INTRODUCTION TO BUSINESS

FINANCE

By MK
Lecture # 8
Review of the Previous Lecture

 „ Cash Flow Statement „

 Financial Statements Analysis „
 Significance „
 Common Size Analysis
 Topics under Discussion

 „ Financial Statements Analysis „

 Common Size Analysis (Cont.) „
 Ratio Analysis „
 Short-term solvency, or liquidity, ratios ƒ
 Current Ratio ƒ
 Acid Test (Quick) ratio ƒ
 Cash ratio
 Common-Size Statements

 „ One very common and useful way of

standardized comparison is to work with
percentages instead of dollars. „
 So, a standardized financial statement
presenting all items in percentages is called a
common size statement.
 „ Balance sheet items are shown as a percentage
of total assets and income statement items as a
percentage of sales.
 A2Z Inc., Common-Size Balance
Sheet
 „ If we standardized the 20X2 common size
numbers by dividing each by the 20X1 common
size number, we get a combined common size,
common base year statement.
 In this case, 80.3%/ 80.9% = 99.26%, so NP&E
almost remained the same as a percentage of
assets. (. .) In absolute terms, NP&E is up by
$149 or 5.45%, but relative to total assets, NP&E
fell by 2.6%.
 A2Z Inc., Common-Size Income
Statement
 „ This statement tells us what happened to each
dollar in sales. „ For A2Z interest expense eats up
6.1% of sales, while taxes take another 8.1% of
sales figure. „ Following this, 15.7% of revenues
from sales flow down to bottom as net income;
one-third of which is paid in dividends and
remainder two-thirds is taken as retained
earnings for business. „
 As far as cost is concerned, 58.2% of revenues
are spent on the goods sold
Standardized Financial Statements

 „ Although an organization’s common-size

statements provide a better analytical insight
into the it’s strength and standing, yet it’s
performance and efficiency can be better judged
by comparing these with those of the firm’s
competitors.