Cost of sales
=%
Percentage net profit on sales
Net profit
Turnover
Percentage operating expenses on sales
Percentage operating profit on sales
x
x
100
1
100
1
=%
Operating expenses
Turnover
Operating profit
Turnover
x
x
100
1
100
1
=%
=%
LIQUIDITY RATIO’S (from the Balance sheet)
Current assets : Current liabilities
Current ratio
= x:1
Current assets - inventories : Current liabilities
Acid-test ratio
= x:1
SOLVENCY RATIO (from the Balance sheet)
Total assets : Total liabilities
Solvency ratio
=x:1
RETURN ON INVESTMENT (from Income statement and Balance sheet)
Return on owner’s equity
net profit
owner’s equity
x
100
1
=%
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111 Accounting Grade 10
Where do we get our information from?
INCOME STATEMENT
Notes
R
399 480
Sale
Cost of sales
(200 000)
Gross profit
199 480
Other operating income
341 988
Rent income
332 260
Discount received
9 728
Gross operating income
541 468
(165 140)
Operating expenses
Stationery
6 860
Telephone
25 780
Water and electricity
22 100
Salaries
67 400
Depreciation
43 000
Operating profit
376 328
Interest income
100
Operating profit before interest expense
376 428
Interest expense
(52 200)
Net profit for the year
324 228
BALANCE SHEET
ASSETS
NON-CURRENT ASSETS
Tangible assets
Financial assets
Fixed deposit
CURRENT ASSETS
922 000
3
912 000
10 000
240 800
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111 Accounting Grade 10
Inventories
4
200 200
Trade and other debtors
Cash and cash equivalents
5
6
40 000
600
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
1 162 800
7
904 300
NON-CURRENT LIABILITIES
200 000
Loan
200 000
CURRENT LIABILITIES
58 500
Trade and other creditors
Bank overdraft
TOTAL EQUITY AND LIABILITIES
8
40 500
18 000
1 162 800
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111 Accounting Grade 10
CHALKBOARD SUMMARY / TRANSPARENCY
ANALYSIS OF FINANCIAL STATEMENTS
Profitability
Liquidity
Gross profit
on sales
Current
ratio
Gross profit
on
cost of
sales
Acid-test
ratio
Solvency
Return
Net profit
on sales
Operating
expenses
on sales
Operating
profit
on sales
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111 Accounting Grade 10