Modul 8- Financial Statement Analyisis, Study notes of Financial Statement Analysis

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MODUL-

Financial Accounting

Financial Statement Analysis

By MUH. ARIEF EFFENDI,SE,MSI,AK,QIA

Magister Accounting Program (MAKSI)

BUDI LUHUR UNIVERSITY

Jakarta - Indonesia

Financial Statement Analysis

After studying this topic, students should be able to:

1. Understand the outline of Financial Statement Analysis.
2. Understand the Basic of Financial Statement Analysis.
3. Understand the External & Internal Use of Financial Statement Analysis.
4. Understand the Framework for Financial Analysis.
5. Identify the Tools of Financial Statement Analysis.
6. Understand the Horizontal Analysis and Vertical Analysis.
7. Understand the Objective Ratio Analysis , Rationale Behind Ratio Analysis & Limitations of Ratio Analysis.
8. Understand the Classification of Financial Ratio Analysis (Liquidity, Profitability, and solvency Ratio).
9. Understand the DuPont Model / Method.
10. Understand the Concept of Earning Power, and how Irregular Items are presented.
11. Understand the Concept of Quantitative Market Analysis.

Analyzing financial statements involves:

Characteristics Comparison Bases Tools of Analysis

 Liquidity

 Profitability

 Solvency

 Intracompany  Industry averages  Intercompany

 Horizontal  Vertical  Ratio

Basics of Financial Statement Analysis

Examples of External Uses of Financial Statement Analysis

 Trade Creditors : Focus on the liquidity of the

firm.

 Bondholders : Focus on the long-term cash

flow of the firm.

 Shareholders : Focus on the profitability and

long-term health of the firm.

Analytical Tools Used  Sources and Uses Statement  Statement of Cash Flows  Cash Budgets

1. Analysis of the funds needs of the firm.

Trend / Seasonal Component  How much funding will be required in the future?  Is there a seasonal component?

Framework For Financial Analysis

Health of a Firm

Financial Ratios :

1. Individually
2. Over time
3. In combination
4. In comparison
5. Analysis of the funds needs of the firm.
6. Analysis of the financial condition and profitability of the firm.

Framework For Financial Analysis

A Financial Manager must consider all three jointly when determining the financing needs of the firm.

Determining the financing needs of the firm.

1. Analysis of the funds needs of the firm.

2. Analysis of the financial condition and profitability of the firm.

3. Analysis of the business risk of the firm.

Framework For Financial Analysis

Negotiations with suppliers of capital.

Determining the financing needs of the firm.

1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.
3. Analysis of the business risk of the firm.

Framework For Financial Analysis

Quantitative Financial Analysis

 Financial Ratios : is an index that relates two

accounting numbers and is obtained by dividing one number by the other.

1. Balance Sheet Ratio.
2. Income Statement & Income Statement / Balance Sheet Ratio.

 Growth / trend Analysis / Horizontal Analysis.

 Quarterly analysis.

 The DuPont Model / Method.

 Earning Quality / Normalizing Earning..

Quantitative Financial Analysis

 Systematic analysis of key elements based on

analysis context.

 Quantitative techniques to standardize

financial information for relevant

comparisons.

 In-depth analysis for key factors, including

“red flags”.

Tools of Analysis : Horizontal Analysis / Trend Analysis / Growth Analysis

 Horizontal analysis , also called trend analysis , is a

technique for evaluating a series of Financial Statement (FS) data over a period of time.

 Its purpose is to determine the increase or decrease

that has taken place.

 Horizontal analysis is commonly applied to the Balance

Sheet (BS), income statement, and Statement of Retained Earnings (RE).

Quantitative Financial Analysis : Growth Analysis (Period- By-Period Change)

 Long-term trends over time can be significant. Are current year performance measures consistent with earlier years (e.g., maintaining consistent ratios while sales are rising smoothly)?

 As a first step, present growth rates (including % increases) for the last 5-10 years.

 Declining or negative growth rates might be obvious red flags; Red flags and other indicators of poor growth performance require further analysis.

Quantitative Financial Analysis : Quarterly Analysis

 The most recent financial data is presented quarterly (e.g., 10-Q). [The one exception is at year end, with annual information is presented].

 Financial analysts focus on quarterly data and the quarterly earnings announcement is the most important (& earliest) information.

 Common-size and ratios analysis is conducted, and compared over earlier quarters: particularly important are current quarter data to (1) the previous quarter and (2) the same quarter one year ago.

Tools of Analysis : Vertical Analysis

 Vertical analysis , also called common-size analysis ,

is a technique that expresses each Financial Statement (FS) item as a percent of a base amount.

 On an Income Statement (IS) , we might say that

selling expenses are 16% of net sales.

 Vertical analysis is commonly applied to the Balance

Sheet (BS) and the Income Statement (IS).