Financial Analysis Techniques

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Questions and Answers

What is the base year percentage for sales in Year 4 according to trend analysis?

155

106

216 (correct)

100

Which of the following correctly describes trend analysis?

It ignores fundamental changes in financials.

It expresses results in terms of a base year index. (correct)

It uses absolute figures to assess performance.

It focuses solely on short-term changes.

In the ABC Company Ltd. income statement, what is the gross profit for Year 20x3?

65000

34580

91000

35000 (correct)

What is the purpose of common size statements?

To provide a comparison of financial data between different size enterprises. Signup and view all the answers

What is included in operating expenses for ABC Company Ltd. in Year 20x2?

11400 Signup and view all the answers

Which statement about income before taxes in the provided financial data is correct?

It is equal to operating income minus interest expense. Signup and view all the answers

What trend is indicated by the earnings figures from the provided data over the base years?

Earnings exhibit exponential growth over the years. Signup and view all the answers

What is the value of net income for ABC Company Ltd. in Year 20x1?

18760 Signup and view all the answers

What is the main purpose of financial statements analysis?

To provide data for decision making models. Signup and view all the answers

What differentiates horizontal analysis from vertical analysis in financial statements analysis?

Horizontal analysis is for long-term trend analysis while vertical analysis is for one accounting period. Signup and view all the answers

Which of the following is NOT a type of financial statement analysis according to the objective of analysis?

Short Term Analysis Signup and view all the answers

Which group is typically associated with external analysis of financial statements?

Investors and creditors. Signup and view all the answers

What is the characteristic of vertical analysis in financial statements?

Analyses items as a percentage of a total for one accounting period. Signup and view all the answers

Which analysis is particularly useful for assessing long term financial stability and liquidity?

Long Term Analysis Signup and view all the answers

What is a key advantage of performing horizontal analysis on financial statements?

It allows for identification of trends over multiple periods. Signup and view all the answers

What would be considered a limitation of vertical analysis?

It provides insights for only one accounting period. Signup and view all the answers

What does the profit & loss account measure?

Profitability through revenues and expenses Signup and view all the answers

Which financial statement provides a snapshot of the financial position at the end of the year?

Balance sheet Signup and view all the answers

In horizontal analysis, what is compared?

Each item against its corresponding item in an earlier statement Signup and view all the answers

What best describes a common size statement?

A financial document comparing individual items as a percentage of a total Signup and view all the answers

What is net worth defined as?

Share capital plus reserves and surplus minus fictitious assets Signup and view all the answers

What aspect are trade creditors primarily concerned with?

Short term liquidity Signup and view all the answers

Which statement accurately describes vertical analysis?

Analysis focusing on each item as a percentage of a base amount within the same statement Signup and view all the answers

Which user group is primarily interested in ensuring timely payment of taxes and duties?

Government departments Signup and view all the answers

Study Notes

Financial Performance Metrics

Total Revenue: Rs. 89,140 million with an operating margin of 21.5%.
Operating Income: Rs. 35,860 million which represents an 8.6% margin.
Interest Expense totaled Rs. 3,000 million at 0.7%.
Income before Taxes was Rs. 32,860 million, yielding a 7.9% margin.
Income Tax expense was Rs. 14,100 million, equating to a 3.4% tax rate.
Net Income stands at Rs. 18,760 million, reflecting a 4.5% profit margin.

Techniques of Financial Analysis

Trend Analysis: Utilizes index numbers with the base year set at '100' for comparative analysis of financial figures over time.
Common Size Statements: Present data in percentage form to facilitate comparisons across companies of varying sizes and sectors.

Trend Analysis Data

Sales Growth: From Rs. 192.3 million in Year 1 to Rs. 414.6 million in Year 5, indicating a growth rate moving from 100% to 216%.
Earnings Growth: Increased from Rs. 1.9 million in Year 1 to Rs. 10 million in Year 5, showing substantial growth from 100% to 526%.

Common Size Statements Example

ABC Company Ltd.:
- Net Sales increased from Rs. 91,000 thousand to Rs. 100,000 thousand over three years.
- Cost of Goods Sold rose from Rs. 56,420 thousand to Rs. 65,000 thousand.
- Gross Profit slightly fluctuated, starting at Rs. 34,580 thousand and reaching Rs. 35,000 thousand in the third year.

Types of Financial Statements

Balance Sheet: Summarizes assets, liabilities, and owner's equity at the end of the fiscal year.
Profit & Loss Account: Measures profitability through revenues and expenses, culminating in net income or loss.
Cash Flow Statement: Shows cash inflows and outflows, detailing the annual changes in cash position.

User Groups of Financial Statements

Trade Creditors: Concerned with short-term liquidity.
Long-term Debt Suppliers: Banks are interested in long-term solvency and profitability.
Investors: Focus on present and future earnings potential.
Management: Aims to ensure resource efficiency and sound financial health.
Government Authorities: Monitor tax compliance and receipt.

Key Financial Terms

Net Worth: Defined as shareholders' funds, calculated as Share Capital + Reserves & Surplus - Fictitious Assets.
Total Capital Employed: Calculated as Net Worth + Total Debt - Investments.

Analysis Techniques

Horizontal Analysis: Compares financial metrics year-over-year, identifying increases or decreases in percentage.
Vertical Analysis: Focuses on financial data from a single accounting period.

Scope of Financial Statement Analysis

Aims to assess past performance to forecast future results and streamline planning processes.
Distinction between External Analysis (based on published statements) and Internal Analysis (using comprehensive internal data).

Objective of Financial Analysis

Long-term analysis targets financial stability, liquidity, profitability, and overall solvency objectives.

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Description

This quiz focuses on financial analysis techniques, particularly trend analysis using index numbers. Participants will explore how to interpret financial data over time and its implications for long-term decision making. Perfect for students in finance or accounting.