Understanding and Interpretation

of Financial Statements

Dr. Md. Mahabbat Hossain

BBA & MBA (Accounting), PhD. (IBA, RU), DIB (IIBI, UK), CIPA & CSAA (AAOIFI)
Faculty Member, BIBM;
Member, WG of AAOIFI;
Academic Advisor, CSBIB;
Member, SSC of SBAC Bank Ltd.;
Member, SSC of Meghna Bank Ltd.;
Member, SSB of B E X I M C O SUKUK;
Member, SSB of IDLC Shariah Fund; and
Member, SSB of Summit Communication Ltd.
Email: mahabbat@bibm.org.bd; Mobile: +8801716373565
BIBM

FINANCIAL STATEMENTS (FS)

Financial Statements Includes:

1. Balance Sheet (B/S) or Statement of Financial Position (SFP)
2. Comprehensive Income Statement (CIS) and Other CIS
3. Statement of Changes in Equity (SCE)
4. Cash Flow Statement (CFS)
5. Notes to FS

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FS Analysis_ Definition

FS Analysis consists of :
Applying analytical tools to - - - -
FSs and other relevant data - - -
To obtain useful information - -
For making decision.

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 FS ANALYSIS- Useful Information

1. Its Liquidity
2. Its Solvency
3. Its Profitability
4. Cash Flows
5. Growth
6. Activities, etc.

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TOOLS OF FS ANALYSIS

Horizontal Analysis
Vertical Analysis
Ratio Analysis
Cash Flow Statement

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Basis of Comparison

Basis of Comparison:
1. Intra-Company Basis
2. Inter-Company basis
3. Industry Average
4. Ideal Ratio
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 FUNDAMENTAL
CLASSIFICATION of RATIO

Liquidity Ratio
Profitability Ratio
Solvency Ratio
Coverage Ratio
Operating Efficiency
Earning Quality
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LIQUIDITY RATIO

Ability to pay off

Short-Term Obligations
With the Current Assets
Interested Group:
Short-term Creditors
Bankers
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Suppliers 8

LIQUIDITY RATIO

Current Assets
1. Current Ratio =
Current Liabilities

Quick Assets
2. Quick Ratio =
Current Liabilities

Net Credit Sales

3. Receivables Turnover =
Average Net Receivables

Cost of Good Sold

4. Inventory Turnover =
Average Inventory
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 PROFITABILITY RATIO

Measure Operating Success

Affects Liquidity Position and
Ability to grow
Interested Group:
Creditors and
Investors
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PROFITABILITY RATIO

Net Income
1. Profit Margin on Sales =
Net Sales
Net Sales
2. Asset Turnover =
Average Assets
Net Income
3. ROA =
Average Assets
Net I ncome
4. ROE =
Average Equity
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PROFITABILITY RATIO

Net Income
5. EPS =
Weighted Average Common Share Outstanding

Market Price per Share of Stock

6. P-E Ratio =
Earnings per Share

Cash Dividends
7. Payout Ratio =
Net Income
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 SOLVENCY RATIO

Measure Ability to Survive over long

period of time
Provide Information about debt-Paying Ability
Interested Group:
Long-term Creditors and
Stockholders
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SOLVENCY RATIO

Total Debt
1. Debt to Total Assets =
Total Assets

Total Debt
2. Debt to Equity Ratio =
Total Equity

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COVERAGE RATIO

EBIT
1. Interest Coverage =
Total Interest

EBITDA
2. Debt Service Coverage =
Interest + CMLTD

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 Cash Flow Statement: Introduction

It is one of the mandatory components of a complete set of financial

statements.
The statement is very crucial for creditors and bankers.
ICRRS has highlighted the importance of Cash Flows.
The Main Objectives are
To Identify the Changes in Cash Balance
To Analyze the Changes in Cash Balance
It is prepared as per IAS 7
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Cash Flow Statement: Concept

The statement of cash flows reports

Cash Receipts,
Cash Payments, and
Net Change in cash Balance
Resulting from
Operating,
Investing, and
Financing activities
of an enterprise during a particular period.
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Cash Flow Statement: Importance

It Provides the answer of Three Questions:

Where did the cash come from during the period
What was the cash used for during the period, and
What was the changes in cash bl. during the period
CFS is necessary as we Follow Accrual Basis Accounting
System.

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 CFS: Operating Activities
That Create Revenues and Expenses
CF from O.A = Received from customers Paid to supplier
Cash inflows
From sale of goods or services
Inst. received and dividends received
Cash outflows:
To Suppliers for Inventory
To Employees for Services
To Government for Taxes
To Lenders for Interest
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To Others for Expenses

CFS: Investing Activities

Acquiring and disposing of Assets and Investments
CF from Investing Activities
= Sale of Assets & Invt. Acqu. of Assets & Invt.
Cash inflows
From sale of property, plant, and equip.
From sale of debt or equity securities of other entities
From collection of principal on loans to other entities
Cash outflows:
To purchase property, plant, and equip.
To purchase debt or equity securities of other entities
To make loans to other entities
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CFS: Financing Activities

Relating to Share & Debenture i.e. Equity and Debt
Cash inflows:
From sale of equity securities (own)
From issuance of debt (own)
Cash Outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital stock

Cash Received Cash paid for dividend

from issue of - Repaying St. & Lt. Loan
June 28,share
2021 or debt Reacquisition of Share 21
 CFS: Usefulness

obligations
The reasons for the difference between net income and net cash
provided by operating activities
The cash investing and financing transactions during the period
There are two methods for preparing the SCF:
Direct Method
Indirect Method
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CFS: Non-Cash Transactions

Credit Sale and Accrued Revenues

Depreciation and Accrual Expenses
Issuance of common stock to purchase assets
Conversion of bonds into common stock.
Issuance of debt to purchase assets
Exchanges of plant assets

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Quantitative Indicators in ICRRS (Total 16 under 6 Broad Categories)

S/N Aspects Indicators Weight Definition

1 Leverage (10) a) Debt to Tangible Net
Worth (DTN)
b) Debt to Total Assets (DTA)
2 Liquidity (10) a) Current Ratio (CR)
b) Cash Ratio (Cash)
3 Profitability (10%) a) Net Profit Margin (NPM)
b) Return on Assets (ROA)
c) Operating Profit to
Operating Assets (OPOA)
7 Total Interest-bearing liabilities or
Financial Debt/ Total Tangible Net Worth
3 Total Interest-Bearing Liabilities or
Financial Debt/ Total Assets
7 Current Assets/ Current Liabilities
3 Cash and easily marketable securities/
Current Liabilities
5 Net profit after tax/ Net Sales
3 Net profit after tax/ Total Assets
2 Operating Profit/ Average Operating
Assets

Bangladesh Institute of Bank Management Dr. M. Mahabbat Hossain

 Quantitative Indicators in ICRRS (6 Broad Categories) - 2
S/N Aspects Indicators Weight Definition
4 Coverage a) Interest Coverage (IC) 3 Earnings Before Interest and Tax/Interest
(15%) Expense
b) Debt Service Coverage Ratio 5 Earnings Before Interest Tax Depreciation
(DSCR) Amortization/ Debts to be Serviced
c) Operating Cash Flow to 4 Operating Cash Flow/ Financial Debt
Financial Debt Ratio (OCDR)
d) Cash flow Coverage Ratio (CCR) 3 Cash flow from operation / Debts to be
Serviced
5 Operational a) Stock Turnover Days (STD) 4 (Total Inventory/COGS)*360
Efficiency b) Trade Debtor Collection Days 3 (Total Accounts Receivable/Sales)*360
(10%) (TDCD)
c) Asset Turnover (AT) 3 Sales /Average Total Assets
6 Earning Quality a) Operating Cash Flow to Sales 3 Operating Cash flow / Sales
(5%) (CFS)
b) Cash flow based accrual ratio 2 NI-(CFO+CFI) /Average Net Operating
(CFAR) Assets
Bangladesh Institute of Bank Management Dr. M. Mahabbat Hossain

Decision Usefulness
Who is the decision maker?
Purpose of decision making?
Type of the entity?
Life cycle of the entity?
When the decision is taking?
Where the entity is working?
Importance of the decision?

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Allahu Alam
Jazakumullahu Khairan

Dr. Md. Mahabbat Hossain

BBA & MBA (Accounting), PhD. (IBA, RU), DIB (IIBI, UK), CIPA & CSAA (AAOIFI)
Faculty Member, BIBM;
Member, WG of AAOIFI;
Academic Advisor, CSBIB;
Member, SSC of SBAC Bank Ltd.;
Member, SSC of Meghna Bank Ltd.;
Member, SSB of B E X I M C O SUKUK;
Member, SSB of IDLC Shariah Fund; and
Member, SSB of Summit Communication Ltd.
Email: mahabbat@bibm.org.bd; Mobile: +8801716373565
BIBM