FINANCIAL STATEMENT ANALYSIS

Ioan Alin Nistor

Faculty of Business

Overview
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 Financial statements
 Reports
 BalanceSheet
 IncomeStatement
 Statement of Retained Earnings

 Statement of Cash Flows

 Financial Ratios
 IFRS

Annual report
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 Annual report – four basic financial statements

 BalanceSheet
 IncomeStatement
 Statement of Retained Earnings

 Statement of Cash Flows

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 Financial staff’s responsibilities
4
 Forecasting and planning
 Major investment and financing decision
 Coordination and control
 Dealing with financial markets
 Risk management
Balance sheet
5
 ASSETS
 Cash
 Marketable securities
 Accounts receivable
 Inventory
 Total current assets
 Fixed assets (property, plant,
equipment, intangible assets)
 TOTAL ASSETS
Balance sheet
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 ASSETS
 Cash
 Marketable securities
 Accounts receivable
 Inventory
 Total current assets
 Fixed assets (property, plant,
equipment, intangible assets)
 TOTAL ASSETS
 LIABILITIES & EQUITY
 Accounts payable
 Notes payable
 Accruals
 Total current liabilities
 Long term bonds
 Total Liabilities
 Stock (preferred, common)
 Retained earnings
 Total equity
 TOTAL LIABILITIES AND EQUITY
 LIABILITIES & EQUITY
 Accounts payable
 Notes payable
 Accruals
 Total current liabilities
 Long term bonds
 Total Liabilities
 Stock (preferred, common)
 Retained earnings
 Total equity
 TOTAL LIABILITIES AND EQUITY
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 Balance sheet
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 ASSETS  LIABILITIES & EQUITY

 Cash 15  Accounts payable 45

 Marketable securities 5  Notes payable 125
 Accounts receivable 265  Accruals 130
 Inventory 575  Total current liabilities 300
 Total current assets 860  Long term bonds 250
 Total Liabilities 550
 Fixed assets (property, plant,
equipment, intangible assets)  Stock (preferred, common) 1000
 1140  Retained earnings 450
 Total equity 1450

 TOTAL ASSETS 2000  TOTAL LIABILITIES AND EQUITY

 2000

Income statement
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 Net sales  3000

 Costs excluding depreciation  2650
 Depreciation  183
 Total operating costs  2833
 Earnings before interest and  167
taxes (EBIT)
 Less interest  30
 Earning before taxes (EBT)  137
 Taxes  22
 Net income  115

Statement of Cash-flow
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 OPERATING ACTIVITIES (+ or -)
 Operating activities
 Depreciation and amortization
 Changes in other accounts affecting operations:
 (Increase)/decrease in accounts receivable
 (Increase)/decrease in inventories
 Increase/(decrease) in accounts payable
 Net cash provided by operating activities
 LONG-TERM INVESTING ACTIVITIES (+ or -)
 Capital expenditures
 Investments in subsidiary
 Proceeds from sales of investments
 FINANCING ACTIVITIES (+ or -)
 Increase in notes payable
 Payments of long-term debt
 Increase in bonds

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 Statement of Retained Earnings
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 Balance of retained earnings at Dec.  525

31, 2010
 Add: Net income, 2011  75
 Less: Dividends to common stockholders
 35
 Balance of retained earnings at Dec.
 565
31, 2011

Analysis of Financial Statements – Ratios

Analysis
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 Liquidity Analysis Ratios

 Asset Management Ratios
 Debt Management Ratios
 Profitability Ratios

Ratios Analysis –
Liquidity Analysis Ratios
12

Current assets
 Current ratio 
Current liabilities

Current assets  Inventories

Quick , or acid test 
Current liabilities

Current assets Industry Comment

Current ratio  860/ 300 2.87 Average
Current liabilitie s
Current assets  Inventories (860 - 575) Industry Comment
Quick , or acid test  /300 0.95 Average
Current liabilitie s

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 Ratios Analysis –
Asset Management Ratios
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Sales
Inventory turnover 
Inventorie s

Sales
Fixed assets turnover 
Net fixed assets

Sales
Total assets turnover 
Total assets

Re ceivables
Days sales outs tan ding 
Annual sales / 360

Ratios Analysis –
Asset Management Ratios
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Sales 3000/575 5.21 Industry Comment

Inventory turnover  Average
Inventories

Sales 3000/1140 2.63 Industry Comment

Fixed assets turnover  Average
Net fixed assets

Sales 3000/2000 1.5 Industry Comment

Total assets turnover Average
Total assets

Re ceivables Industry Comment

Days sales outs tan ding  265/ 32 Average
Annual sales / 360
(3000/360) days

Ratios Analysis –
Debt Management Ratios
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Total debt
Total debt to total assets 
Total assets

Total debt 550/2000 27.5 Industry Comment

Total debt to total assets  % Average
Total assets

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 Ratios Analysis –
Profitability Ratios
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Netincome
Return on total assets(ROA) 
Totalassets

Net income
Return on equity(ROE) 
Common equity

Net income
Pr ofitm argin on sales
Sales

Ratios Analysis –
Profitability Ratios
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Net income 115/2000 5.75 Industry Comment

Re turn on total assets ( ROA)  % Average
Total assets

Net income 115/1450 7.9% Industry Comment

Re turn on equity ( ROE)  Average
Common equity

Net income 115/3000 3.83 Industry Comment

Pr ofit m arg in on sales  % Average
Sales

Ratios Analysis –
Du Pont Chart
18

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 IFRS - International Financial Reporting
Standards
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 Why ?
 Improve functionality of capital markets by
providing better information to investors and users
of financial statements.
 Decrease the costs of preparing and interpreting
financial statements
 Supports raising capital overseas
 Understand the financial statements of overseas
companies (suppliers, customers, subsidiaries)

IFRS - International Financial Reporting

Standards
20

 “If you were to look back from the year 2020 to

the year 2001 you would say ‘What chaos!’ and
‘What inefficient capital markets!’ People will look
back and say, ‘How did those people get along
then?’ It will be like we now say, ‘How did people
get along without cell phones?’ When you are in the
middle of it, it is always difficult. It is important just
to keep on towards that end goal.” Robert Herz Chairman
FASB

IFRS - International Financial Reporting

Standards
21

The Journal of the IASB and the IASC Foundation, Insight