The document provides examples of how to calculate various financial ratios used in analyzing financial statements. It includes calculations for current and quick ratios, average accounts receivable and related turnover ratios, inventory turnover ratios, times interest earned ratio, debt and debt to equity ratios, return on sales, return on assets, earnings per share, price earnings ratio, dividend yield, and dividend payout ratio. The document demonstrates how to perform the calculations using financial data from sample company income statements and balance sheets.

1. Financial Statement
Analysis
COST
ACCOUNTING
Advanced Cost Accounting2@diu.edu.bd

2. Match Definitions
Common
-Size
Analysis
Horizontal
Analysis
Expresses a line item amount as a % of
some prior-period amount
Expresses all the other items of a
financial statement as a % of one item
Ratio
Analysis
Vertical
Analysis
Fractions or percentages computed by
dividing one account or line-item by
another
Comparing two financial statements by
converting to percentages so size
differences in companies is not an
issue

3. How to prepare common-size
income statements using base
period: horizontal analysis.
SiimSiim Company income statements for third and
forth years of operation:
Year 3 Year 4
Net sales $132,000 $144,000
Less: COGS (81,000) (85,000)
Gross margin $51,000 $59,000
Less:
Operating exp. (29,000) (35,000)
Income taxes (10,000) (11,000)
Net income $12,000 $13,000
REQUIRED: Prepare common-size statement for
year four using year three as the base.
1

4. How to prepare common-size
income statements using base
period: horizontal analysis.
Calculation: Year 3 is the base year. Therefore, every
dollar amount in year 3 is 100% of itself.
Year 3 Year 4
Dollars % Dollars %
Net sales $132,000 100% $144,000 109.1%
Less: COGS (81,000) 100% (85,000) 104.9%
Gross margin $51,000 100% $59,000 115.7%
Less:
Operating exp. (29,000) 100% (35,000) 120.7%
Income taxes (10,000) 100% (11,000) 110.0%
Net income $12,000 100% $13,000 108.3%
1

5. How to prepare common-size
income statements using net sales
as the base: vertical analysis.
SiimSiim Company income statements for third and
forth years of operation:
Year 3 Year 4
Net sales $132,000 $144,000
Less: COGS (81,000) (85,000)
Gross margin $51,000 $59,000
Less:
Operating exp. (29,000) (35,000)
Income taxes (10,000) (11,000)
Net income $12,000 $13,000
REQUIRED: Prepare common-size statement for
year four using net sales as the base.
2

6. How to prepare common-size
income statements using net sales
as the base: vertical analysis.
Calculation: Since the analysis is based on net sales, net
sales in each year equals 100% of itself. Then, every line-
item on the income statement is figured as a percent of that
year’s net sales.
Year 3 Year 4
Dollars % Dollars %
Net sales $132,000 100.0% $144,000 100.0%
Less: COGS (81,000) 61.4% (85,000) 59.0%
Gross margin $51,000 38.6% $59,000 41.0%
Less:
Operating exp. (29,000) 22.0% (35,000) 24.3%
Income taxes (10,000) 7.6% (11,000) 7.6%
Net income $12,000 9.1% $13,000 9.0%
2

7. Discuss Ratio Analysis
◙ Ratios alone are meaningless, they need
to be compared to some standard.
◙ One way to use them is to compare a
ratio to a value over time.
◙ There are many industrial averages
available through various publications.
◙ Ratios are classified into three categories:
liquidity, leverage and profitability
ratios.

8. Match Definitions
Liquidity
Ratios
Leverage
Ratios
Measures the earning ability
of a company
The ability of a company to
meet its current obligations
Profitability
Ratios
The ability of a company to
meet its long- and short-term
obligations

9. How to calculate the current and
the quick (or acid-test) ratios.
Deshbashito Company had current assets of $160,000, $20,000
were cash, $15,000 were marketable securities, $35,000
were receivables and the rest were inventories. Current
liabilities were $57,000.
REQUIRED:
1. Calculate the current ratio.
2. Calculate the quick ratio (acid-test).
Calculation:
1. Current ratio = Current assets / Current liabilities
= $160,000 / $57,000 = 2.81
2. Quick ratio = (Cash + Marketable securities
+ receivables) / Current liabilities
= ($20,000 +$15,000 + $35,000) / $57,000 = 1.23
3

10. How to calculate the average accounts
receivable (A/R) the A/R turnover
ratio, the A/R turnover in days.
Last year Peepers, Corp., had net sales of
$1,000,000 and cost of goods sold of $420,000.
Buttons reported the following balances
January 1 December 31
A/R $150,000 $170,000
Inventories $75,000 $95,000
REQUIRED:
1. Calculate the average A/R.
2. Calculate the A/R turnover ratio.
3. Calculate the A/R in days.
4

11. Calculation:
1. Average accounts receivable = (Beginning
receivables + Ending receivable) / 2
= ($150,000 + $170,000) / 2 = $160,000
2. Accounts receivable turnover ratio = Net
sales / Average accounts receivable =
= $1,000,000 / $160,000 = 6.25
3. Accounts receivable in days = 365 / A/R
turnover ratio
= 365 / 6.25 = 58.4 days
How to calculate the average accounts
receivable (A/R) the A/R turnover ratio,
the A/R turnover in days.
4

12. How to calculate the average inventory
the inventory turnover ratio, the
inventory turnover in days.
Last year Uncles, Inc., had net sales of $1,000,000
and cost of goods sold of $420,000. Buttons
reported the following balances
January 1 December 31
A/R $150,000 $170,000
Inventories $75,000 $95,000
REQUIRED:
1. Calculate the average inventory.
2. Calculate the inventory turnover ratio.
3. Calculate the inventory in days.
5

13. Calculation:
1. Average inventory = (Beginning inventory +
Ending inventory) / 2
= ($75,000 + $95,000) / 2 = $85,000
2. Inventory turnover ratio = Cost of goods
sold / Average inventory =
= $420,000 / $85,000 = 4.94
3. Inventory in days = 365 / Inventory turnover
ratio = 365 / 4.94 = 73.9 days
5
How to calculate the average inventory
the inventory turnover ratio, the
inventory turnover in days.

14. How to calculate the times-
interest-earned ratio.
The Albis Company provided the following
income statement for the prior year:
Sales $1,100,000
Cost of goods sold 500,000
Gross margin $600,000
Operating expenses 300,000
Operating income $300,000
Interest expense 25,000
Net income before taxes $275,000
Income taxes 110,000
Net Income $165,000
6

15. How to calculate the times-
interest-earned ratio.
REQUIRED: Calculate the
times-interest-earned
ratio.
Calculation:
Times-interest-earned =
(Income before taxes +
Interest expense) /
Interest expense
= ($275,000 + $25,000) /
$25,000 = 12
6

16. How to calculate the debt ratio
and the debt to equity ratio.
The AShes Company’s balance sheet showed total
liabilities of $600,000, total stockholders’ equity of
$450,000, and total assets of $900,000.
REQUIRED:
1. Calculate the debt ratio for the Jewell Company.
2. Calculate the debt to equity ratio for the Jewell
Company.
Calculation:
1. Debt ratio = Total liabilities / Total Assets
= $600,000 / $900,000 = 66.67%
2. Debt to equity ratio = Total liabilities / Total
stockholders’ equity = $600,000 / $450,000 = 1.33
7

17. The Albis Company provided the following
income statement for the prior year:
Sales $1,100,000
Cost of goods sold 500,000
Gross margin $600,000
Operating expenses 300,000
Operating income $300,000
Interest expense 25,000
Net income before taxes $275,000
Income taxes 110,000
Net Income $165,000
How to calculate the return
on sales.8

18. REQUIRED: Calculation the return on
sales.
Calculation:
Return on sales = Net income / Sales
= $165,000 / $1,100,000 = .15

19. How to calculate the average total
assets and the return on assets.
Buttons, Inc., had net sales of $1,000,000 and cost of goods
sold of $420,000 and net income 100,000. Buttons reported
the following balances
January 1 December 31
Total Assets $400,000 $600,000
Required:
1. Calculate the return on total assets.
Calculation:
1. Average total assets = ($400,000 + $600,000) / 2 = 500,000
2. Return on total assets
= $100,000 /$500,000 = 0.20 or 20%
9

20. How to calculate the average common
stockholders’ equity and return on
stockholders’ equity.
Buttons, Inc., had net sales of $1,000,000 and COGS
$480,000 and operating expenses of $220,000.
Buttons reported the following balances
January 1 December 31
Equity $150,000 $170,000
REQUIRED:
1. Calculate the net profit margin percentage.
2. Calculate the Gross profit margin.
3. Calculate the return on stockholders’ equity.
10

21. Calculation:
1. Net profit margin percentage = (Net income/
Net sales)= ($5,20,000/10,00,000)=52%
2. Gross profit margin= ($300,000/
1000,000)=0.30%
3. Return on stockholders’ equity = Net income/
Average total stock holders equity)
={$5,20,000/($150,000+170,000)/2}
=3.25

22. How to compute earnings
per share.
Company had current assets of $160,000, $20,000 were cash,
$15,000 were marketable securities, $35,000 were
receivables and the rest were inventories. Current
liabilities were $57,000.
Last year Buttons, Inc., had net sales of $1,000,000 and cost of
goods sold of $420,000. Buttons reported the following
balances
January 1 December 31
A/R $150,000 $170,000
Inventories $75,000 $95,000
11

23. REQUIRED:
1. Compute the dollar amount of preferred dividends.
2. Compute the number of common shares.
3. Compute the earning per share for Payne Company.
Calculation:
1. Preferred dividends = $3,200,000 x .07 = $224,000
2. Number of common shares = $1,600,000 / $2 = 800,000
shares
3. Earnings per share = ($2,300,000 - $224,000) / 800,000
= $2,076,000 / 800,000 = $2.60

24. How to compute the price-
earnings ratio.
Assume the price per share for Payne
Company is $16.
REQUIRED: Compute the price-earnings
ratio.
Calculation:
Price-earnings ratio = $16 / $2.60 =
= 6.1538 or 6.2
12

25. How to compute the dividend
yield and dividend payout ratio.
Company had common stock 800,000share @ TK 1 and
endings retained earnings 700,000 .Company net income
1,000,000 . Dividend declared 600,000
Assume that the market price per common share is $16.
REQUIRED:
1. Compute the Earning per share.
2. Compute the Price earning ratio.
3. Compute the dividend yield.
4. Compute the dividend payout ratio.
5. Compute the book value per share.
13

26. Calculation:
Dividend per share=600,000/800,000)=0.75
1. Earning per share = $1,000,000 / 800,000 = $1.25
2. Price earning ratio= $16 / $1.25 = 12.8
3. Dividend yield = $1.25 / $16 = 0.7813 or 7.81%
4. Dividend payout ratio = $0.75/$1.25= 0.6 or 60%
5. Book value per share=
(800,000+1700,000)/800,000shares=$3.125

27. Match Ratio to Formula
Return on
Sales
Return on
Total Assets
Operating income after taxes /
Average total assets
Earnings per
Share
Price-Earnings
Ratio
Net income / Sales
Dividends per common share /
Market price per common share
Dividend Yield
Return on
Stockholders’
Equity (Net income – Preferred
dividends) / Average stockholders’
(Net income – Preferred dividends)
/ Average common shares
Market price per share / Earning
per share