Principle of Finance: Income Statement, Balance Sheet, Ratio Analysis
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This document provides an overview of the income statement, balance sheet, and ratio analysis in the principle of finance. It includes a detailed analysis of the financial position and health of a company using various ratios.
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PRINCIPLE OF FINANCE
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TABLE OF CONTENTS INCOME STATEMENT................................................................................................................1 BALANCE SHEET.........................................................................................................................1 RATIO ANALYSIS.........................................................................................................................2 REFERENCES................................................................................................................................5
INCOME STATEMENT Income statement Income statement Revenues Sales revenue112760 Cost of Goods Sold85300 Gross Profit27460 Operating Expenses: Selling expense6540 General & Administrative expenses9400 Total Operating Expense15940 Operating Profits (EBIT-Earnings before interest and taxes)11520 Interest expense: Interest on bank notes:850 Interest on bonds:2310 Total Interest expenses3160 Net Profit before taxes (EBT- Earnings before taxes)8360 Taxes3344 Net Profit after taxes (Net Income)5016 Earnings per share3.858 Dividends per share2.154 Notes: Shares outstanding (000)1300 Dividends paid on common stock2800 BALANCE SHEET Balance Sheet as on June 30, 2014 ASSETS Fixed Assets Plant and equipment31700 Market securities1800 33500 Current Assets Accounts receivables18320 Cash at Bank2540 Inventory27530 1
48390 TOTAL ASSETS81890 EQUITY AND LIABILITIES Owner's Equity Ordinary Shares13000 Securities Premium10000 Retained Earnings11367 34367 Liabilities Non Current Liabilities Bond22000 Current Liabilities Accrued taxes payable3200 Accounts payable9721 notes payable8500 Other current liabilities4102 Total current liabilities25523 Total Liabilities47523 TOTAL LIAB. & EQUITIES81890 RATIO ANALYSIS ParticularsFormula2017 Profitability Ratios Return on Equity Net Income / Shareholder's Equity14.60% Net Income5016 Shareholder's Equity34367 Gross profit margin Total Sales – COGS/Total Sales24.35% COGS85300 Sales112760 Operating profit margin Operating Income/ Net Sales10.22% Operating income11520 Revenues112760 2
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Activity Ratios Assets TurnoverSales / Net assets328.11% Sales112760 Net assets34367 Average Collection Period Accounts Receivable ÷ (Annual sales/365)59 Trade Receivables18320 Sales112760 Days365 Inventory TurnoverCOGS ÷ Inventory309.84% COGS85300 Inventory27530 Liquidity Ratios Current assets48390 Current liabilities25523 Inventory27530 Quick assets20860 Current ratio Current assets / current liabilities1.90 Quick ratio Current assets - (stock + prepaid expenses)0.82 Debt Ratios EBIT11520 Total Assets81890 Time Interest Earned RatioEBIT ÷ Interests14.07% Long-term debt22000 Shareholder's equity34367 Debt-equity ratio Long-term debt / Shareholder's equity64.01% Interpretations The financial positionand health of company is assessed using the financial statements of company using the ratio analysis tool. From the above analysis it could be analysed that the business performance is good and efficient. 3
Return on equity of company is 14.60 % that is above the industry average. ROE represents the efficiency of company in managing its operations very efficiently and effectively. The investors are concerned with the return over their investments in equity of firm(Boyas and Teeter,2017). The return is required to be adequate for attracting other investors for making investments in the company. This represents how efficiently the resources of organisation are being utilised for generating returns. Gross profit margin of company is 24.35%. that represents the company is effectively managing its operational costs. Gross profit represents the income left with the company after carrying out cost of goods. This should be high so that company is available with enough funds for carrying out its other business costs. Operating margin represents the income left with the company after carrying out the business cost incurred during the year. Operating margin of company is 10.22% that shows company is having adequate returns left after carrying out the business. Assets turnover represents the sales generated over the assets of company. Higher is the turnover more efficiently the assets are being utilised for generating revenues for company (Haskins, 2017). Company is having a asset turnover of 328.11% that is high and good. Inventory turnover refers to the movement of inventories in the business. The inventory turnover of a company should be high and in the present case it is 309.84 % that represents that inventory is moving fast. Average collection period is 59 days that is around 2 months, as the companies are required to give credits forincreasing their sales. This helps in having adequate operating cash cycle reducing the working capital requirement. Current ratio of company is 1.90 that is not very low and near to the standard. The ratio represents that company is having strong liquidity position for meeting its short term obligations. Quick ratio of company is 0.82 that is considerably low. The debt equity ratio of company is 64.01% that shows company uses high debt for financing its business operations. Though the performance of company is adequate and good, company is having high financial risks(Rodrigues and Rodrigues, 2018). It should adopt for new sources of finance like equity as this will decrease the financial risk in business. 4
REFERENCES Books and Journals Boyas,E.andTeeter,R.,2017.TeachingFinancialRatioAnalysisusingXBRL. InDevelopments in Business Simulation and Experiential Learning: Proceedings of the Annual ABSEL conference(Vol. 44, No. 1). Haskins, M.E., 2017. Remington, Inc.: Instant Insights for Financial Ratios.Darden Business Publishing Cases. Rodrigues, L. and Rodrigues, L., 2018. Economic-financialperformanceof the Brazilian sugarcane energy industry: An empirical evaluation using financial ratio, cluster and discriminant analysis.Biomass and bioenergy.108.pp.289-296. 5