Financial Statements Analysis:

Assets classification:

Current Asset:

Asset that can be converted into cash/cash equivalents/any other resources within one year.

Example:

Accounts Receivable, Inventory, Loan paid, Bank deposit

Non-current assets:

Asset that can be converted into cash/cash equivalents/any other resources beyond one year.

Example: land, property plant and equipment, Furniture, patent, copyright, trademarks

Mr. x issued a loan in favor of Mr. Y for taka 10,000. R. Y is committed to pay loan for taka 7500 within
one year and remaining he will in 18th month.

Current asset: 7500

Non-current asset: 2,500

Liability Classification:

Current Liabilities: obligation that should be paid within one year.

Example: Notes payable, Accounts payable, Salaries payable, utilities payable

Non-current liabilities/Long term liabilities : obligation that should be paid after one year. It is long
term liabilities

Example: Debenture, Notes payable

Working capital= Current assets – Current liabilities, WC is used to maintain business operation.
WC loan taken from bank

Different Ratios:

Current Ratio: (Current Assets/Current liabilities)

Standard: 2:1

Quick Ratio: (Current asset- Inventories) / (current liabilities- Bank overdraft))

Standard 1:1

Return on Assets: (Net income/ Average total assets)

Gross profit Ratio: (Gross profit/Net Sales)

Net Profit Ratio: (Net profit/ net sales)

Debt to assets ratio: (Debt/ Total assets)

Debt to equity ratio: (Debt/Equity)

EPS (Earning per share): (Net income attributable to equity holder/Number of share outstanding)

Interest coverage ratio: (operating profit or. EBIT /interest expenses)

Financial Statement Analysis:

Common Size Analysis: through preparing common size statement

1) Common size analysis for the income statement: Show each item in the income statement as a
percentage of gross sale
2) Common Size analysis for the balance sheet: Show each item in the balance sheet as a percentage of
total assets

Again the analysis can be made in two ways

1) Horizontal Analysis

2) Vertical Analysis

The accompanying balance sheet and profit and loss account relate to Hypothetical Ltd is as
follows.
Balance Sheet as at March 31 (Amount in Lakh of Taka)
Particulars Previous Percentage Current Percentage
Year Year
Liabilities
Equity share capital(of Tk. 10 240 40% 240 37%
each)
General reserves 96 16% 182 28%
Long-term loans 182 30% 169.5 26%
Creditors 67 12% 52 8%
Outstanding expenses 6 1% 0 0%
Other current liabilities 9 1.5% 6.5 1%
Total Liabilities 600 650

Assets:
Plant (net of accumulated 402 67% 390 60%
depreciation)
Cash 54 9% 78 12%
Debtors/ AR 60 10% 65 10%
Inventories 84 14% 117 18%
Total Assets 600 650

Income Statement for the year Ended March 31 (Amount in Lakh of Taka)
 Particulars Previous Percentage Current Percentage
year year
Gross sales 370 100% 480 100%
(Less) Returns (20) (5%) (30) (7%)
Net Sales 350 95% 450 93%
(Less) Cost of goods sold (190) 51% (215) (45%)
Gross profit 160 43% 235 48%
(Less) Selling, general and (50) (14%) (72) (15%)
Administrative cost
Operating profit(EBIT) 110 29% 163 33%
(Less) Interest Expenses (20) (5%) (17) (4%)
EBT 90 24% 146 29%
(Less) Taxes (31.5) (9%) (51.5) (11%)
Net Income(EAT) 58.5 15% 94.9 18%
Requirement:
a. Convert these into common-size statements( Only show percentage not amounts)
b. Calculate Cash Conversion Cycle (CCC) for the current year and make comments on
company’s operating efficiency and liquidity.
c. Calculate Current Ratio, Quick Ratio (Both Year)
d. Calculate Debt to Assets Ratio, Debt to Equity Ratio, Financial Leverage Ratio, and
Interest Coverage Ratio and make comments on company’s solvency (Both Year).

Cash Conversion Cycle (CCC)/ Cash Cycle: IHP+ARCP-APPP

Operating Cycle: IHP+ARCP

Accounts Receivable Turnover: (Net credit sales/average accounts receivable)

Avg A/R= (Beginning AR+Ending AR)/2
ARCP (Accounts Receivable Collection Period): (360/AR turnover)

Accounts Payable Turnover: (net credit purchase/Avg. accounts payable)

Accounts payable Payment period (APPP): (360/ AP turnover)
Inventory Turnover: (Cost of Goods sold/Average inventory)

Inventory Holding Period (IHP): (360 days/ Inventory turnover)

Janu 1 (APPP) Feb 15 March 20 (ARCP ) April 25

(IHP)

Purchase= cost of goods sold+ closing inventory –beginning inventory

January 1 , beginning inventory 5 taka

Purchase during the year 100 taka

Sale during year 85 (COGS) taka cost sold Tk.155

Closing inventory 20 tk