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2. Ratios Analysis
31,
2002,
2002
2001
Amount
Percent
Assets Current Assets: Cash Accounts receivable Inventory Prepaid Expenses $1,200 6,000 8,000 300 ---------Total current assets $15,500 ----------Property and equipment: Land Building 4,000 12,000 ----------4,000 8,500 ----------0 3,500 ---------0% 41.2% $2,350 4,000 10,000 120 ----------$16,470 ----------$(1,150)* 2000 (2000) 180 ---------(970) ---------(48.9)% 50% (20.0)% 150.0% ---------(5.9)% ---------
Liabilities and Stockholders' Equity Current liabilities: Accounts payables Accrued payables Notes payables $5,800 900 300 ---------Total current liabilities 7,000 ---------Long term liabilities: Bonds payable 8% 7,500 ---------Total long term liabilities 7,500 ---------Total Liabilities Stock holders equity: Preferred stock, 100 par, 6%, $100 liquidation value Common stock, $12 par Additional paid in capital $2,000 6,000 1,000 ---------Total paid in capital Retained earnings 9,000 8,000 ---------Total stockholders' equity 17,000 ---------Total liabilities and stockholders' equity $31,500 ===== $2,000 6,000 1,000 ---------0 0 0 --------0% 0% 0% -------$14,500 8,000 (500) (6.3)% $4,000 400 600 ---------5,000 1800 500 (300) ----------2,000 45% 125% (50%) --------40%
----------
----------
-----------
---------8,000 ---------13,000
---------(500) ---------1,500
---------6.3% ---------(11.5)%
Increase (Decrease) 2002 Sales Cost of goods sold $52,000 36,000 -----------Gross margin 16,000 -----------Operating expenses: Selling expenses Administrative expense 7,000 5,860 -----------Total operating expenses 12,860 -----------Net operating income Interest expense 3,140 640 -----------Net income before taxes Less income taxes (30%) 2,500 750 -----------Net income 1,750 6,500 6,100 -----------12,600 -----------3,900 700 -----------3,200 960 -----------2,240 500 (240) -----------260 -----------(760) (60) -----------(700) (210) -----------$ (490) ====== Dividends to preferred stockholders, $6 per share (see 7.7% (3.9)% -----------2.1% -----------(19.5)% (8.6)% -----------(21.9)% (21.9)% -----------21.9% 2001 $48,000 31,500 -----------16,500 -----------Amount $4,000 4,500 -----------(500) -----------Percent 8.3% 14.3% ----------(3.0)% ------------
Horizontal analysis of financial statements can also be carried out by computing trend percentages.
Trend Percentage:
Horizontal analysis of financial statements can also be carried out by computing trend percentages. Trend percentage states several years' financial data in terms of a base year. The base year equals 100%, with all other years stated in some percentage of this base.
2002,
Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses $ 1,200 6,000 8,000 300 -----------Total current assets 15,500 -----------Property and equipment: Land Building and equipment 4,000 12,000 -----------Total property and equipment 16,000 -----------Total assets $ 31,500 ====== 4,000 8,5000 -----------12,500 -----------$ 28,970 ====== 12.7% 38.1% -----------50.8% -----------100.0% ====== 13.8% 29.3% -----------43.1% -----------100.0% ====== $ 2,350 4,000 10,000 120 -----------16,470 -----------3.8% 19.0% 25.4% 1.0% ----------49.2% -----------8.1% 13.8% 34.5% 0.4% -----------56.9% ------------
Liabilities and Stockholders' Equity Current liabilities: Accounts payable Accrued payable Notes payable, short term $ 5,800 900 300 $ 4,000 400 600 18.4% 2.9% 1.0% 13.8% 1.4% 2.1%
*Each
asset in common size statement is expressed in terms of total assets, and each liability and equity account is expressed in terms of total liabilities and stockholders' equity. For example, the percentage figure above for cash in 2002 is computed as follows: [$1,200 / $31,500 = 3.8%]
Notice from the above example that placing all assets in common size form clearly shows the relative importance of the current assets as compared to the non-current assets. It also shows that the significant changes have taken place in the composition of the current assets over the last year. Notice, for example, that the receivables have increased in relative importance and that both cash and inventory have declined in relative importance. Judging from the sharp increase in receivables, the deterioration in cash position may be a result of inability to collect from customers. 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.
and
statement 2001
Common-Size Percentage 2002 Sales Cost of goods sold $52,000 36,000 -----------Gross margin 16,000 -----------Operating expenses: Selling expenses Administrative expense 7,000 5,860 -----------Total operating expenses 12,860 -----------Net operating income Interest expense 3,140 640 -----------Net income before taxes Income tax (30%) 2,500 750 -----------Net income $ 1,750 ====== 6,500 6,100 -----------12,600 -----------3,900 700 -----------3,200 960 -----------$2,240 ====== 13.5% 11.3% -----------24.7% -----------6% 1.2% -----------4.8% 1.4% -----------3.4% ====== 13.5% 12.7% -----------26.2% -----------8.1% 1.5% -----------6.7% 2.0% -----------4.7% ====== 2001 $48,000 31,500 -----------16,500 -----------2002 100.0% 69.2% -----------30.8% -----------2001 100.0% 65.6% -----------34.4% ------------
*Note
that the percentage figures for each year are expressed in terms of total sales for the year. For example, the percentage figure for cost of goods sold in 2002 is computed as follows: [($36,000 / $52,000) 100 = 69.2%]
By placing all items on the income statement in common size in terms of sales, it is possible to see at a glance how each dollar of sales is distributed among the various
2. Ratios Analysis:
Accounting Ratios Definition, Advantages, Classification and Limitations: The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another.
Profitability Ratios:
Profitability ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most popular profitability ratios are as under: Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) Ratio Dividend yield ratio
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Liquidity Ratios:
Liquidity ratios measure the short term solvency of financial position of a firm. These ratios are calculated to comment upon the short term paying capacity of a concern or the firm's ability to meet its current obligations. Following are the most important liquidity ratios. Current ratio Liquid / Acid test / Quick ratio
Activity Ratios:
Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. Following are the most important activity ratios: Inventory / Stock turnover ratio Debtors / Receivables turnover ratio Average collection period Creditors / Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading
Financial-Accounting- Ratios Formulas: A collection of financial ratios formulas which can help you calculate financial ratios in a given problem. Limitations of Financial Statement Analysis: Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios..
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