Chapter 17, Problem 6BTN

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.

The key metrics mentioned above include the following:

• Horizontal Analysis – Refers to comparison of the figures of the components of financial statements across the figures for the previous years to determine favorable or unfavorable trends

• Vertical analysis - Refers to comparison of the figures of the components of financial statements against each other in order to determine relative composition of the components in relation to the total

To Determine:

Meaning of horizontal and vertical analysis with examples

To determine

2)

Introduction:

Ratio Analysis

• Ratio analysis 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.

The key metrics mentioned above include the following:

• Equity Ratio – It is a measure of the total equity component out of the total capital employed by an entity that comprises of both debt and equity

• Return on Total Assets – A measure of the return earned by the shareholders on the total assets employed. It is an indicator of profitability in relation to the assets.

• Dividend Yield Ratio – It is a measure of the total dividend earned by the equity shareholder in relation to the shares held.

• Book Value per Share – It is a measure of the actual book value or cost of the equity shares. It seeks to measure the actual price that the share is worth and the difference between market price and actual book value.

• Days’ sales in inventory – A measure of the total outstanding collections for credit sales in terms of inventory. It is calculated to understand how many days the company holds inventory before selling it

• Accounts receivable turnover – A measure of the relation between the turnover and accounts receivable measured in number of times.

• Debt Equity Ratio – A Measure of the total debt used to leverage the business in relation to the percentage of equity.

• Times Interest earned Ratio – A measure of the total income and the total interest payments made by the business. It seeks to measure how much of the earnings can finance interest costs and at what multiple. The higher the ratio, the better.

• Gross Margin Ratio – A measure of the gross margin earned from the turnover for the reporting period.

• Acid Test Ratio – Also known as quick ratio, it seeks to measure the liquidity position of the business.

To Prepare:

Ratios relating to the following building blocks of financial analysis:

• Liquidity And Efficiency

• Solvency,

• Profitability,

• Market Prospects