Financial Math
5 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
Generally there are two approaches in analyzing financial statements by use of ratios: 1. Common size percentages – where a key item in the financial statements is identified and then all the other items are expressed as a percentage of the item.
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Accounting and Reporting II
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1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
Common size percentage can be applied as follows: a) Other incomes and all expenses are expressed as a percentage of revenue. b) Different items or some totals for assets, liabilities and capital are expressed as a percentage of Total Assets. c) All items of cash receipts and payments are expressed as a percentage of say cash flows from operating activities.
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Accounting and Reporting II
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1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
2. Financial statements items The most popular method of analyzing financial statements is by relating financial statements items individually or as a group. In this case we identify five main categories of ratios as regards the income statement and the statement of financial position. These will be discussed in the next section
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Accounting and Reporting II
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1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
1. Liquidity ratios: These measure the ability of the firm to meet its short term maturing obligations. They focus mainly on current assets and current liabilities.
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The following are the main examples of liquidity ratios
Accounting and Reporting II 4
0011 0010 1010 1101 0001 0100 1011
1.4 Analyzing financial statements using ratios
Formula Current Assets Current Liabilities Explanation How many times the current assets cover current liabilities Considers that inventory may not be sold quickly To what extent the available cash cover current liabilities Remark The
Generally there are two approaches in analyzing financial statements by use of ratios: 1. Common size percentages – where a key item in the financial statements is identified and then all the other items are expressed as a percentage of the item.
1
Accounting and Reporting II
1
1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
Common size percentage can be applied as follows: a) Other incomes and all expenses are expressed as a percentage of revenue. b) Different items or some totals for assets, liabilities and capital are expressed as a percentage of Total Assets. c) All items of cash receipts and payments are expressed as a percentage of say cash flows from operating activities.
1
Accounting and Reporting II
2
1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
2. Financial statements items The most popular method of analyzing financial statements is by relating financial statements items individually or as a group. In this case we identify five main categories of ratios as regards the income statement and the statement of financial position. These will be discussed in the next section
1
Accounting and Reporting II
3
1.4 Analyzing financial statements using ratios 0011 0010 1010 1101 0001 0100 1011
1. Liquidity ratios: These measure the ability of the firm to meet its short term maturing obligations. They focus mainly on current assets and current liabilities.
1
The following are the main examples of liquidity ratios
Accounting and Reporting II 4
0011 0010 1010 1101 0001 0100 1011
1.4 Analyzing financial statements using ratios
Formula Current Assets Current Liabilities Explanation How many times the current assets cover current liabilities Considers that inventory may not be sold quickly To what extent the available cash cover current liabilities Remark The