CMA USA PART2 SECTION-A
FINANCIAL RATIO ANALYSIS:
Financial ratio analysis is used to analyze a company's financial statement.
RATIOS” S ARE CLASSIFIED INTO:
1. LIQUIDITY RATIO
2. LEVERAGE, SOLVENCY, CAPITAL STRUCTURE RATIO, AND EARNING COVERAGE RATIO.
3. ACTIVITY RATIO
4. PROFITABILITY ANALYSIS
LIQUIDITY RATIO
Liquidity means the ability of a firm to pay its short-term liability
Liquidity ratios are:
1. current ratio
2. quick ratio
3. cash ratio
4. networking capital ratio
Current ratio
It is the most commonly used ratio, it measures the ability of a firm to pay its current liability with current assets.
Current ratio=current asset÷ Current liability
COMPANY WITH AGGRESSIVE FINANCING POLICY:
>They maintain the lower current ratio
>Higher risk
A COMPANY WITH CONSERVATIVE FINANCIAL POLICY:
>they maintain the higher current ratio
>lower risk
QUICK RATIO:
It is also called the acid-test ratio.
QUICK RATIO=QUICK ASSET ÷ CURRENT LIABILITY
QUICK ASSET = CASH AND CASH Equivalents+ACCOUNT Receivables+MARKETABLE SECURITIES
QUICK ASSET=CURRENT ASSET-{INVENTORY+PREPAID EXPENSES}
NOTE: It measures the ability of a firm to pay its short-term obligation by using its most liquid asset.{without inventory and prepaid expenses}
CASH RATIO:
CASH RATIO=CASH AND CASH Equivalents+MARKETABLE SECURITIES
CURRENT LIABILITY
CASH FLOW RATIO:
CASH FLOW RATE OPERATING CASH FLOW÷ PERIOD END CURRENT LIABILITY
It measures how many times greater than cash flow generated by operations is than the current liability.
NET WORKING CAPITAL:
WORKING CAPITAL=CURRENT ASSET -CURRENT LIABILITY
Net working capital is also called working capital.
NET WORKING CAPITAL RATIO=WORKING CAPITAL÷TOTAL ASSET
DATES RELATED TO DIVIDENDS:
1. DATE OF DECLARATION
On this date, the board of director of a company officially announce or declare a dividend.
Journal entry: Dr-retained earnings
Cr-dividend payable
2. DATE OF RECORDING
3. DATE OF PAYMENT
On this date company actually paid dividends to shareholders.
JOURNAL ENTRY: Dr. dividend payable
Cr. Cash
BASIC FINANCIAL STATEMENT ANALYSIS
FINANCIAL STATEMENT
1. BALANCE SHEET
2.STATEMENT OF CASHFLOW
It provides information about companies' cash inflow and cash outflow during the period.
3. INCOME STATEMENT
It provides information about companies' results of operation during the period.
FORMATE OF INCOME STATEMENT
Revenues $XXXXX
Cost of goods sold XXXX
Gross profit $XXXXX
Selling, general, and administrative expenses XXX
Operating income $XXXXX
Interest and dividend income XXX
Interest expense XXX
Non-operating gains/(losses) XXXX
Income from continuing operations before income taxes $XXXXX
Provision for income taxes on continuing operations XXXX
Income from continuing operations $ XXXX
Discontinued operations: Gain/(loss) from operations of discontinued Component X
(including gain/[loss] on disposal of $XXX) XXXX
Income tax benefit or (income tax expense) XXX
Income (loss) on discontinued operations XXXX
Net Income $ XXXX
COMPETITIVE FINANCIAL STATEMENT ANALYSIS
It helps to company the financial statement of different companies.
The comparative financial statements can be
1. VERTICAL ANALYSIS
2. HORIZONTAL ANALYSIS
>VERTICAL ANALYSIS:
It is also called a common-size financial statement.
It helps to compare the performance of companies of different sizes during the same period.
Items on the income statement are usually presented as a percentage of sales revenue.
The item on the balance sheet is usually presented as a percentage of total assets.
Example:
INCOME STATEMENT OF VERTICAL ANALISIS [sales]
Sales 1000 100% 1000/1000
-Cogs 300 30% 300/ 1000
Gross profit 700 70% 700/1000
-operating expenses 200 20% 200/1000
=operating income 500 50% 500/1000
BALANCE SHEET [TOTAL ASSET]
CASH
A/C RECEIVABLES
INVENTORY
CURRENT ASSET
FIXED ASSET
=TOTAL ASSET
-CURRENT LIABILITY
-NON-CURRENT LIABILITY
EQUITY
=TOTAL EQUITY AND LIABILITY
Example:
OPERATING PROFIT
Year 1= $500/$1000= 50%
Year 2= $600/$1300=46.1%
NET PROFIT
Year 1=$120/$1000=12%
Year2=$180/$130= 13.8%
Operating income decreased, and net income increased.
>HORIZONTAL ANALYSIS:
It is also called a common-base year statement or trend analysis.
It helps to compare the performance of a single company or single industry over some time.
Common base year statement=new line item amount /base year item amount
Or
=new line item-old line item amount/base year amount