CHAPTER 2

Financial
Analysis
Part 1 Part 2
□ Definitions and Basic sources and uses of
functions of financial funds
statement
□ Financial ratios

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 1.
What is Financial
Analysis?
Let’s start with the first set of slides
“ Is the process of collecting
and refining financial data to
provides necessary information
to aid decision making in an
effort to determine future
course of actions”
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-The Study of Financial
Statement (i.e. historical
performance)
Enables:
-To asses operating result &
financial status
-To assist in developing plans
and strategies
Consists of:
Balance sheet,
Income Statement,
Cash flows statement,
Statement of retained earnings

Primary source of data information

and the standing of operations and
financial
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specific point in time
Consist of :
“
Represent snapshot of firm’s financial position at

- Assets (i.e. current and fixed)

- Liabilities (i.e. short and long term)
- Owner’s equity (i.e. common equity)
Balance Sheet Equation
Assets = Liabilities + Owner’s Equity

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Balance Sheet as at December 20XX

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 Income Statement

The summary of the firm’s operating result over a period of time

Shows Revenues (i.e. sales & other income), costs (i.e. COGS),
expenses incurred & Profit
Profit = Sales - Expenses
Split into 2 parts:
Operating activities
Financing activities

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 Income Statement
Income Statement for the year ended December 20XX

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 Statement of Retained Earnings

✔Shows the distribution of the firm’s net income

✔How much the retained earnings
✔Relates to dividend policy
✔Investment & Need for Dividend

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 Statement Of Retained Earning for
the year ended Dec 31, 2018

Balance of retained earnings Dec XXX

31,2017
Add: Earning after tax 2018 XXX

Less: Dividend 2018 XXX

Balance of retained earnings Dec XXX

31, 2018

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 Cash flow statement
Summarizes the inflows and outflows of cash
transactions for the year

Divided into 4 categories:

Vestibulum congue Vestibulum congue Vestibulum congue Vestibulum congue

⮚C/flow from Operations

⮚C/flow from Investments
⮚C/flow from financings
⮚Reconciliation of cash

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 FINANCIAL RATIOS
As an Analysis tools (i.e. to interpret and evaluate firm’s
performance)
Base on Financial Statement
Users (i.e. Managers, investors, or interested parties )
Two ways to interpret:
✔Trend analysis (i.e. vertical or time series)
✔Comparative analysis (i.e. horizontal)

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i. Liquidity ratios (i.e. how liquid the firms to meet short-term
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obligation)
ii. Activity ratios (i.e. to measure efficiency of assets to
generate sales)
iii. Leverage ratios (i.e. how firms finance the its assets, to
determine the capital structure)
iv. Profitability ratios (i.e. measure the efficiency of firms to
generate profit)
v. Market/Equity ratios (i.e. concern to shareholders)

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FINANCIAL RATIOS
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i. Liquidity ratios (i.e. how liquid the firms to meet short-term
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obligation)
Current Ratio= CA / CL
The ratio is better than industry. It shows that the company able to
pay their short term obligation.
Quick Ratio/Acid Test Ratio= (CA-Inventory-PE)/CL
The ratio is better than industry. It shows that the company able to
pay their short term obligation without relying on the inventory
and prepaid expenses.

(Both ratio higher better for the15company)