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Lecture Accounting for business: A guide for non-accountants (2/e) – Chapter 6: Analysis of basic financial statements

After you have mastered the material in this chapter, you will be able to: Explain the importance of comparisons and trends in financial statement analysis; calculate the ratios related to the profitability and financial stability of a business, from a given set of financial statements;. | Chapter 6 Analysis of basic financial statements 6- Objectives Explain the importance of comparisons and trends in financial statement analysis. Calculate the ratios related to the profitability and financial stability of a business, from a given set of financial statements. 6- Objectives (continued) Analyse a given set of financial statements in terms of: Managerial performance Earning capacity Financial risk Shareholder return. Prepare a report evaluating a business’s results and future prospects 6- Comparisons and trends in financial statement analysis Most businesses analyse their performance for the year by using the ratio analysis approach. Presents results are compared with: results obtained from previous years activities industry averages results from creditors absolute standards. 6- Calculating ratios Profitability ratios help management to evaluate profitable the activities of the business have been. Financial stability ratios show either short term or long term positions. 6- Calculating ratios (continued) The main groups of ratios are: Liquidity (short term) Activity (short term, and profitability) Leverage (long term) Profitability (profitability) Market related (profitability) 6- Liquidity ratios (short-term stability) Working capital ratio = Current assets Current liabilities Quick assets ratio = Current assets - Inventory Current liabilities - Overdraft 6- Activity ratios Inventory turnover = Cost of goods sold Average inventory Accounts receivable turnover = Credit sales Average accounts receivable Average collections period =Average accounts receivable Average daily credit sales 6- Activity ratios (continued) Total assets turnover = Sales Average total assets Fixed assets turnover = Sales Average fixed assets 6- Leverage ratios Debt to assets ratio= Total debt X 100 (gearing ratio) Total assets 1 Earnings coverage ratio = Long-term debt X 100 Shareholders’ funds 1 6- Profitability ratios Net profit margin . | Chapter 6 Analysis of basic financial statements 6- Objectives Explain the importance of comparisons and trends in financial statement analysis. Calculate the ratios related to the profitability and financial stability of a business, from a given set of financial statements. 6- Objectives (continued) Analyse a given set of financial statements in terms of: Managerial performance Earning capacity Financial risk Shareholder return. Prepare a report evaluating a business’s results and future prospects 6- Comparisons and trends in financial statement analysis Most businesses analyse their performance for the year by using the ratio analysis approach. Presents results are compared with: results obtained from previous years activities industry averages results from creditors absolute standards. 6- Calculating ratios Profitability ratios help management to evaluate profitable the activities of the business have been. Financial stability ratios show either short term or long