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BAAF 202
CHAPTER 8
INTRODUCTION TO FINANCIAL
ACCOUNTING
FINANCIAL STATEMENT ANALYSIS
SCHOOL OF ACCOUNTING AND FINANCE
FACULTY OF BUSINESS AND MANAGEMENT
PREPARED BY:
DZULKARNAIN DAHALAN
C
Slide 2 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
LEARNING OUTCOMES
At the end of this chapter, students will be able to understand :
 Ratios
 Users of Ratios
 Types of Ratios
 Investors’ Choice
 Trend Analysis
 Limitations
 Financial Reporting Standards for Accounting Policies and Other Aspects
C
Slide 3 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
 Without ratios,financial statements would be uninformative
 Ratios can be used as a basis to make decision
 A common measure (ratios formulae) is used by all companies
 An analysis can be made about the performance of different
companies by comparing the common ratios
.
THE NEED FOR RATIOS
C
Slide 4 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
USERS OF RATIOS
Ratio category Examples of interested group
Profitability Shareholders,management,employees,creditors,
competitors,potential investors
Liquidity Shareholders,suppliers,creditors,competitors
Efficiency Shareholders,potential purchasers,competitors
Shareholder Shareholders,potential investors
Capital Structure Shareholders,lenders,creditors,potential
investors
C
Slide 5 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
TYPES OF RATIOS
Profitability ratios Uses Formula
a.Return on capital
employed (ROCE)
Indicates how well capital
has been employed
Net profit X 100
Capital employed
b.Gross profit as a
percentage of sales
Indicates how much
percentage gross profit
made out of sales
Gross profit X 100
Sales
c.Net profit as a percentage
of sales
Indicates how much
percentage net profit made
out of sales
Net profit X 100
Sales
C
Slide 6 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
TYPES OF RATIOS
Liquidity ratios Uses Formula
a.Current ratio Indicates whether there
are sufficient short-term
assets to meet the short-
term liabilities
Current assets
Current liabilities
b.Acid test ratio Indicates whether the
business has sufficient
liquid resources to meet
its current liabilities
Current assets-inventory
Current Liabilities
C
Slide 7 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
TYPES OF RATIOS
Efficiency ratios Uses Formula
a.Inventory turnover Indicates how efficient a
business is at maintaining
an appropriate level of
inventory
Cost of sales X 365
Average Inventory
b.Accounts
receivable/sales ratio
Indicates money tied up
unnecessarily in accounts
receivable is unproductive
money
Accounts receivable X 365
Sales
c.Accounts
payable/purchases ratio
Indicates the length of
time to pay creditors
Accounts payable X365
Purchases (days)
C
Slide 8 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
TYPES OF RATIOS
Shareholder ratios Uses Formula
a.Earning per share
(EPS)
Gives the shareholder a
chance to compare one’s
year’s earnings with
another
Net profit after interest and
tax and preference
dividends
Number of ordinary shares
issued
b.Price/earnings ratio
(P/E)
The greater the P/E ratio
the greater the demand
for the shares
Market price per share
Earning per share
c.Dividend Cover The proportion that
ordinary dividends bear to
amount available for
distribution to ordinary
shareholders
Net profit after tax and
preference dividends
Ordinary dividends paid
and proposed
C
Slide 9 of 17
TOPIC
CHAPTER 8:FINANCIAL STATEMENT ANALYSIS
1. Financial statements show what has happened in the past,more
information needed to fully understand the present situation
2. Often businessess are not comparing like with like
LIMITATIONS OF ACCOUNTING STATEMENTS

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Bdc 101 08

  • 1. BAAF 202 CHAPTER 8 INTRODUCTION TO FINANCIAL ACCOUNTING FINANCIAL STATEMENT ANALYSIS SCHOOL OF ACCOUNTING AND FINANCE FACULTY OF BUSINESS AND MANAGEMENT PREPARED BY: DZULKARNAIN DAHALAN
  • 2. C Slide 2 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS LEARNING OUTCOMES At the end of this chapter, students will be able to understand :  Ratios  Users of Ratios  Types of Ratios  Investors’ Choice  Trend Analysis  Limitations  Financial Reporting Standards for Accounting Policies and Other Aspects
  • 3. C Slide 3 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS  Without ratios,financial statements would be uninformative  Ratios can be used as a basis to make decision  A common measure (ratios formulae) is used by all companies  An analysis can be made about the performance of different companies by comparing the common ratios . THE NEED FOR RATIOS
  • 4. C Slide 4 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS USERS OF RATIOS Ratio category Examples of interested group Profitability Shareholders,management,employees,creditors, competitors,potential investors Liquidity Shareholders,suppliers,creditors,competitors Efficiency Shareholders,potential purchasers,competitors Shareholder Shareholders,potential investors Capital Structure Shareholders,lenders,creditors,potential investors
  • 5. C Slide 5 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS TYPES OF RATIOS Profitability ratios Uses Formula a.Return on capital employed (ROCE) Indicates how well capital has been employed Net profit X 100 Capital employed b.Gross profit as a percentage of sales Indicates how much percentage gross profit made out of sales Gross profit X 100 Sales c.Net profit as a percentage of sales Indicates how much percentage net profit made out of sales Net profit X 100 Sales
  • 6. C Slide 6 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS TYPES OF RATIOS Liquidity ratios Uses Formula a.Current ratio Indicates whether there are sufficient short-term assets to meet the short- term liabilities Current assets Current liabilities b.Acid test ratio Indicates whether the business has sufficient liquid resources to meet its current liabilities Current assets-inventory Current Liabilities
  • 7. C Slide 7 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS TYPES OF RATIOS Efficiency ratios Uses Formula a.Inventory turnover Indicates how efficient a business is at maintaining an appropriate level of inventory Cost of sales X 365 Average Inventory b.Accounts receivable/sales ratio Indicates money tied up unnecessarily in accounts receivable is unproductive money Accounts receivable X 365 Sales c.Accounts payable/purchases ratio Indicates the length of time to pay creditors Accounts payable X365 Purchases (days)
  • 8. C Slide 8 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS TYPES OF RATIOS Shareholder ratios Uses Formula a.Earning per share (EPS) Gives the shareholder a chance to compare one’s year’s earnings with another Net profit after interest and tax and preference dividends Number of ordinary shares issued b.Price/earnings ratio (P/E) The greater the P/E ratio the greater the demand for the shares Market price per share Earning per share c.Dividend Cover The proportion that ordinary dividends bear to amount available for distribution to ordinary shareholders Net profit after tax and preference dividends Ordinary dividends paid and proposed
  • 9. C Slide 9 of 17 TOPIC CHAPTER 8:FINANCIAL STATEMENT ANALYSIS 1. Financial statements show what has happened in the past,more information needed to fully understand the present situation 2. Often businessess are not comparing like with like LIMITATIONS OF ACCOUNTING STATEMENTS