1. ANALYSIS OF FINANCIAL STATEMENT
BASIC FINANCIAL ACCOUNTING
MGT 2304
MOHD ZARIR YUSOFF

2. What is Financial statement analysis?
Is the process of understanding the risk and profitability of a firm (business or project) through analysis of reported financial information by using different accounting tools and techniques.

3. Who normally do or interested in the financial analysis and why?
Top Management
Decision making process
Investor
Potential Return
Government
Business performance
Lenders
Dividend
Researchers
Comparative Industries
Media
Public information

4. Question we would like to answered
Assets
Liabilities
1. What are the assets in place?
2. How valuable are these assets?
3. How risky are these asset?
1. What is the value of the debt?
2. How risky is the debt?
1. What are the growth Assets?
2. How valuable are these asset?
1. What is the value of the equity?
2. How risky is the equity?

5. How to do the analysis? Involve 3 major steps.
Reformulating Financial Statement.
Analysis and adjustments of measurement errors
Financial ratio analysis
Analysis of Risk.
Analysis of Profit

6. Introduction to financial ratio analysis
The main purpose of ratio analysis is enable users of financial statement (internal and external users) to evaluate a firm’s financial performance and financial position over time and/ or relation to other firm
Also provide the basis of answering some important questions
How liquid is the firm?
Is management generating sufficient profits from the firm’s assets?
How does the firm’s management finance its investment?

7. Types of comparison using financial ratios
Intra-company
Comparison of a firm’s financial data at difference points of time. Ex: Net profit for the company in year 2005 and 2006
Inter-company
Comparison between companies in the form of competitors. Ex. Sales value between Magnolia Ice cream & Nestle Ice cream
Industry Average
Performance is compared with the performance of industry as a whole.

8. Benefits of ratio analysis
Can be used to compare company’s performance either inter-times or inter- companies
Problems or critical areas that need attention and action in a company can be indentified
Can be used in forecasting a company’s performance

9. The limitations of ratio analysis
Ratio is not useful on its own. It should be compared to whether with inter-times or intercompany
Comparisons between companies and for particular company over time may be misleading if difference accounting policies has been used to calculate profits and value of assets

10. Categories of financial ratio
1. Liquidity Ratio
Measure the ability of a firm in repaying its short-term liabilities
2. Efficiency Ratio
Also known as activity ratio and measure how well and how efficient a firm manage its current assets and its current liabilities
3. Leverage Ratio
Also known as gearing ratios and measure a firm’s ability to pay long term liability
4. Profitability Ratio
Measure the profits of a firm in relation to its sales and assets (capital employed)

11. 1.0 LIQUIDITY RATIO 1.1 Current Ratio 1.2 Quick Ratio
Current Ratio = Current Asset/ Current Liabilities
x no. of times
High- good quality, efficient use of capital e.g stock and debtors
Low – firm is weak lack of liquidity to pay debt
1.2 Quick Ratio
Quick Ratio = (Current Asset – Closing Stock)/ Current Liabilities
Closing stock excluded as it is least liquid among the current assets.

12. 2.0 Efficiency ratios 2.1 Average Collection Period
Debtors Amount x 360 days/ Annual Credit Sales
x no. of days
High- not efficient because debtor are slow settle their debt
Low – very efficient in collection debts from debtor
2.2 Inventory/Stock Turnover Ratio
Cost of Goods Sold / Average Stock
x no. of times
High – very efficient because sales are increasing
Low – not efficient as because sales are slow

13. 2.0 Efficiency ratios cont…
2.3 Debtors Turnover Ratio
Annual sales credit / Debtors Amount
x no. of times
High – Very efficient in collection
Low – Slow in collection

14. 3.0 Leverage ratio 3.1 Debt Ratio Total Liabilities Total Asset x 100
High – Less risky as owner investment is more than outsiders
Low - Greater risk of not being able to pay fixed- interest, financing and owner investment

15. 4.0 Profitability ratio 4.1 Gross Profit Ratio/Margin
Gross Profit / Sales x 100% x%
Result indicate how much gross profit can be obtained from every one ringgit of sales
4.2 Operation Profit Margin
Net Operating Profit / Sales x 100%
Result indicate how much Operating profit can be obtained from every one ringgit of sales

16. 4.0 Profitability ratios cont…
4.3 Net Profit Margin
Net Profit / Sales x 100% x%
Result indicate how much Net profit can be obtained from every one ringgit of sales.
4.4 Return on Investment (ROI)
Net Profit after tax/ Total Assets x 100%
Result indicate how much Net profit after tax can be obtained from every one ringgit of total assets