Chapter 17, Problem 1BTN

To determine

1. Introduction:

Analysis of Financial Statements

• Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.
• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Trend Analysis

• Trend Analysis is a technique of performance measurement and evaluation where the performance of the current year is compared to that of a base year and the direction of the results are analyzed.
• The movement of the results can be interpreted as a positive or favorable trend or as a negative or unfavorable trend.
• Favorable trends mean increase in revenues and decrease in costs and are hence subjective in nature. Unfavorable trends mean decrease in revenues and increase in costs and are also subjective in nature.
• Trend analysis helps in evaluation of repetitive behavior as well as evaluation of effectiveness of strategies implemented by allowing analysis of performance over time.

Trend percent analysis for the years 2013, 2014 and 2015 taking 2013 as the base year for several key figures

To determine

2. Introduction:

Common Size Comparative Statements

• Common size statements are comparative financial statements that facilitate data analysis and comparison of the financial results with the results of previous time periods.
• While preparing a common size income statement, the elements of the financial statements such as expenses, costs and net results (profit / loss) are expressed as a percentage of a fixed base, usually the sales for the year.
• While preparing a common size balance Sheet, the elements of the financial statements such as current assets, fixed assets and current liabilities etc. are expressed as a percentage of a fixed base, usually the total of assets / liabilities for the year.
• The individual cost elements are then analyzed and year on year analysis is performed in order to check if the growth in revenues and expenses / assets and liabilities correspond to a matching proportionate increase and vice versa.
• The main purpose of common size financial statements is to enable comparison with results of previous financial time periods and also facilitate tracking and review.

To Prepare:

Common size percents for the years 2014 and 2015 for Assets

To determine

3. Introduction

Analysis of Financial Statements

Analysis of Financial Statements is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.

It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Trend Analysis

Trend Analysis is a technique of performance measurement and evaluation where the performance of the current year is compared to that of a base year and the direction of the results are analyzed.

The movement of the results can be interpreted as a positive or favorable trend or as a negative or unfavorable trend.

Favorable trends mean increase in revenues and decrease in costs and are hence subjective in nature. Unfavorable trends mean decrease in revenues and increase in costs and are also subjective in nature.

Trend analysis helps in evaluation of repetitive behavior as well as evaluation of effectiveness of strategies implemented by allowing analysis of performance over time.

Common Size Comparative Statements

Common size statements are comparative financial statements that facilitate data analysis and comparison of the financial results with the results of previous time periods.

While preparing a common size income statement, the elements of the financial statements such as expenses, costs and net results (profit / loss) are expressed as a percentage of a fixed base, usually the sales for the year.

While preparing a common size balance Sheet, the elements of the financial statements such as current assets, fixed assets and current liabilities etc. are expressed as a percentage of a fixed base, usually the total of assets / liabilities for the year.

The individual cost elements are then analyzed and year on year analysis is performed in order to check if the growth in revenues and expenses / assets and liabilities correspond to a matching proportionate increase and vice versa.

The main purpose of common size financial statements is to enable comparison with results of previous financial time periods and also facilitate tracking and review.

Analysis of Changes in income statement components and balance sheet items