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ACT3120 Financial Accounting Financial Statement Analysis (“FSA”) Dr. Hairul Suhaimi b. Nahar

ACT3120 Financial Accounting Financial Statement Analysis (“FSA”) Dr. Hairul Suhaimi b. Nahar. The Plan: < 2 hours. Types Horizontal vs. Vertical Financial Ratios Limitations of FSA. Current Period Value Base Period Value. ×. 100%. =. FSA: What’s the Big deal?.

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ACT3120 Financial Accounting Financial Statement Analysis (“FSA”) Dr. Hairul Suhaimi b. Nahar

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  1. ACT3120 Financial Accounting Financial Statement Analysis (“FSA”) Dr. Hairul Suhaimi b. Nahar

  2. The Plan: < 2 hours • Types • Horizontal vs. Vertical • Financial Ratios • Limitations of FSA

  3. Current Period Value Base Period Value × 100% = FSA: What’s the Big deal? • Recall: I.R.S.R.A • FSA: Method to analyze Financial Statement • Horizontal vs. Vertical • Horizontal = Trend = across different periods • Value Change = Current Period – Base Period • % Change = Value Change X 100% Base Period Value • Trend %

  4. [40÷480] x 100% FSA: Horizontal (1) 520 – 480 Value Change % Change

  5. Current Period Value Base Period Value × 100% = FSA: Horizontal (2) • Trend % [([290–275]÷275)x100%] + 100% [([400–275]÷275)x100%] + 100% Trends % shows that COGS is increasing fasterthansales, thusslowingtheincreaseingross margin.

  6. FSA:Vertical(1) • Vertical: focuses on the relationships among FS items at a given point in time. • E.g. A common-size FS  each FS item is expressed as a % • SoCi: items expressed as a % of Sales • SOFP: items expressed as a % of Σ Assets

  7. SoCi  % of Sales FSA:Vertical(2) What conclusions can we draw?

  8. FINANCIALRATIOS (1) Ratios for Common S/holders (2 to 9) Ratios for ST Creditors (10 to 16) Ratios for LT Creditors (17 to 18)

  9. FINANCIALRATIOS (2) GM% = 60% $1 of sales  60¢ left to cover exp. & give profit!

  10. FINANCIALRATIOS (3) The share price is 8.26 times its EPS 82.6% of earnings are paid out as dividend

  11. FINANCIALRATIOS (4) Dividend is only 10% of the share price ROTA = 5% $1 of asset generates 5¢ of profit

  12. FINANCIALRATIOS (5) ROCE = 5% 1 unit of share generates 5¢ of profit. Loan to buy ASB!! Return = Dividend (8%) Interest on Loan to purchase ASB = 5%

  13. FINANCIALRATIOS (6) Note: A = L + E BVPS = $8.55 $8.55 is available to ordinary s/h after all creditors were paid off

  14. FINANCIALRATIOS (7) CR = 1.55 $1 of CL is covered by $1.55 of CA…..OR $1.55 is available to meet $1 of debt For inventory ≠ 0, QR < CR

  15. FINANCIALRATIOS (8) 13.67 days in a year to collect from debtors Industry average = IT of all co’s in the same industry

  16. FINANCIALRATIOS (9) $11.51¢ is available to meet $1 of LT debt

  17. FINANCIALRATIOS (10)

  18. FSA:LIMITATIONS • Differences in accounting methods between companies sometimes make comparisons difficult. • FIFO vs. LIFO • Other factors beyond the ratios • Industry trends • Co’s internal changes • Consumer tastes • Economic factors • Technological changes

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