1. ZULFIQAR HASAN 1

2. 2 Corporate Financial Statement A financial statement (or financial report) is a formal record of the financial activities of a corporation. A financial statement is often referred to as an account, For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a Income Statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Balance Sheet also referred to as statement of financial position or condition, reports on a company's Assets, Liabilities, and ownership equity at a given point in time. Statement of Retain Earnings: explains the changes in a company's retained earnings over the reporting period. Statement of Cash Flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

3. ZULFIQAR HASAN 3 Elements of Annual Report of a Corporation 1.Cover: The cover design should reflect the company image. It might incorporate corporate colors and logo. 2.Mission Statement/ Corporate Message 3.Letter to Stockholders 4.History of Company or Organization 5.Services / Product Lines (Sales & Marketing) 6.Auditors Certificate 7.Notes to the Share Holders 8.Management Report 9.5-10 Year Financial Summary. 10.Performance / Year in Review 11.Photos/Illustrations 12.Financial Statements 13.Graphs and Charts 14.Financial Ratios 15.Appendices and References

4. ZULFIQAR HASAN 4 Elements of Annual Report

5. ZULFIQAR HASAN 5 Methods of Financial Statement Analysis 1.Horizontal Analysis: Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. Comparative study of a balance sheet or income statement for two or more accounting periods, to compute both total and relative variances for each line item. 2.Vertical Analysis: Vertical analysis reports each amount on a financial statement as a percentage of another item..A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of analyzing a balance sheet in this manner is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business.

6. ZULFIQAR HASAN 6 Methods of Financial Statement Analysis 3.Trend Percentage: analysis of changes over time. A comparative analysis of a company's financial ratios over time. This is the analysis of data that exhibits an ongoing upward or downward pattern. 4.Common Size Analysis: A common-size balance sheet allows to compare one company's balance sheet to another company's balance sheet or to the average for its industry by making equal percentage in sales amount, Total Assets and Total Liabilities and Owner’s Equity. 5.Ratio Analysis Time Series Analysis Cross Sectional Analysis

7. ZULFIQAR HASAN 7 Differences between Horizontal and Vertical Analysis Under horizontal analysis an analyst compares the financial statement of the company for two more accounting periods, it can be used on any item in the financial statement company so if company wants to see whether its sales for current year is good or not it will compare the sales for the year 2010 with sales for year 2009 or for previous years. It is a time series analysis in the sense that it shows comparison of financial data for several years against a chosen base year. It is also called dynamic analysis of the financial statements. Vertical analysis is done to review and analysis the financial statements for a year only and therefore it is also called static analysis. Under this method each entry for assets, liabilities and equities in a balance sheet is represented as a percentage of the total account. So if in asset side of balance sheet cash is $200, building is $400 and machinery is $600 and total of balance sheet is $1000, then cash will be 20 percent of total of balance sheet building will be 40 percent and machinery will be 60 percent. One of the advantages of using this method is that one gets an idea of composition of the balance sheet and then it can compared with previous years to see the relative annual changes in company’s balance sheet.

8. ZULFIQAR HASAN 8 Example 01: Horizontal Analysis Increase/Decrease 2011 2010 AmountPercent Sales$41,500$37,850 Expenses 40,000 36,900 Net income 1,500 950 Increase/Decrease 2010 2009 AmountPercent Sales$50,500$41,850 $------ -----% Expenses 45,000 39,900 $-----------% Net income ???? ???? ????-----% Practice 01: Easy Practice $3,650 9.6% 3,100 8.4% 55057.9%

9. ZULFIQAR HASAN 9 Practice 02: Horizontal Analysis 20092010201120102011 Net Sales Tk 1,435.00Tk 1,500.00Tk 2,000.00 Cost of Goods Sold Tk 1,175.00Tk 1,220.00Tk 1,620.00 Gross Profit Tk 260.00Tk 280.00Tk 380.00 Fixed Operating Expenses Tk 85.00Tk 90.00Tk 110.00 Depreciation Tk 40.00Tk 50.00 Earnings Before Interest & Taxes Tk 135.00Tk 140.00Tk 220.00 Interest Expenses Tk 30.00Tk 36.00Tk 45.00 Earnings Before Taxes Tk 105.00Tk 104.00Tk 175.00 Taxes 40% Tk 42.00Tk 41.60Tk 70.00 Net Income Tk 63.00Tk 62.40Tk 105.00 Preferred Dividends Tk - Earnings Available to Common Shareholders Tk 63.00Tk 62.40Tk 105.00 Common Stock Dividends Tk 27.00Tk 29.00Tk 32.00 Addition to Retained Earnings Tk 36.00Tk 33.40Tk 73.00 Number of Common Stock 25??

10. ZULFIQAR HASAN 10 Trend Percentages... Trend Percentages are computed by selecting a base year whose amounts are set equal to 100%. The amounts of each following year are expressed as a percentage of the base amount.

11. ZULFIQAR HASAN 11 Year 2011 2010 2009 Sales Revenues$27,611$24,215$21,718 Cost of Goods Sold 15,318 14,709 13,049 Gross profit$12,293$ 9,506$ 8,669 2009 is the base year. What are the trend percentages? Example 02: Trend Percentages Year 2011 2010 2009 Sales Revenues127%111%100% Cost of Goods Sold 117%113%100% Gross profit142%110%100% These percentages were calculated by dividing each item by the base year

12. ZULFIQAR HASAN 12 Practice 03: Trend Percentages 2009 base20102011200920102011 Net Sales Tk 1,435.00Tk 1,500.00Tk 2,000.00 Cost of Goods Sold Tk 1,175.00Tk 1,220.00Tk 1,620.00 Gross Profit Tk 260.00Tk 280.00Tk 380.00 Fixed Operating Expenses Tk 85.00Tk 90.00Tk 110.00 Depreciation Tk 40.00Tk 50.00 Earnings Before Interest & Taxes Tk 135.00Tk 140.00Tk 220.00 Interest Expenses Tk 30.00Tk 36.00Tk 45.00 Earnings Before Taxes Tk 105.00Tk 104.00Tk 175.00 Taxes 40% Tk 42.00Tk 41.60Tk 70.00 Net Income Tk 63.00Tk 62.40Tk 105.00 Preferred Dividends Tk - Earnings Available to Common Shareholders Tk 63.00Tk 62.40Tk 105.00 Common Stock Dividends Tk 27.00Tk 29.00Tk 32.00 Addition to Retained Earnings Tk 36.00Tk 33.40Tk 73.00 Number of Common Stock 25??

13. ZULFIQAR HASAN 13 Solutions: Trend Percentages 200920102011 Net Sales 100%105%139% Cost of Goods Sold 100%104%138% Gross Profit 100%108%146% Fixed Operating Expenses 100%106%129% Depreciation 100%125% Earnings Before Interest & Taxes 100%104%163% Interest Expenses 100%120%150% Earnings Before Taxes 100%99%167% Taxes 40% 100%99%167% Net Income 100%99%167% Preferred Dividends ----- Earnings Available to Common Shareholders 100%99%167% Common Stock Dividends 100%107%119% Addition to Retained Earnings 100%93%203% Number of Common Stock -----

14. ZULFIQAR HASAN 14 Graphical Presentation

15. ZULFIQAR HASAN 15 Vertical Analysis... –Vertical Analysis compares each item in a financial statement to a base number set to 100%. –Every item on the financial statement is then reported as a percentage of that base. –Common size financial statement is so close to the vertical analysis

16. ZULFIQAR HASAN 16 Vertical Analysis Examples 03: Income Statement 2009 % Sales$38,303100.0 Cost of Goods Sold 19,688 51.4 Gross profit$18,615 48.6 Total operating expenses 13,209 34.5 Operating income$ 5,406 14.1 Other income 2,187 5.7 Income before taxes$ 7,593 19.8 Income taxes 2,827 7.4 Net income$ 4,766 12.4

17. ZULFIQAR HASAN 17 Practice 04: Vertical Analysis of Income Statement 2009 2008 Sales$48,303$49100 Cost of Goods Sold 23,303 25100 Gross profit$25,615 $24000 Total operating expenses 13,615 12000 Operating income EBIT$ 12000 $12000 Other income 2,000 2500 Income before taxes$ 14000 $14500 Income taxes 5600 5800 Net income$ 8400 $8700

18. ZULFIQAR HASAN 18 Vertical Analysis: Asset Side of Balance Sheet Assets 2009 % Current assets: Cash$ 1,816 4.7 Receivables net 10,438 26.9 Inventories 6,151 15.9 Prepaid expenses 3,526 9.1 Total current assets$21,931 56.6 Plant and equipment, net 6,847 17.7 Other assets 9,997 25.7 Total assets$38,775100.0

19. ZULFIQAR HASAN 19 Common Size Financial Statement Making Common Size Balance Sheet For Asset Side: Divide all items by Total Assets For Liabilities and Owners Equity Side: Divide all items by Total Liabilities & Equity Common Size Income Statement: Divide all items by Sales Common-size statements are used to compare one company to other companies, and to the industry average.

20. ZULFIQAR HASAN 20 Dollars, in Thousands Income Statement Common Size Percentage Squa re Bexi mco IBN SINA BIO Phar. Squ are Bexi mco IBN SINA BIO Phar $525$595$630$724Sales100 158190208217Gross Profit3032 7995 101Selling Exp.1516 31 32 Gen. & Admin.65 $ 48$ 64$ 81$ 84EBIT911 6668Interest11 $ 42$ 58$ 75$ 76EBT810 142026 Tax33 $ 28$ 38$ 49$ 50Net Income56

21. ZULFIQAR HASAN 21 Dollars, in Thousands Common Size Income Statement Common Size Percentage Squa re Bexi mco IBN SINA BIO Phar. Squ are Bexi mco IBN SINA BIO Phar $525$595$630$724Sales100 158190208217Gross Profit30323330 7995 101Selling Exp.15161514 31 32 Gen. & Admin.6554 $ 48$ 64$ 81$ 84EBIT9111312 6668Interest1111 $ 42$ 58$ 75$ 76EBT8101210 142026 Tax3344 $ 28$ 38$ 49$ 50Net Income5687

22. ZULFIQAR HASAN 22 Common Size Financial Statement: Balance Sheet Dollars, in ThousandsAssetsCommon Size Percentage Square Beximc o IBN SI NA BIO Phar. Items Square Bexim co IBN SINA BIO Phar. $ 50$ 40$ 45$ 70Cash64 230250175225Accts. Rec.2627 175180195185Inventory2019 101510310Other Current Assets12 $465$485$425$490Total Current Assets5352 400425500515Plant & Equip.4546 1520510Other Non-Current Assets22 $880$930 $1015Total Assets100 Liabilities and Owners Equity 200225220210Accts. Pay.2324 50452080Bank Debt65 $250$270$240$290Total Current Liabs.2829 15010060250Long-Term Debt1711 $400$370$300$540Total Liabs.4543 480560630475Owner's Equity5452 $880$930 $1015Total Liabs. & Equity100

23. ZULFIQAR HASAN 23 Common Size Financial Statement: Balance Sheet Dollars, in ThousandsAssetsCommon Size Percentage SquareBeximcoIBN SINABIO Phar. Items SquareBeximco IBN SINA BIO Phar. $ 50$ 40$ 45$ 70Cash6457 230250175225Accts. Rec.26271922 175180195185Inventory20192118 101510310Other Current Assets1211 $465$485$425$490Total Current Assets53524648 400425500515Plant & Equip.45465451 1520510Other Non-Current Assets2211 $880$930 $1015Total Assets100 Liabilities and Owners Equity 200225220210Accts. Pay.2324 21 50452080Bank Debt6528 $250$270$240$290Total Current Liabs.28292629 15010060250Long-Term Debt1711625 $400$370$300$540Total Liabs.45433253 480560630475Owner's Equity54526847 $880$930 $1015Total Liabs. & Equity100

24. ZULFIQAR HASAN 24

25. ZULFIQAR HASAN 25 Ratio Classification 1Measuring ability to pay current liabilities 2Measuring ability to sell inventory and collect receivables 3Measuring ability to pay short-term and long- term debt 4Measuring profitability 5Analyzing stock as an investment

26. ZULFIQAR HASAN 26 Income Statement Net sales Year 2005$858,000 Cost of goods sold 513,000 Gross profit$345,000 Total operating expenses 244,000 Operating income$101,000 Interest revenue 4,000 Interest expense 24,000 Income before taxes$ 81,000 Income taxes 33,000 Net income$ 48,000

27. ZULFIQAR HASAN 27 Balance Sheet: Asset Side Assets2009 2008 Current assets: Cash$ 29,000$ 32,000 Receivables net 114,000 85,000 Inventories 113,000 111,000 Prepaid expenses 6,000 8,000 Total current assets$262,000$236,000 Long-term investments 18,000 9,000 Plant and equipment, net 507,000 399,000 Total assets$787,000$644,000

28. ZULFIQAR HASAN 28 Balance Sheet: Liabilities & Owners Equity Sides Liabilities2009 2008 Current liabilities: Notes payable$ 42,000$ 27,000 Accounts payable 73,000 68,000 Accrued liabilities 27,000 31,000 Total current liabilities$142,000$126,000 Long-term debt 289,000 198,000 Total liabilities$431,000$324,000 Stockholders’ Equity 20x5 20x4 Common stock, no par$186,000$186,000 Retained earnings 170,000 134,000 Total stockholders’ equity$356,000$320,000 Total liabilities and stockholders’ equity$787,000$644,000

29. ZULFIQAR HASAN 29 1.Short-Term Solvency, or Liquidity Ratios 2.Long-Term Solvency or Financial Leverage or Debt management Ratios 3.Profitability Ratios 4.Market Value Ratios 5.Asset Management, or Turnover Ratios

30. ZULFIQAR HASAN 30 Ratios Description The current ratio measures the company’s ability to pay current liabilities with current assets. The acid-test ratio shows the company’s liability to pay all current liabilities if they come due immediately. Inventory turnover is a measure of the number of times the average level of inventory is sold during a year. Accounts receivable turnover measures a company’s liability to collect cash from credit customers. Days’ sales in receivable ratio measures how many day’s sales remain in Accounts Receivable The debt ratio indicates the proportion of assets financed with debt Times-interest-earned ratio measures the number of times operating income can cover interest expense

31. ZULFIQAR HASAN 31 Ratios Description Rate of return on net sales shows the percentage of each sales dollar earned as net income. Rate of return on total assets measures how profitably a company uses its assets. Common equity includes additional paid-in capital on common stock and retained earnings. Price/earning ratio is the ratio of market price per share to earnings per share. Dividend yield shows the percentage of a stock’s market value returned as dividends to stockholders each period. Book value per share of common stock = Total stockholders’ equity – Preferred equity ÷ Number of shares of common stock outstanding

32. ZULFIQAR HASAN 32 Importance of Corporate Financial Statement Analysis All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time. Comparison of one company with another can provide valuable clues about the financial health of an organization. Stockholders are concerned with future earnings and dividends. Creditors are concerned with the company's future ability to repay its debts. Managers are concerned with the company's ability to finance future expansion.

33. ZULFIQAR HASAN 33 Importance of Corporate Financial Statement Analysis Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns. Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios. Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing.

34. ZULFIQAR HASAN 34 Importance of Corporate Financial Statement Analysis Owners and managers require financial statements to make important business decisions that affect its continued operations Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. Prospective investors make use of financial statements to assess the viability of investing in a business.

35. ZULFIQAR HASAN 35 Limitations of Financial Analysis Business decisions are made in a world of uncertainty. No single ratio or one-year figure should be relied upon to provide an assessment of a company’s performance.