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Assets Amount Amount
Current Assets
Plant, Property and Equipment
Investment
Intangible assets
Total Assets
+++
+++
+++
+++
+++
Liabilities
Current liabilities
Non-current liabilities
Total liabilities
Owners’ Equity:
Contributed capital
Retained earning
Total Owners’ Equity
Total Owners’ Equity and Liabilities
+++
+++
+++
+++
+++
+++
+++
………..Company
Balance Sheet
For the year ended……………….

Horizontal Analysis
What is horizontal
analysis?

Horizontal Analysis
It’s an analysis of the percentage
increases and decreases of related
items in comparative financial
statements.

LINCOLN COMPANY
COMPARATIVE BALANCE SHEET
DECEMBER 31, 2006 AND 2005
Assets
Current assets Rs 550,000 Rs 533,000 Rs 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets 1,139,500 1,230,500 (91,000) (7.4%)
Liabilities
Current liabilities 210,000 243,000 (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
Total liabilities 310,000 443,000 (133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, Rs 100 par 150,000 150,000 —
Common stock, Rs 10 par 500,000 500,000 —
Retained earnings 179,500 137,500 42,000 30.5%
Total stockholders’ equity 829,500 787,500 42,000 5.3%
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4%)
2006 2005 Amount Percent
Increase (Decrease)

Assets
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Total assets Rs 1,139,500 Rs 1,230,500 Rs (91,000) (7.4%)
Liabilities
Current liabilities Rs 210,000 Rs 243,000 Rs (33,000) (13.6%)
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4%)
Horizontal Analysis:
LINCOLN COMPANY
Difference Rs 17,000
Base year (2005)Rs 533,000
= 3.2%
Increase (Decrease)

Assets
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Total assets Rs 1,139,500 Rs 1,230,500 Rs (91,000) (7.4%)
Liabilities
Total liabilities Rs 310,000 Rs 443,000 Rs (133,000) (30.0%)
Preferred stock, Rs 100 par 150,000 150,000 —
Common stock, Rs10 par 500,000 500,000 —
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4%)
Difference Rs (82,500)
Base year (2005)Rs 177,500
= (46.5%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Increase (Decrease)

Assets
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Total assets 1,139,500 1,230,500 (91,000) (7.4%)
Liabilities
Total liabilities Rs 310,000 Rs 443,000 Rs (133,000) (30.0%)
Preferred 6% stock, Rs 100 parRs 150,000Rs 150,000 —
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4%)
Difference ?
Base year (2005) ?
= ?
Lincoln Company
Increase (Decrease)
Okay, go to the next slide
and calculate the
percentage change for fixed
assets.

Assets
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Total assets 1,139,500 1,230,500 (91,000) (7.4%)
Liabilities
Current liabilities 210,000 243,000 (33,000) (13.6%)
Total liab. & SE 1,139,500 1230,500 (91,000) (7.4%)
Lincoln Company
(5.4%)
Increase (Decrease)

Sales Rs 1,530,500 Rs 1,234,000 Rs 296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales Rs 1,498,000 Rs 1,200,000 Rs 298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit Rs 455,000 Rs 380,000 Rs 75,000 19.7%
Selling expenses Rs 191,000 Rs 147,000 Rs 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses Rs 295,000 Rs 244,400 Rs 50,600 20.7%
Operating income Rs 160,000 Rs 135,600 Rs 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
Rs 168,500 Rs 146,600 Rs 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax Rs 162,500 Rs 134,600 Rs 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income Rs 91,000 Rs 76,500 Rs 14,500 19.0%
LINCOLN COMPANY
COMPARATIVE INCOME STATEMENT
Increase (Decrease)
Income Statement

Sales Rs 1,530,500 Rs 1,234,000 Rs 296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales Rs 1,498,000 Rs 1,200,000 Rs 298,000 24.8%
Administrative expenses 104,000 97,400 6,600 6.8% Total
operating expenses Rs 295,000 Rs 244,400 Rs 50,600 20.7%
Other income 8,500 11,000 (2,500) (22.7%)
Rs 168,500 Rs 146,600 Rs 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income tax 71,500 58,100 13,400 23.1%
Increase amountRs 296,500
Base year (2005) Rs
1,234,000
= 24.0%
24.0%
Lincoln Company
Comparative Income Statement
Increase (Decrease)

Sales Rs 1,530,500 Rs 1,234,000 Rs 296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales Rs 1,498,000 Rs 1,200,000 Rs 298,000 24.8%
Administrative expenses 104,000 97,400 6,600 6.8% Total
operating expenses Rs 295,000 Rs 244,400 Rs 50,600 20.7%
Other income 8,500 11,000 (2,500) (22.7%)
Rs 168,500 Rs 146,600 Rs 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income tax 71,500 58,100 13,400 23.1%
Increase amountRs 298,000
Base year (2005) Rs
1,200,000
= 24.8%
24.8%
Lincoln Company
Increase (Decrease)

2017 2018
Sales 200,000 300,000
Less: Cost of goods sold 120,000 200,000
Gross profit 80,000 100,000
Less: Operating expenses 25,000 40,000
Operating income 55,000 60,000
Less: Interest Expense 15,000 10,000
Net income before tax 40,000 50,000
Less: Tax Expense 10,000 12,000
Net income after tax 30,000 38,000
Problem 1: Horizontal Analysis
Income statements for Star Company for 2017 and 2018 follow:
Required: Perform a horizontal analysis, showing the percentage change in each
income statement component between 2017 and 2018.

Vertical Analysis
A percentage analysis can be
used to show the relationship of
each component to a total
within a single statement.

The total, or 100% item,
on the balance sheet is
“total assets.”
Vertical Analysis

LINCOLN COMPANY
Assets
Current assets Rs 550,000 48.3% Rs 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1
Total assets Rs 1,139,500 100.0% Rs 1,230,500 100.0%
Liabilities
Current liabilities Rs 210,000 18.4% Rs 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities Rs 310,000 27.2% Rs 443,000 36.0%
Preferred stock, 6%, Rs 100 par Rs 150,000 13.2% Rs 150,000 12.2%
Common stock, Rs 10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity Rs 829,500 72.8% Rs 787,500 64.0%
Total liab. & SE Rs 1,139,500 100.0% Rs 1,230,500 100.0%
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Vertical Analysis:
Current assets Rs 550,000
Total assets Rs 1,139,500
= 48.3%
48.3%
Balance
Sheet

Lincoln Company
Assets
Liabilities
Preferred 6% stock, Rs 100 parRs 150,000 13.2% Rs 150,000 12.2%
Vertical Analysis:
Current assets Rs 533,000
Total assets Rs 1,230,500
= 43.3%
43.3%

Lincoln Company
Assets
Liabilities
Preferred 6% stock, Rs 100 parRs 150,000 13.2% Rs 150,000 12.2%

Sales Rs 1,530,500 102.2% Rs 1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales Rs 1,498,000 100.0%Rs 1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit Rs 455,000 30.4% Rs 380,000 31.7%
Selling expenses Rs 191,000 12.8% Rs 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses Rs 295,000 19.7% Rs 244,400 20.4%
Income from operations Rs 160,000 10.7 Rs 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
Rs 168,500 11.3% Rs 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax Rs 162,500 10.9% Rs 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income Rs 91,000 6.1% Rs 76,500 6.4%
2006 2005
Net sales
is 100.0%
Lincoln Company
For the Years Ended December 31, 2006 and 2005
Income
Statement

Lincoln Company
Sales Rs 1,530,500 102.2% Rs 1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales Rs 1,498,000 100.0%Rs 1,200,000 100.0%
Other income 8,500 0.6 11,000 0.9
Rs 168,500 11.3% Rs 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Net income Rs 91,000 6.1% Rs 76,500 6.4%
2006 2005
Vertical Analysis:
Selling expenses Rs 191,000
Net sales Rs 1,498,000
= 12.8%
12.8%

Sales Rs 1,530,500 102.2% Rs 1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales Rs 1,498,000 100.0%Rs 1,200,000 100.0%
Other income 8,500 0.6 11,000 0.9
Rs 168,500 11.3% Rs 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Net income Rs 91,000 6.1% Rs 76,500 6.4%
2006 2005
Lincoln Company

Common Size Statements
Vertical analysis with both Rs and
percentage amounts is also useful in
comparing one company with another or
with industry averages. Such
comparisons are easier to make with the
use of common-size statements in
which all items are expressed in
percentages.

Solvency Analysis
 Solvency is the ability of a business to meet its
financial obligations (debts) as they are due.
 Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its current
and noncurrent liabilities.
 This ability is normally assessed by examining
balance sheet relationships.

Sales revenue 4,000
Less: Cost of goods sold
Beginning inventory of raw material 500
Purchases of raw material 1,000
Carriage in purchases 50
Ending inventory of raw material (600) 950
Direct labour 1,500
Supplies and stocks 150
Manufacturing overhead cost 400
Total cost of goods sold 3,000
Gross margin 1,000
Less: Operating expenses 600
Operating income 400
Add: Non-operating income 50
Net income before tax 450
Average number of employee 30
Investment in fixed assets (in '000) 2400
4. The income statement and other related data have been given below:
Required: a. Sales per employee. b. Net added value per employee.
c.Labour equipment ratio. d. Wage distribution ratio. e. Wage base.
f. Decision regarding over all productivity of labour.

Particulars Amount
Net sales revenue ×××
Add: Ending inventory ×××
Less: Beginning inventory (×××)
Value of output
Add: Other income
(Dividend received, interest received, rent received etc.)
×××
×××
Less: Cost of bought in materials and services
(All expenses except expenses related to employees,
capital providers, government, and re-investment) (×××)
Net Value Added ×××

Applied as follows (conversion cost)
1. Paid to employees
(Wages, salaries, pension, bonus to employees, fringe
benefits, allowance provident fund,
Directors remuneration, gratuity, overtime wages)
xxx
2. Paid to government
(Income tax, property or wealth tax, corporate tax)
xxx
3. Paid to providers of capital
(Interest on loan & debenture, dividend paid to
shareholders)
xxx
4. Paid for maintenance & expansion of assets
(Deprecation on fixed assets, Intangible assets written
off or amortization, loss on sale of fixed assets,
transfer to general reserve & sinking fund, retain
earnings (NPAT)
xxx
xxx
Net Value Added xxx

Current Position Analysis
Current assets Rs 550,000 Rs 533,000
Current liabilities 210,000 243,000
Working capital Rs 340,000 Rs 290,000
Current ratio 2.6 2.2
Working Capital and Current Ratio
Use: To indicate the ability to meet
currently maturing obligations.
2006 2005
Divide
current
assets by
current
liabilities

Quick Ratio
Use: To indicate instant debt-paying ability.
2006 2005
Quick assets:
Cash Rs 90,500 Rs 64,700
Marketable securities 75,000 60,000
Accounts receivable (net) 115,000 120,000
Total Rs 280,500 Rs 244,700
Current liabilities Rs 210,000 Rs 243,000
Quick ratio 1.3 1.0
Current Position Analysis

Accounts Receivable Turnover
Net sales on account Rs 1,498,000 Rs 1,200,000
Accounts receivable (net):
Beginning of year Rs 120,000 Rs 140,000
End of year 115,500 120,000
Total Rs 235,000 Rs 260,000
Average (Total ÷ 2) Rs 117,500 Rs 130,000
2006 2005
Accounts Receivable Analysis
Net sales on account
Average accounts
receivable

Use: To assess the efficiency in collecting
receivables and in the management of credit.
Accounts receivable (net):
End of year 115,500 120,000
Total Rs 235,000 Rs 260,000
Average Rs 117,500 Rs 130,000
Accounts receivable turnover 12.7 9.2
2006 2005
Accounts Receivable Turnover

Number of Days’ Sales in Receivables
Accounts receivable (net),
end of year Rs 115,000 Rs 120,000
Average daily sales on
account (sales ÷ 365) Rs 4,104 Rs 3,288
2006 2005
Accounts receivable, end of year
Average daily sales on account

Number of Days’ Sales in Receivables
Use: To assess the efficiency in collecting
receivables and in the management of credit.
Number of days’ sales in
receivables 28.0 36.5
Accounts receivable (net),
end of year Rs 115,000 Rs 120,000
Average daily sales on
account (sales ÷ 365) Rs 4,104 Rs 3,288
2006 2005

Inventory Turnover
2006 2005
Cost of goods sold Rs 1,043,000 Rs 820,000
Inventories:
End of year 264,000 283,000
Total Rs 547,000 Rs 594,000
Inventory Analysis
Cost of goods sold
Average inventory
Inventory turnover =

Inventory Turnover
Use: To assess the efficiency in the
management of inventory.
2006 2005
Inventories:
End of year 264,000 283,000
Total Rs 547,000 Rs 594,000
Inventory turnover 3.8 2.8
Inventory Analysis

Number of Days’ Sales in Inventory
2006 2005
Inventories, end of year Rs 264,000 Rs 283,000
Average daily cost of
goods sold
(COGS ÷ 365) Rs 2,858 Rs 2,247
Inventory Analysis
Inventories, end of year
Average daily cost of goods sold
Number of
Days’ Sales
in Inventory
=

Number of Days’ Sales in Inventory
Use:To assess the efficiency in the
management of inventory.
Inventories, end of year Rs 264,000 Rs 283,000
Average daily cost of
goods sold
(COGS ÷ 365) Rs 2,858 Rs 2,247
Number of days’ sales
in inventory 92.4 125.9
Inventory Analysis
2006 2005

Use: To indicate the margin of safety
to long-term creditors.
2006 2005
Fixed assets (net) Rs 444,500 Rs 470,000
Long-term liabilities Rs 100,000 Rs 200,000
Ratio of fixed assets to
long-term liabilities 4.4 2.4
Ratio of Fixed Assets to Long-Term Liabilities
Long-Term Creditors

Ratio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to
creditors.
Total liabilities Rs 310,000 Rs 443,000
Total stockholders’ equity Rs 829,500 Rs 787,500
Ratio of liabilities to
stockholders’ equity 0.37 0.56
Long-Term Creditors
2006 2005

Number of Times Interest Charges Earned
2006 2005
Income before income tax Rs 900,000Rs 800,000
Add interest expense 300,000 250,000
Amount available for interest Rs 1,200,000Rs 1,050,000
Long-Term Creditors
Income before
income tax + interest expense
Interest expense
Number of
Times Interest
Charges Earned
=

Number of Times Interest Charges Earned
Use: To assess the risk to debtholders in
terms of number of times interest
charges were earned.
2006 2005
Income before income tax Rs 900,000Rs 800,000
Add interest expense 300,000 250,000
Amount available for interest Rs 1,200,000Rs 1,050,000
Number of times earned 4.0 4.2
Long-Term Creditors

PROFITABILITY ANALYSIS
 Profitability is the ability of an entity to
earn profits.
 This ability to earn profits depends on the
effectiveness and efficiency of operations
as well as resources available.
 Profitability analysis focuses primarily on
the relationship between operating results
reported in the income statement and
resources reported in the balance sheet.

Ratio of Net Sales to Assets
2006 2005
Net sales Rs 1,498,000 Rs 1,200,000
Total assets:
Beginning of year Rs 1,053,000 Rs 1,010,000
End of year 1,044,500 1,053,000
Total Rs 2,097,500 Rs 2,063,000
Average (Total ÷ 2) Rs 1,048,750 Rs 1,031,500
The Common Stockholder
Excludes long-term investments

Use: To assess the effectiveness of
the use of assets.
Ratio of net sales to assets 1.4 1.2
Ratio of Net Sales to Assets
2006 2005
Net sales Rs 1,498,000 Rs 1,200,000
Total assets:
End of year 1,044,500 1,053,000
Total Rs 2,097,500 Rs 2,063,000

Rate Earned on Total Assets
Use: To assess the profitability of the assets.
2006 2005
Rate earned on total assets 8.2% 7.3%
Net income Rs 91,000 Rs 76,500
Plus interest expense 6,000 12,000
Total Rs 97,000 Rs 88,500
Total assets:
End of year 1,139,500 1,230,500
Total Rs 2,370,000 Rs 2,418,000

Rate Earned on Stockholders’ Equity
Use: To assess the profitability of the
investment by stockholders.
Rate earned on stockholders’
equity 11.3% 10.0%
Stockholders’ equity:
End of year 829,500 787,500
Total Rs 1,617,000 Rs 1,537,500
2006 2005

LEVERAGE
10%
5%
0%
Rate earned
on total
assets
Rate earned on
stockholders’
equity
8.2%
11.3%
Leverage
3.1%
2006
7.3%
10.0%
Leverage
2.7%
2005

Rate Earned on Common Stockholders’ Equity
2006 2005
Less preferred dividends 9,000 9,000
Remainder—common stock Rs 82,000 Rs 67,500
Common stockholders’ equity:
End of year 679,500 637,500
Total Rs 1,317,000 Rs 1,237,500

investment by common stockholders.
2006 2005
Rate earned on common
stockholders’ equity 12.5% 10.9%
Common stockholders’ equity:
End of year 679,500 637,500
Total Rs 1,317,000 Rs 1,237,500
Rate Earned on Common Stockholders’ Equity

Earnings Per Share on Common Stock
2006 2005
Earnings per share on common stock Rs 1.64 Rs 1.35
Shares of common stock 50,000 50,000
investment by common stockholders.

Price-Earnings Ratio
Use: To indicate future earnings
prospects, based on the relationship
between market value of common
stock and earnings.
2006 2005
Price-earnings ratio on common stock 25 20
Market price per share of common Rs 41.00 Rs 27.00
Earnings per share on common ÷ 1.64 ÷ 1.35

Dividends and Earnings Per Share
Dividends Earnings
Rs
0.80
Rs
1.64
2006
Rs
0.60
Rs
1.35
2005
Per
share
Rs 2.00
Rs 1.50
Rs 1.00
Rs 0.50
Rs
0.00

Dividend Yield on Common Stock
Use: To indicate the rate of return to common
stockholders in terms of dividends.
2006 2005
Dividend yield on common stock 1.95% 2.22%
Dividends per share of common Rs 0.80 Rs 0.60
Market price per share of common ÷ 41.00 ÷ 27.00

CORPORATE ANNUAL REPORTS
In addition to financial statements, the annual
report includes a management discussion analysis
(MDA) and an independent auditors’ report.
The MDA includes an analysis of the results of
operations and discusses management’s
opinion about future performance. It
compares the prior year’s income statement
with the current year’s. It also contains an
analysis of the firm’s financial condition.

Corporate Annual Reports
In addition to financial statements, the annual
report includes a management discussion analysis
(MDA) and an independent auditors’ report.
Before issuing annual statements, all
publicly held corporations are required
to have an independent audit of their
financial statements. The CPAs who
conduct the audit render an opinion as
to the fairness of the statements.

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