Chapter IE, Problem 11IE

1)

To determine

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:

• Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

• Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

  $\text{Current Ratio = Current Assets / Current Liabilities}$

To Calculate:

1. Working Capital

1. Current Ratio

2)

To determine

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:

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

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

• Average Collection period − A measure of the Average number of days that it takes to realize the monetary benefits from a credit sale.

• It is calculated by dividing 365 by the Accounts receivable turnover ratio. It helps in tracking the reconciliation between credit periods offered to customers for sales and the time taken to actually receive the money for such sales.

  $\text{Average Collection Period = 365 / Accounts Receivable Turnover Ratio }$

• Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

• It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

• Average Sale Period − 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.

  $\text{Average Sale Period = 365 / Inventory Turnover Ratio}$

• Operating Cycle - Operating Cycle is the time taken for the entire Procure to Pay (Purchase) and Order to Cash (Sale) process to complete, with respect to goods and services and money received for the same.

• It is used to determine the funds required to finance operations of a business. It may be considered the sum of the average sale period and average collection period

  $\text{Operating Cycle = Average Sale Period + Average Collection Period }$

1. Accounts Receivable Turnover

1. Average Collection Period

1. Inventory Turnover

1. Average Sale Period

1. Operating Cycle

3)

To determine

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:

• 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.

  $\text{Times Interest Earned Ratio = EBIT / Interest Expense}$

• Equity Multiplier - An indicator of the financial leverage i.e. the degree to which debt is used to fund the assets of the company.

• It is computed by dividing the total assets of the company to the closing balance of the stockholders equity. The closing balance is considered for computation.

  $\text{Equity Multiplier =}\frac{\text{Total Assets of the company for the reporting period}}{\text{Closing Balance of Shareholders Equity for the reporting period}}$

1. Times Interest Earned Ratio

1. Equity Multiplier

4)

To determine

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:

• Net Profit Margin − It is a measure of the total Profit earned from sales after deduction of operating expenses, selling and distribution expenses and other indirect costs.

• It is often the most sought after financial measure to evaluate profitability since it gives a clear indication of the Profit / Loss of the company at the end of the reporting period.

  $\text{Net Profit Margin = Net Profit / Turnover x 100}$

• Return on Shareholders’ Equity − A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them.

• It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is.

  $\text{Return on Shareholders' Equity = Net Income / Equity Share Capital x 100}$

To Calculate:

1. Net profit margin

1. Return on Equity

5)

To determine

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:

• Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

• Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

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

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

• Average Collection period − A measure of the Average number of days that it takes to realize the monetary benefits from a credit sale.

• It is calculated by dividing 365 by the Accounts receivable turnover ratio. It helps in tracking the reconciliation between credit periods offered to customers for sales and the time taken to actually receive the money for such sales.

  $\text{Average Collection Period = 365 / Accounts Receivable Turnover Ratio }$

• Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

• It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

• Average Sale Period − 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.

  $\text{Average Sale Period = 365 / Inventory Turnover Ratio}$

• Operating Cycle - Operating Cycle is the time taken for the entire Procure to Pay (Purchase) and Order to Cash (Sale) process to complete, with respect to goods and services and money received for the same.

• It is used to determine the funds required to finance operations of a business. It may be considered the sum of the average sale period and average collection period

  $\text{Operating Cycle = Average Sale Period + Average Collection Period }$

• 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.

  $\text{Times Interest Earned Ratio = EBIT / Interest Expense}$

• Equity Multiplier - An indicator of the financial leverage i.e. the degree to which debt is used to fund the assets of the company.

• It is computed by dividing the total assets of the company to the closing balance of the stockholders equity. The closing balance is considered for computation.

  $\text{Equity Multiplier =}\frac{\text{Total Assets of the company for the reporting period}}{\text{Closing Balance of Shareholders Equity for the reporting period}}$

• Net Profit Margin − It is a measure of the total Profit earned from sales after deduction of operating expenses, selling and distribution expenses and other indirect costs.

• It is often the most sought after financial measure to evaluate profitability since it gives a clear indication of the Profit / Loss of the company at the end of the reporting period.

  $\text{Net Profit Margin = Net Profit / Turnover x 100}$

• Return on Shareholders’ Equity − A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them.

• It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is.

  $\text{Return on Shareholders' Equity = Net Income / Equity Share Capital x 100}$

Analysis of parameters computed and whether they should increase or decrease with time.