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Corporate Financial Statement• A financial statement (or financial report) is a formal record of

the financial activities of a corporation. A financial statement is often referred to as an account,

• For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a

• Income Statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time.

• Balance Sheet also referred to as statement of financial position or condition, reports on a company's Assets, Liabilities, and ownership equity at a given point in time.

• Statement of Retain Earnings: explains the changes in a company's retained earnings over the reporting period.

• Statement of Cash Flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

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Elements of Annual Report of a Corporation

1. Cover: The cover design should reflect the company image. It might incorporate corporate colors and logo.

2. Mission Statement/ Corporate Message

3. Letter to Stockholders

4. History of Company or Organization

5. Services / Product Lines (Sales & Marketing)

6. Auditors Certificate

7. Notes to the Share Holders

8. Management Report 9. 5-10 Year Financial

Summary .10. Performance / Year in

Review 11. Photos/Illustrations12. Financial Statements13. Graphs and Charts14. Financial Ratios15. Appendices and

References

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Elements of Annual Report

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Methods of Financial Statement Analysis1. Horizontal Analysis: Horizontal analysis is the

comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information.  Comparative study of a balance sheet or income statement for two or more accounting periods, to compute both total and relative variances for each line item.

2. Vertical Analysis: Vertical analysis reports each amount on a financial statement as a percentage of another item. .A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of analyzing a balance sheet in this manner is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business.

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Methods of Financial Statement Analysis

3. Trend Percentage: analysis of changes over time. A comparative analysis of a company's financial ratios over time. This is the analysis of data that exhibits an ongoing upward or downward pattern.

4. Common Size Analysis: A common-size balance sheet allows to compare one company's balance sheet to another company's balance sheet or to the average for its industry by making equal percentage in sales amount, Total Assets and Total Liabilities and Owner’s Equity.

5. Ratio Analysis• Time Series Analysis• Cross Sectional Analysis

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Differences between Horizontal and Vertical Analysis

• Under horizontal analysis an analyst compares the financial statement of the company for two more accounting periods, it can be used on any item in the financial statement company so if company wants to see whether its sales for current year is good or not it will compare the sales for the year 2010 with sales for year 2009 or for previous years. It is a time series analysis in the sense that it shows comparison of financial data for several years against a chosen base year. It is also called dynamic analysis of the financial statements.

• Vertical analysis is done to review and analysis the financial statements for a year only and therefore it is also called static analysis. Under this method each entry for assets, liabilities and equities in a balance sheet is represented as a percentage of the total account. So if in asset side of balance sheet cash is $200, building is $400 and machinery is $600 and total of balance sheet is $1000, then cash will be 20 percent of total of balance sheet building will be 40 percent and machinery will be 60 percent. One of the advantages of using this method is that one gets an idea of composition of the balance sheet and then it can compared with previous years to see the relative annual changes in company’s balance sheet.

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Example 01: Horizontal Analysis

Increase/Decrease 2011 2010 Amount Percent

Sales $41,500 $37,850Expenses 40,000 36,900 Net income 1,500 950

100Old

Old - New Change Percentage

Increase/Decrease 2010 2009 Amount Percent

Sales $50,500 $41,850 $------ -----%Expenses 45,000 39,900 $------ -----%Net income ???? ???? ???? -----%

Practice 01: Easy PracticePractice 01: Easy Practice

$3,650 9.6%3,100 8.4%

550 57.9%

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Practice 02: Horizontal Analysis 2009 2010 2011 2010 2011

Net Sales Tk 1,435.00 Tk 1,500.00 Tk 2,000.00

Cost of Goods Sold Tk 1,175.00 Tk 1,220.00 Tk 1,620.00

Gross Profit Tk 260.00 Tk 280.00 Tk 380.00

Fixed Operating Expenses Tk 85.00 Tk 90.00 Tk 110.00

Depreciation Tk 40.00 Tk 50.00 Tk 50.00

Earnings Before Interest & Taxes Tk 135.00 Tk 140.00 Tk 220.00

Interest Expenses Tk 30.00 Tk 36.00 Tk 45.00

Earnings Before Taxes Tk 105.00 Tk 104.00 Tk 175.00

Taxes 40% Tk 42.00 Tk 41.60 Tk 70.00

Net Income Tk 63.00 Tk 62.40 Tk 105.00

Preferred DividendsTk - Tk -

Tk -

Earnings Available to Common Shareholders

Tk 63.00 Tk 62.40 Tk 105.00

Common Stock Dividends Tk 27.00 Tk 29.00 Tk 32.00

Addition to Retained Earnings Tk 36.00 Tk 33.40 Tk 73.00

Number of Common Stock 25 ? ?

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Trend Percentages...

Trend Percentages are computed by selecting a base year whose amounts are set equal to 100%.

• The amounts of each following year are expressed as a percentage of the base amount.

100AmountYear Base

AmountYear Any age % Trend

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Year 2011 2010 2009Sales Revenues $27,611 $24,215 $21,718Cost of Goods Sold 15,318 14,709 13,049Gross profit $12,293 $ 9,506 $ 8,6692009 is the base year. What are the trend percentages?

Example 02: Trend Percentages

Year 2011 2010 2009Sales Revenues 127% 111% 100%Cost of Goods Sold 117% 113% 100%Gross profit 142% 110% 100%

These percentages were calculated by dividing each item by the base year

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Practice 03: Trend Percentages2009 base 2010 2011 2009 2010 2011

Net Sales Tk 1,435.00 Tk 1,500.00 Tk 2,000.00

Cost of Goods Sold Tk 1,175.00 Tk 1,220.00 Tk 1,620.00

Gross Profit Tk 260.00 Tk 280.00 Tk 380.00

Fixed Operating Expenses Tk 85.00 Tk 90.00 Tk 110.00

Depreciation Tk 40.00 Tk 50.00 Tk 50.00

Earnings Before Interest & Taxes Tk 135.00 Tk 140.00 Tk 220.00

Interest Expenses Tk 30.00 Tk 36.00 Tk 45.00

Earnings Before Taxes Tk 105.00 Tk 104.00 Tk 175.00

Taxes 40% Tk 42.00 Tk 41.60 Tk 70.00

Net Income Tk 63.00 Tk 62.40 Tk 105.00

Preferred Dividends Tk - Tk - Tk -

Earnings Available to Common Shareholders

Tk 63.00 Tk 62.40 Tk 105.00

Common Stock Dividends Tk 27.00 Tk 29.00 Tk 32.00

Addition to Retained Earnings

Tk 36.00 Tk 33.40 Tk 73.00

Number of Common Stock 25 ? ?

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Solutions: Trend Percentages  2009 2010 2011

Net Sales 100% 105% 139%

Cost of Goods Sold 100% 104% 138%

Gross Profit 100% 108% 146%

Fixed Operating Expenses 100% 106% 129%

Depreciation 100% 125% 125%

Earnings Before Interest & Taxes 100% 104% 163%

Interest Expenses 100% 120% 150%

Earnings Before Taxes 100% 99% 167%

Taxes 40% 100% 99% 167%

Net Income 100% 99% 167%

Preferred Dividends ----- ----- -----

Earnings Available to Common Shareholders 100% 99% 167%

Common Stock Dividends 100% 107% 119%

Addition to Retained Earnings 100% 93% 203%

Number of Common Stock ----- ----- -----

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Graphical Presentation

0%

50%

100%

150%

200%

Net Sales 100% 105% 139%

Cost of Goods Sold 100% 104% 138%

Gross Profit 100% 108% 146%

Depreciation 100% 125% 125%

Earnings Before Interest & Taxes 100% 104% 163%

Interest Expenses 100% 120% 150%

Earnings Before Taxes 100% 99% 167%

Taxes (40%) 100% 99% 167%

Net Income 100% 99% 167%

2004 2005 2006

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Vertical Analysis...

– Vertical Analysis compares each item in a financial statement to a base number set to 100%.

– Every item on the financial statement is then reported as a percentage of that base.

– Common size financial statement is so close to the vertical analysis

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Vertical Analysis Examples 03: Income Statement

2009 %Sales $38,303 100.0Cost of Goods Sold 19,688 51.4Gross profit $18,615 48.6Total operating expenses 13,209 34.5Operating income $ 5,406 14.1Other income 2,187 5.7Income before taxes $ 7,593 19.8Income taxes 2,827 7.4Net income $ 4,766 12.4

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Practice 04: Vertical Analysis of Income Statement

2009 2008Sales $48,303 $49100Cost of Goods Sold 23,303 25100Gross profit $25,615 $24000Total operating expenses 13,615 12000Operating income EBIT $ 12000 $12000Other income 2,000 2500Income before taxes $ 14000 $14500Income taxes 5600 5800Net income $ 8400 $8700

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Vertical Analysis: Asset Side of Balance Sheet

Assets 2009 %Current assets:Cash $ 1,816 4.7Receivables net 10,438 26.9Inventories 6,151 15.9Prepaid expenses 3,526 9.1Total current assets $21,931 56.6Plant and equipment, net 6,847 17.7Other assets 9,997 25.7Total assets $38,775 100.0

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Common Size Financial Statement

Making Common Size Balance Sheet• For Asset Side: Divide all items by Total Assets• For Liabilities and Owners Equity Side: Divide all

items by Total Liabilities & Equity

•Common Size Income Statement:Divide all items by Sales

Common-size statements are used to compare one company to other companies, and to the industry average.

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Dollars, in Thousands Income

Statement

Common Size Percentage

Square

Beximco

IBN SINA

BIO Phar.

Square

Beximco

IBN SINA

BIO Phar

$525 $595 $630 $724 Sales 100 100

158 190 208 217 Gross Profit 30 32

79 95 95 101 Selling Exp. 15 16

31 31 32 32 Gen. & Admin. 6 5

$ 48 $ 64 $ 81 $ 84 EBIT 9 11

6 6 6 8 Interest 1 1

$ 42 $ 58 $ 75 $ 76 EBT 8 10

14 20 26 26 Tax 3 3

$ 28 $ 38 $ 49 $ 50 Net Income 5 6

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Dollars, in Thousands Common Size Income

Statement

Common Size Percentage

Square

Beximco

IBN SINA

BIO Phar.

Square

Beximco

IBN SINA

BIO Phar

$525 $595 $630 $724 Sales 100 100 100 100

158 190 208 217 Gross Profit 30 32 33 30

79 95 95 101 Selling Exp. 15 16 15 14

31 31 32 32 Gen. & Admin.

6 5 5 4

$ 48 $ 64 $ 81 $ 84 EBIT 9 11 13 12

6 6 6 8 Interest 1 1 1 1

$ 42 $ 58 $ 75 $ 76 EBT 8 10 12 10

14 20 26 26 Tax 3 3 4 4

$ 28 $ 38 $ 49 $ 50 Net Income 5 6 8 7

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Common Size Financial Statement: Balance SheetDollars, in Thousands Assets Common Size Percentage

SquareBeximc

o

IBN SINA

BIO Phar

.Items Square

Beximco

IBN SINA

BIO Phar.

$ 50 $ 40 $ 45 $ 70 Cash 6 4

230 250 175 225 Accts. Rec. 26 27

175 180 195 185 Inventory 20 19

10 15 10 310 Other Current Assets 1 2

$465 $485 $425 $490 Total Current Assets 53 52

400 425 500 515 Plant & Equip. 45 46

15 20 5 10 Other Non-Current Assets 2 2

$880 $930 $930 $1015 Total Assets 100 100

Liabilities and Owners Equity

200 225 220 210 Accts. Pay. 23 24

50 45 20 80 Bank Debt 6 5

$250 $270 $240 $290 Total Current Liabs. 28 29

150 100 60 250 Long-Term Debt 17 11

$400 $370 $300 $540 Total Liabs. 45 43

480 560 630 475 Owner's Equity 54 52

$880 $930 $930 $1015 Total Liabs. & Equity 100 100

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Common Size Financial Statement: Balance Sheet

Dollars, in Thousands Assets Common Size Percentage

Square Beximco IBN SINA BIO Phar. Items Square BeximcoIBN SINA

BIO Phar.

$ 50 $ 40 $ 45 $ 70 Cash 6 4 5 7

230 250 175 225 Accts. Rec. 26 27 19 22

175 180 195 185 Inventory 20 19 21 18

10 15 10 310 Other Current Assets 1 2 1 1

$465 $485 $425 $490 Total Current Assets 53 52 46 48

400 425 500 515 Plant & Equip. 45 46 54 51

15 20 5 10 Other Non-Current Assets 2 2 1 1

$880 $930 $930 $1015 Total Assets 100 100 100 100

Liabilities and Owners Equity

200 225 220 210 Accts. Pay. 23 24 24 21

50 45 20 80 Bank Debt 6 5 2 8

$250 $270 $240 $290 Total Current Liabs. 28 29 26 29

150 100 60 250 Long-Term Debt 17 11 6 25

$400 $370 $300 $540 Total Liabs. 45 43 32 53

480 560 630 475 Owner's Equity 54 52 68 47

$880 $930 $930 $1015 Total Liabs. & Equity 100 100 100 100

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Ratio Classification

1 Measuring ability to pay current liabilities

2 Measuring ability to sell inventory and collect receivables

3 Measuring ability to pay short-term and long-term debt

4 Measuring profitability

5 Analyzing stock as an investment

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Income Statement

Net sales Year 2005 $858,000Cost of goods sold 513,000Gross profit $345,000Total operating expenses 244,000Operating income $101,000Interest revenue 4,000Interest expense 24,000Income before taxes $ 81,000Income taxes 33,000Net income $ 48,000

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Balance Sheet: Asset Side

Assets 2009 2008Current assets:Cash $ 29,000 $ 32,000Receivables net 114,000 85,000Inventories 113,000 111,000Prepaid expenses 6,000 8,000Total current assets $262,000 $236,000Long-term investments 18,000 9,000Plant and equipment, net 507,000 399,000Total assets $787,000 $644,000

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Balance Sheet: Liabilities & Owners Equity Sides

Liabilities 2009 2008Current liabilities:Notes payable $ 42,000 $ 27,000Accounts payable 73,000 68,000Accrued liabilities 27,000 31,000Total current liabilities $142,000 $126,000Long-term debt 289,000 198,000Total liabilities $431,000 $324,000Stockholders’ Equity 20x5 20x4Common stock, no par $186,000 $186,000Retained earnings 170,000 134,000Total stockholders’ equity $356,000 $320,000

Total liabilities andstockholders’ equity $787,000 $644,000

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1. Short-Term Solvency, or Liquidity Ratios

2. Long-Term Solvency or Financial Leverage or Debt management Ratios

3. Profitability Ratios

4. Market Value Ratios

5. Asset Management, or Turnover Ratios

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Ratios Description

The current ratio measures the company’s ability to pay current liabilities with current assets.The acid-test ratio shows the company’s liability to pay all current liabilities if they come due immediately.Inventory turnover is a measure of the number of times the average level of inventory is sold during a year.Accounts receivable turnover measures a company’s liability to collect cash from credit customers.Days’ sales in receivable ratio measures how many day’s sales remain in Accounts ReceivableThe debt ratio indicates the proportion of assets financed with debtTimes-interest-earned ratio measures the number of times operating income can cover interest expense

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Ratios DescriptionRate of return on net sales shows the percentage of each sales dollar earned as net income.Rate of return on total assets measures how profitably a company uses its assets.Common equity includes additional paid-in capital on common stock and retained earnings.

Price/earning ratio is the ratio of market price per share to earnings per share.Dividend yield shows the percentage of a stock’s market value returned as dividends to stockholders each period.Book value per share of common stock = Total stockholders’ equity – Preferred equity ÷ Number of shares of common stock outstanding

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Importance of Corporate Financial Statement Analysis

• All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time.

• Comparison of one company with another can provide valuable clues about the financial health of an organization.

• Stockholders are concerned with future earnings and dividends.

• Creditors are concerned with the company's future ability to repay its debts.

• Managers are concerned  with the company's ability to finance future expansion.

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Importance of Corporate Financial Statement Analysis

• Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns.

• Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company.

• This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.

• Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing.

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Importance of Corporate Financial Statement Analysis

• Owners and managers require financial statements to make important business decisions that affect its continued operations

• Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

• Prospective investors make use of financial statements to assess the viability of investing in a business.

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Limitations of Financial Analysis

• Business decisions are made in a world of uncertainty.

• No single ratio or one-year figure should be relied upon to provide an assessment of a company’s performance.