Analysis & Interpretation

7/31/2019 Analysis & Interpretation

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ANALYSISANDINTERPRETATION OF

FINANCIAL STATEMENTS


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Financial Statement Analysis

What is financial statement analysis?

Tearingapart the financial statements

and looking at the relationships


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Who analyzes financial statements?

Internal users (i.e., management)

External users (emphasis of chapter) Examples?

Investors, creditors, regulatory agencies &

stock market analysts and

auditors


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What do internal users use it for?

Planning, evaluating and controlling company

operations

What do external users use it for?

Assessing past performance and current financial

position and making predictions about the futureprofitability and solvency of the company as well

as evaluating the effectiveness of management


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Information is available from Published annual reports

(1) Financial statements

(2) Notes to financial statements

(3) Letters to stockholders

(4) Auditors report (Independent accountants)

(5) Managements discussion and analysis

Reports filed with the government Tax Returns

Filings with the regulators ( SEBI(India), SEC(US),

MAS(Singapore) etc


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Information is available from

Other sources

(1) Newspapers (e.g., Economic Times, FinancialExpress(India), Wall Street Journal(US), FinancialTimes(UK))

(2) Periodicals (e.g. Capital Market, Fortune etc)

(3) Financial information organizations suchas: CRISIL, CARE, ICRA, Moodys, Standard & Poors,Dun & Bradstreet, Inc., and Robert Morris Associates,CRISIL.

(4) Other business publications


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Methods of


Horizontal Analysis

Vertical Analysis

Common-Size Statements

Trend Percentages

Ratio Analysis


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Horizontal Analysis

Using comparative financial

statements to calculate dollar

or percentage changes in a

financial statement item from

one period to the next


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Vertical Analysis

For a single financial

statement, each item

is expressed as apercentage of a significant

total,

e.g., all income statement

items are expressed as a

percentage of sales


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Common-Size Statements

Financial statements that show only

percentages and no absolute dollar

amounts


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Trend Percentages

Show changes over time in

given financial statement items

(can help evaluate financial

information of several years)


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Ratio Analysis

Expression of logical relationships

between items in a financial statement

of a single period

(e.g., percentage relationship between

revenue and net income)


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Horizontal Analysis Example

The management of Amalgamated Company

provides you with comparative balance sheets of

the years ended March 31, 2009 and 2008.

Management asks you to prepare a horizontalanalysis on the information.


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AMALGAMATED CORPORATION

Comparative Balance Sheets

March 31, 2009 and 2008

2009 2008

Assets

Current assets:

Cash INR 12,000 INR 23,500Accounts receivable, net 60,000 40,000

Inventory 80,000 100,000

Prepaid expenses 3,000 1,200

Total current assets 155,000 164,700

Property and equipment:

Land 40,000 40,000

Buildings and equipment, net 120,000 85,000

Total property and equipment 160,000 125,000

Total assets INR 315,000 INR 289,700


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Calculating Change in Dollar Amounts

Dollar

Change

Current Year

Figure

Base Year

Figure=


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Calculating Change in INRmounts

Since we are measuring the amount of thechange between 2008 and 2009, the INR

amounts for 2008 become the base year

figures.

Dollar

Change

Current Year

Figure

Base Year

Figure=


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Calculating Change as a Percentage

Percentage

Change

Dollar Change

Base Year Figure100%=


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Horizontal Analysis ExampleAMALGAMATED CORPORATION


March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %

Assets

Current assets:Cash 12,000INR 23,500INR (11,500)INR

Accounts receivable, net 60,000 40,000

Inventory 80,000 100,000


Total current assets 155,000 164,700Property and equipment:

Land 40,000 40,000



Total assets 315,000INR 289,700INR

INR12,000 INR23,500 = INR(11,500)


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March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %

AssetsCurrent assets:

Cash 12,000INR 23,500INR (11,500)INR (48.9)

Accounts receivable, net 60,000 40,000

Inventory 80,000 100,000


Total current assets 155,000 164,700Property and equipment:

Land 40,000 40,000



Total assets 315,000INR 289,700INR

(INR11,500 INR23,500) 100% = 48.9%


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Horizontal Analysis ExampleAMALGAMATED CORPORATION


March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %

Assets

Current assets:Cash 12,000INR 23,500INR (INR 11,500) (48.9)

Accounts receivable, net 60,000 40,000 20,000 50.0

Inventory 80,000 100,000 (20,000) (20.0)

Prepaid expenses 3,000 1,200 1,800 150.0

Total current assets 155,000 164,700 (9,700) (5.9)Property and equipment:

Land 40,000 40,000 - 0.0

Buildings and equipment, net 120,000 85,000 35,000 41.2

Total property and equipment 160,000 125,000 35,000 28.0

Total assets 315,000INR 289,700INR INR 25,300 8.7


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Lets apply the same

procedures to the

liability and stockholders

equity sections of the

balance sheet.


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March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable INR 67,000 INR 44,000 INR 23,000 52.3

Notes payable 3,000 6,000 (3,000) (50.0)

Total current liabilities 70,000 50,000 20,000 40.0

Long-term liabilities:Bonds payable, 8% 75,000 80,000 (5,000) (6.3)

Total liabilities 145,000 130,000 15,000 11.5

Stockholders' equity:

Preferred stock 20,000 20,000 - 0.0

Common stock 60,000 60,000 - 0.0Additional paid-in capital 10,000 10,000 - 0.0

Total paid-in capital 90,000 90,000 - 0.0

Retained earnings 80,000 69,700 10,300 14.8

Total stockholders' equity 170,000 159,700 10,300 6.4

Total liabilities and stockholders' equity INR 315,000 INR 289,700 INR 25,300 8.7


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Now, lets apply the

procedures to the

income statement.


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AMALAGAMATED CORPORATION

Comparative Income StatementsFor the Years Ended March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %

Net sales INR 520,000 INR 480,000 INR 40,000 8.3

Cost of goods sold 360,000 315,000 45,000 14.3Gross margin 160,000 165,000 (5,000) (3.0)

Operating expenses 128,600 126,000 2,600 2.1

Net operating income 31,400 39,000 (7,600) (19.5)

Interest expense 6,400 7,000 (600) (8.6)

Net income before taxes 25,000 32,000 (7,000) (21.9)

Less income taxes (30%) 7,500 9,600 (2,100) (21.9)

Net income INR 17,500 INR 22,400 (INR 4,900) (21.9)


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AMALAGAMATED CORPORATION

Comparative Income Statements

For the Years Ended March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %Net sales INR 520,000 INR 480,000 INR 40,000 8.3

Cost of goods sold 360,000 315,000 45,000 14.3

Gross margin 160,000 165,000 (5,000) (3.0)


Net operating income 31,400 39,000 (7,600) (19.5)

Interest expense 6,400 7,000 (600) (8.6)




Sales increased by 8.3% while net income decreased by

21.9%.


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AMALAGAMATED CORPORATIONComparative Income Statements

For the Years Ended March 31, 2009 and 2008

Increase (Decrease)

2009 2008 Amount %

Net sales INR 520,000 INR 480,000 INR 40,000 8.3

Cost of goods sold 360,000 315,000 45,000 14.3

Gross margin 160,000 165,000 (5,000) (3.0)


Net operating income 31,400 39,000 (7,600) (19.5)Interest expense 6,400 7,000 (600) (8.6)




There were increases in both cost of goods sold (14.3%) and operating

expenses (2.1%). These increased costs more than offset the increase

in sales, yielding an overall decrease in net income.

Analysis & Interpretation

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