Financial statements are one of the instruments that help guide business decisions. The two
financial statements used at this level are the Balance Sheet and the Income Statement.
Someone reading financial statements for analysis purposes must understand accounting,
terminology, and the meaning of each component of the statements. As an informed reader of
financial statements, you will be able to determine the actual amount of income/loss, and realize
that generally accepted accounting principles have been applied if statements have been
audited or otherwise verified. From this, you will be able to design and run a series of tests, the
result of which will be of aid to insiders and outsiders in decision making.
Analysis establishes relationships and points out changes and trends. The analysis section in this
guide will include two components:


comparisons and
ratios.
The Income Statement lists sources of revenue and expired costs or expenses. It matches revenue
to expenses for the period of time. It does not predict future profitability, but it may be used for
comparison purposes. Net income/loss is only an approximation and does not infer cash
availability.
A balance sheet gives the reader a detailed summary of assets, liabilities, and owners' equity on
a specific date. Each category may be used for further analysis. The balance sheet does not show
how profits were made or where they may have been distributed.
Comparisons are one of the tools used for financial statement analysis. Primary users of
comparisons are insiders (managers, owners, controllers, and others). Comparisons focus on trends
and percentage changes. They may compare stages within one company's life or they may
compare one company to another, etc. They may also focus on trends in revenue and expenses.
Comparisons may be shown in graphical or numerical format. Tools that will be used include:

Comparative Balance Sheets - A comparative balance sheet presents side-by-side
information about an entity's assets, liabilities, and shareholders' equity as of
multiple points in time. For example, a comparative balance sheet could present
the balance sheet as of the end of each year for the past three years. Another
variation is to present the balance sheet as of the end of each month for the past
12 months on a rolling basis. In both cases, the intent is to provide the reader with
a series of snapshots of a company's financial condition over time, which is useful
for developing trend line analyses (though this works better when the reader has
the entire set of financial statements to work with and not just the balance sheet).

Comparative Income Statements - A comparative income statement will consist of
two or three columns of amounts appearing to the right of the account titles or
descriptions. For example, the income statement for the year 2012 will report the
amounts for each of the years 2012, 2011, and 2010. As a courtesy to the
reader, the amounts from the most recent period are in the column closest to the
titles. The older amounts are deemed to be less significant and thus appear
furthest from the titles.

Common-Size statements. (A common-size statement shows separate items as a
percentage rather than in dollar amounts.)
Below are examples of each.
To calculate common size statements you do the following:
Common Size Balance Sheet:
Step 1:
Determine the amount of total assets on your small business’s balance sheet. For example, assume
your total assets are $100,000.
Step 2:
Divide the amount of each asset on your balance sheet by the amount of total assets. Multiply
each result by 100 to determine the common-size percentage of each asset. For example, if your
cash account is $20,000, divide $20,000 by $100,000 to get 0.2. Multiply 0.2 by 100 to get 20
percent as the common-size percentage for the cash account. This means cash makes up 20
percent of total assets.
Step 3:
Identify the amount of total liabilities and shareholders’ equity on your small business’ balance
sheet. In this example, total liabilities and shareholders’ equity would be $100,000, the same as
total assets.
Step 4:
Divide the amount of each liability account and each shareholders' equity account by the amount
of total liabilities and shareholders’ equity. Multiply each result by 100 to determine the commonsize percentage of each account. In this example, if the liability account long-term debt is
$10,000, divide $10,000 by $100,000 to get 0.1. Multiply 0.1 by 100 to get 10 percent as the
common-size percentage for long-term debt. If the shareholders' equity account common stock is
$40,000, divide $40,000 by $100,000 to get 0.4. Multiply 0.4 by 100 to get 40 percent for
common stock.
Common Size Income Statements:
You divide each line item by Gross Sales and then multiply by 100.
What Information should you be gathering from these statements?
The whole idea, is that these statements will aid decision makers in suggesting changes or
interpreting the activities of the business. Some things to consider include: What are the base
amounts? What is the purpose of a common-size statement? What is revealed? How would various
insiders use some of the comparison data? For example, how should a manager interpret a slight
increase in net sales from one month to another? Is it caused by an increase in the number of units
sold? An increase in the price? A decrease in sales returns and allowances? Are there any other
causes? How has technology and the use of the computer affected the financial analysis of a
company?
You are going to find financial statement for three major Saskatchewan Companies. Once you have
found them, print them off and in the space below, create a reflection based on the statements that you
have found. Refer to the questions in the notes above.
Company 1 :
Reflection:
Company 2 :
Reflection:
Company 3 :
Reflection:
The 2014 and 2015 comparative income statement for Murphy Corporation is below.
1. Calculate the percentages and prepare a common size statement using the above information.
2. Comment on any significant changes.
The 2014 and 2015 comparative balance sheet for Murphy Corporation is below.
1. Calculate the percentages and prepare a common size statement using the above information.
2. Comment on any significant changes.