Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Owners and investors –How is my investment doing? –Should I buy, sell, hold? –Is the dividend likely to increase? –Will the company go out of business?

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Potential investors –What are the risks involved in this business? –Would I lose money? –Would my investment be safe? –How much can I make from this investment? –Can I make a better return elsewhere?

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Creditors –How likely is it that I will be paid? –How likely is it that I will be paid on time? –Will interest be paid on time? –Is there a risk that the business will go bust before I get paid?

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Compare two or more figures to assess the differences between them Example: Ilse

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: Ilse (continued) Between 20X2 and 20X3 sales rose by £4980, an increase of 2.4% Between 20X3 and 20X4 sales rose by £8080, an increase of 3.9% Is this good news? Depends upon the context

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: EMI plc

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: EMI plc (continued) Percentage increases (decreases) in key figures

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Example: EMI plc (continued) The business appears to be experiencing difficulties But there was a recovery in operating profit levels in 2003 Interest has fallen back from a very high level in 2001 Chairman’s statement: ‘macro-economic effects in some regions, a growing impact of music piracy in all its forms and the disruptive impact of our restructuring activities’.

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Changes in the business –Figures are not really comparable –New accounting standards and rules may have come into force Failure to take the effects of inflation into account –Accounts are not usually adjusted for inflation in the UK –Even where the inflation rate is low, the effects can be substantial over several years

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Vertical analysis Expresses each figure in a financial statement as a percentage of one key figure (e.g. sales in the P&L account) Common size analysis Extends vertical analysis over more than one accounting period

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Gross profit percentage has fallen in each of the four years Administrative expenses have remained fairly constant until 20X6 when there is a sudden increase

Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN © 2005 Thomson Learning Importance of comparability BUT NB Differences in accounting policies Differences in business activities Misleading industry averages