ACCY111 Lecture Notes - Lecture 10: Profit Margin, Accounts Receivable, Financial Statement Analysis
Analysis and Interpretation of Financial Statements
Sources of financial information:
• Financial statements
• Accompanying schedules
• Explanatory notes
• Financial advisory services
• Australian stock exchange (ASX)
• Stockbroking firms
What can you do with this data/information to make it meaningful?
Technical skills to learn this week…
• Comparative analysis
• Horizontal analysis
• Vertical analysis
• Ratio analysis
• Liquidity ratios
• Solvency ratios
• Profitability ratios
• Limitations of financial analysis
Comparative Analysis:
3 types of useful comparative information
1. Intra-entity basis
• Comparisons within a single entity (detects changes in financial relationships and trends)
2. Industry averages
• Between entities in same industry (determines position relative to others)
3. Inter-entity basis
• Between other entities (indicates competitive position)
Why do this?
• Helps to identify relationships among data
• Reduces data to an understandable basis
• May be helpful in forecasting performance
3 basic comparative analysis techniques
1. Horizontal analysis
• Evaluates a series of financial data over time
2. Vertical analysis
• Evaluates financial items in relation to a base amount
3. Ratio analysis analysis
• Evaluates a comprehensive range of financial relationships representing difference aspects of an
entity's activities.
Percentage analysis:
Horizontal analysis
• Uses preceding years financial statements
• Focuses on change from year to year
• Compares % changes rather than dollars
• One year is selected as the base year and then increases or decreases are based on the formula:
From 2015 to 2016 the cash at bank of Sandra ltd increased by $30000 from $740000 to $770000.
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Document Summary
Sources of financial information: financial statements, accompanying schedules, explanatory notes, financial advisory services, australian stock exchange (asx, stockbroking firms. Technical skills to learn this week : comparative analysis, horizontal analysis, vertical analysis, ratio analysis, liquidity ratios, solvency ratios, profitability ratios, limitations of financial analysis. Why do this: helps to identify relationships among data, reduces data to an understandable basis, may be helpful in forecasting performance. Horizontal analysis: uses preceding years financial statements, focuses on change from year to year, compares % changes rather than dollars, one year is selected as the base year and then increases or decreases are based on the formula: From 2015 to 2016 the cash at bank of sandra ltd increased by from to . Trend analysis: needs 3 or more years, used to assess growth prospects, each year compared to base year. Ratio analysis: ratio analysis can be used to make both: Inter-entity comparisons: 3 types of ratios, liquidity, solvency (financial stability, profitability.
