Financial Statement Analysis Report: A Comprehensive Guide

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FINANCIAL STATEMENTS ELEMENTS
AND FINANCIAL STATEMENT
ANALYSIS
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Table of Contents
INTRODUCTION........................................................................................................................3
PART A ANALYSIS OF FINANCIAL RATIOS AND FINANCIAL STATEMENT...................................4
a. TO EXPLAIN AND CALCULATE THE FOLLOWING RATIOS................................................4
b. ANALYSIS OF THE SHORT-TERM SOLVENCY ALONG WITH THE BUSINESS EFFICIENCY. .6
PART B INCOME AND REVENUE...............................................................................................7
PART C COMPARISON OF THE BALANCE SHEETS......................................................................8
CONCLUSION............................................................................................................................9
REFERENCES........................................................................................................................... 10
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INTRODUCTION
In the following report, the analysis will be made on the financial statement and
understanding will be laid on the ratio analysis for performance evaluation of the business.
The ratios like liquidity ratios and the efficiency ratios will also be determined. The
importance of the revenues and the comparison of the financial statement for the
companies will be done which will help in taking the various decisions like acquiring the
business, providing the loan, and so on.
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PART A ANALYSIS OF FINANCIAL RATIOS AND FINANCIAL STATEMENT
a. TO EXPLAIN AND CALCULATE THE FOLLOWING RATIOS
1. Current Ratio: This ratio is one of the types of Liquidity Ratios. It measures the
financial strength and capabilities of the respective company. Generally, the ratio of
2:1 is treated as the ideal ratio. Such a ratio is based on the business unit and its
purpose (Penman, 2015).
Current ratio= Current Assets/Current Liabilities
Here, Current assets= Cash + Accounts Receivable + Inventory
30 June Year 2019 30 June Year 2018
Current Ratio
= 18,000+70,000+1,30,000/1,05,000
= 2,18,000/1,05,000
= 2.07 times
Current Ratio
= 12,000+60,000+1,50,000/81,000
= 2,22,000/81,000
= 2.74 times
2. Quick Ratio: This ratio can be considered as the best ratio as well as the best
measure of the liquidity in the company. This ratio is more appropriate than the
current ratio. The quick ratio is calculated by adjusting the current assets to remove
those assets which are not in cash. Generally, the ratio of 1:1 is treated as an ideal
ratio (Durand, 2019).
Quick ratio= Liquid Assets/Current Liabilities
Where Liquid assets= Current assets except stock i.e. inventory
30 June Year 2019 30 June Year 2018
Quick Ratio
= 18,000+70,000/1,05,000
= 88,000/1,05,000
= 0.83 times
Quick Ratio
= 12,000+60,000/81,000
= 72,000/81,000
= 0.88 times
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3. Accounts Receivable Turnover: This ratio is the part of the Efficiency Ratio. It is also
known as Debtor's turnover ratio. Accounts receivable turnover is used to measure
how capable a business unit in increasing credits and also in collecting the debts. It is
an activity ratio which measures how effectively a company uses its assets. A higher
ratio shows that the company operates on the basis of cash or its extension of credit
and collection from debtors is efficient. While the lower ratio shows that the
company is not doing the collection of credits from debtors on time (Penman, 2015).
Accounts Receivable Turnover (In times) = Net Credit Sales
Average Trade Receivables
Average Trade Receivables = OpeningTrade Receivables+Closing Trade Receivables
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Accounts Receivable Turnover (In days) = Days
Accounts Receivable Turnover
30 June Year 2019 30 June Year 2018
Average Trade Receivables
= 1,50,000 + 1,30,000/ 2
= 90,000
Accounts Receivable Turnover (In times)
= 6,30,000/90,000
= 7 times
Accounts Receivable Turnover (In days)
= 30 days/ 7
= 4.28 days
Average Trade Receivables
= 78,000 + 60,000/ 2
= 69,000
Accounts Receivable Turnover (In times)
=4,90,000/ 69,000
= 7.10 times
Accounts Receivable Turnover (In days)
= 30 days /7.10
= 4.22 days
4. Inventory Turnover: This ratio is the part of the efficient ratio which is also known as
the Stock turnover ratio. This ratio is used to measure how many numbers of times
the stock has been sold or used in a given period of time. It is computed to check
whether the business has an excessive inventory in comparison to its sales level. A
low turnover rate shows overstocking in the business unit. But, the lower rate of this
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ratio shows the appropriateness whereas the higher ratio indicates the expectations
of rapidly increasing prices or anticipated market recessions (Durand, 2019).
Inventory Turnover (In times) = Cost of Goods Sold
Average Inventory
Average Inventory = Opening Inventory +Closing Inventory
2
Inventory Turnover (In days) = Days
Inventory Turnover
30 June Year 2019 30 June Year 2018
Average Inventory
= 1,50,000+1,30,000/2
= 1,40,000
Inventory Turnover (In times)
=2,90,000/1,40,000
= 2.07 times
Inventory Turnover (In days)
= 101 days/ 2.07
= 48.79 days
Average Inventory
= 1,30,000+1,50,000/2
= 1,40,000
Inventory Turnover (In times)
=2,50,000/1,40,000
= 1.78 times
Inventory Turnover (In days)
= 101 days/ 1.78
= 56.74 days
b. ANALYSIS OF THE SHORT-TERM SOLVENCY ALONG WITH THE
BUSINESS EFFICIENCY
The short-term solvency of the business helps in measuring the efficiency of the firm. This
can be done through the current ratio and the quick ratio that analyses that the firm is able
to pay the short term liabilities or not. Thus as above calculated the current ratio of the
company for the year 2019 is 2.07 times which is near to the ideal ratio of 2:1 and the quick
ratio is 0.83 which is between the ideal ratio of 1:1, it is to be evaluated that the efficiency
of the company in the short term is very effective and the ability of the company to pay off
the short term liabilities is efficient (Garg et al., 2018).
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PART B INCOME AND REVENUE
In this segment, it has been shown the case of the Green Apple Business, the dealer of anti-
virus software. At the end of the financial year i.e. 30th June, the revenues were generated
by the company from various sources.
Revenue: The term revenue means any income generated from the sales of the products
and services which is the part of the main business of the company. Generally, the revenues
earned are shown in the income statement i.e. the profit and loss account of the company
at the end of the year (Sawyer, 2015).
The following are the incomes of the company that will form the part of the revenue in the
financial statement of the company at the end of the year.
The revenue generated from the sales is the part of the income statement of the company
and thus forms the part of the revenue. Therefore, $2,50,00,000 earned by selling the
software in the whole year is part of the revenue of the company. Along with this, as the
main business of the company is to sell software and also to download updated versions,
$30,00,000 earned from this is also the part of the income statement. Whenever a company
invest either in the short-term or the long-term market, whatever the income generated
either through interest or dividend form the part of the revenue of the company. Thus, in
this case, $50,000 is also the income generated by the company and forms the part of the
revenue. When the liability is due and during the settlement of such liabilities with the
creditors, the discount that is received forms the part of the revenue. Thus $2,000 is also
the revenue for the company at the end of the year. Exchanging the shares in lieu of cash is
generally termed as raising the capital from the market. Thus in the given case when the
Green Apple exchanges the shares of $5,00,000 in lieu of cash, it becomes the part of the
capital and is shown in the liabilities side of the balance sheet. Thus it is not part of the
revenue of the company (Sawyer, 2015).
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PART C COMPARISON OF THE BALANCE SHEETS
a. As per given in the first case, being banker, the following applications being received
from the two companies i.e. ABC Ltd. and XYZ Ltd. for the requirement of the short
term loan of $6,000, the application of that company will be approved whose paying
capacity is better than the other firm. So as per the in-depth study and analysis of
the financial statement of both the companies, the application of the XYZ Ltd. will be
approved and the short term loan of $6,000 will be given which will be repayable in
the six months by the company XYZ as the company is found to be more cash rich
and has enough capital to pay off the loans within the specified period (Robinson et
al., 2015).
b. In the next scenario, being the businessman, it is to decide that the company which
has enough capital to set off their liabilities should be acquired so that the future
uncertainties can be met. So after conducting the thorough analysis of the financial
statement of both the companies, it is to be decided that the business of the
company XYZ Ltd should be acquired along with the liabilities as the current liabilities
of the company is around $12,000 which is payable in a short period of time with the
available current assets of the company which are around $26,000 (Easton and
Sommers, 2018).
c. As in this given scenario, the company ABC Ltd. and XYZ Ltd. has decided to pay the
liabilities by their own before selling the business. So in such case being a
businessman, both the companies can be acquired and the companies can be
merged in the future to enhance the profitability of the ABC Ltd. This decision will
also reflect the future efficiencies of both the business and will result in higher
profitability (Easton and Sommers, 2018).
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CONCLUSION
Thus from the given report, the thorough understanding has been injected by analysing the
financial statements of the companies and evaluating the financial ratios. The meaning of
the revenue is also been understood and being applied in analysing the incomes of the
company Green Apple Ltd. The importance of the ratios has also been discussed and with
the help of that, the business efficiency of the company can also be determined.
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REFERENCES
 Durand, P., 2019. On the impact of capital and liquidity ratios on financial stability
(No. 2019-4). University of Paris Nanterre, EconomiX.
 Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
 Garg, S., Garg, K.K. and Gupta, S., 2018. Liquidity Analysis to Ascertain Short-Term
Solvency-A Case Study of Ntpc. International Journal of Research, 5(01), pp.2090-
2105.
 Penman, S.H., 2015. Financial Ratios and Equity Valuation. Wiley Encyclopedia of
Management, pp.1-7.
 Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
 Sawyer, T.Y., 2015. Statements of Profit and Loss and Cash Flow: Plan for Profits and
Ready Money. In Financial Modeling for Business Owners and Entrepreneurs (pp.
231-254). Apress, Berkeley, CA.
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