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Financial statement
analysis

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Table of Contents
PART A..................................................................................................................................... 1
(1) Objectives of financial statements...............................................................1
(2) Conceptual Framework 2010......................................................................... 1
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(3) Dupont analysis...................................................................................................1


(4) Changes in working capital.............................................................................1
(5) Earning quality.....................................................................................................2
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PART B..................................................................................................................................... 2
(6) Ratio calculations................................................................................................2
(7) Interpretations..................................................................................................... 2
(8) Recommendation................................................................................................2
(9) Cash flow and profit...........................................................................................2
REFERENCE............................................................................................................................3
APPENDIX............................................................................................................................... 1

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PART A
(1) Objectives of financial statements
Equity investors have the objectives to know the business future
earning capacity, growth potential and security of their holdings. All the
investors are very much interested to get higher amount of returns.
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Therefore, they make risk and return analysis associated with their
invested funds. Lenders such as bond investors have the objectives to
know the short term as well as long term solvency of the business
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(Bushman and Smith, 2001). They determine the security of their funds.
Further, they require timely the interest and principal payments. Their
expectations about return are highly depend upon the amount, timing and
the uncertainty of the business future cash flows. Thus, they assess the
business ability to get higher the amount of profitability and its stability.
They determine the Government and other agencies are interested to
know the business activities to ensure efficient allocation of resources so
as to improve their tax incomes.

(2) Conceptual Framework 2010


(a) Full disclosure principle says that all the required information for
investors, lenders and other users should be disclosed in the financial
statements. Going concern principle assumes that company will operate
for a longer time period (Scott, 2014). Further, Business entity principle
says that all the business is separate from the entity. Therefore, financial
statement shows only the business transaction not the owner's personal
transaction.

(b) Relevance characteristic says that all the relevant information


should be disclosed because misstatements can influence the user
decisions negatively. Another characteristic is comparability, says that all
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the financial information must be comparable to the other accounting
periods (Edwards, 2013). Therefore, users can identify the comparative
changes and trends of the business performance and the financial position.

(3) Dupont analysis


(a) It is a measurement of return on equity through identifying the
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operational efficiency, assets uses efficiency and financial leverage


(Chang, Chichernea and HassabElnaby, 2014).
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ROE = Profit margin*Total assets turnover*assets to equity


Calculation is enclosed in appendix
(b) Interpretation: The profit margin, assets turnover and financial
leverage ratios of the company are 0.0625, 0.711 and 1.73 respectively.
Therefore, the return on equity is 7.69%. Thus, it can be recommended
that company has to maintain its assets in an efficient manner. Further, it
has to improve its profitability percentage so as to increase its business
performance. This in turn helps to enhance return on equity.

(4) Changes in working capital


(a) Calculations
Enclosed in Appendix
(b) Interpretations
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From the above statement, it can be concluded that company is
increasing its current assets and decreasing its current liability so as to
improve the working capital (Financial Ratio Analysis, 2015). This in turn
helps organization to increase the ability to pay its short term obligations.
Moreover, it helps business to improve the growth in future period.
(5) Earning quality
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Investors determine the earning capacity of the organization.


Decreasing trend of earnings result in reducing the business growth.
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Decreased business profits, earning per share, price to earnings growth


ratio, negative cash flow, inadequate liquidity and decreased solvency
position indicate decreased earning capacity of the business (Reimers,
2013).
PART B
(6) Ratio calculations
Enclosed in Appendix
(7) Interpretations
Fraser & Neave gross profit tends to increase while the net
operational results get declined to 6.25% because of high operating cost.
However, net cash flow of the company is negative amounted to -9.
Moreover, liquidity of the company gets declined (DRURY, 2013). Further,
business has no solvency position to pay its long term liabilities because
of negative net cash flow. Thus, business is not able to pay its finance
obligations out of cash inflow. Further, the earning per share gets
declined to 7.69% that indicates lower shareholder returns.

(8) Recommendation
Mr. Shinawatra has to improve its sales and profitability so as to
avail positive cash flow. Further, operating cost should be declined for
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getting higher amount of profits. It helps to improve the business
performance (Zimmerman and Yahya-Zadeh, 2011). On contrary, business
has to increase its solvency position so as to financially strengthen its
position. This in turn helps company to attract new investors.

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(9) Cash flow and profit


Operating profits and cash flows are different because profitability
statements involve both the cash and non cash expenditures such as
depreciation. Further, transactions are recorded on accrual basis not on
cash basis (Lee, 2014). Therefore, it may be possible that cash flows can
be negative in case of profit availability.

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REFERENCE
Books and Journals
Bushman, R. M. and Smith, A. J., 2001. Financial accounting information
and corporate governance. Journal of accounting and Economics.
32(1). pp.237-333.
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Chang, K.J., Chichernea, D.C. and HassabElnaby, H.R., 2014. On the


DuPont analysis in the health care industry. Journal of Accounting and
Public Policy. 33(1). pp.83-103.
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DRURY, C. M., 2013. Management and cost accounting. Springer.


Edwards, J. R., 2013. A History of Financial Accounting (RLE Accounting)
(Vol. 29). Routledge.
Lee, T. A., 2014. Cash Flow Reporting (RLE Accounting): A Recent History
of an Accounting Practice. Routledge.
Reimers, J. L., 2013. Financial Accounting: Pearson New International
Edition: A Business Process Approach. Pearson Higher Ed.
Scott, W. R., 2014. Financial accounting theory. Pearson Education Canada.
Zimmerman, J. L. and Yahya-Zadeh, M., 2011. Accounting for decision
making and control. Issues in Accounting Education. 26(1). pp.258-
259.
Online
Financial Ratio Analysis, 2015. [Online]. Available through:
<http://www.slideshare.net/algelyee/financial-ratio-analysis-final-
report>. [Accessed on 22 December 2015].

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APPENDIX
Calculation of Return on Equity:
Profit margin Profit /sales 0.0625
Total assets turnover 0.71111111
ratio Sales/Assets 11
1.73076923
Financial leverage Assets/Equity 08
Profit margin*Assets
ROE turnover*leverage 7.69

Changes in Working capital:


Extract from the statement of cash flows for the year ended 30
September, 2015
Operating profit 468
Increase in current assets and decrease in
current liability 2015 2014
Receivables 1325 1250 75
Inventory 869 786 83
Payables 1035 1360 325
Net cash flow from operating activities 951

Ratio Calculations:
Company data
Ratios Formula 2013 2014 2015
Return on
capital
employed PBIT/Equity and NCL 16.00% 15.00% 20.66

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Gross profit
percentage Gross profit/Revenue * 100 30.00% 35.00% 37.5
Net margin Net margin /revenue*100 19.00% 18.00% 6.25
Net cash inflow
coverage NCL/Revenue 15.00% 14.00% -5.625
Cash and
Quick ratio receivable/payables 1.5 1.1 1
Solvency ratio Net cash inflow/equity 25.00% 29.00% -6.92
Profit based
interest cover Net profit/Finance cost 3.2 2.7 2
Cash based Net cash inflow/Finance
interest cover cost 3 2.4 -1.8
Receivable
collection
period Receivable/Revenue*365 32 44 57.03
Earnings per
share Net profit/Equity 18 13 7.69

Calculation of ratios for the year 2015

Ratios Formula (In $000) 2015


Return on capital 25/(130- 20.66115
employed PBIT/Equity and NCL 9)*100 70248
Gross profit/Revenue *
Gross profit percentage 100 60/160*100 37.5
Net margin
Net margin /renvenue*100 10/160*100 6.25

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Net cash inflow
coverage NCL/Revenue (9)/160*100 -5.625
Cash and
Quick ratio receivable/payables 30/30 1
-
6.923076
Solvency ratio Net cash inflow/equity (9)/130*100 9231
Profit based interest
cover Net profit/Finance cost 10/5 2
Cash based interest Net cash
cover inflow/Finance cost (9)/5 -1.8
Receivable collection Receivable/Revenue*3
period 65 25/160*365 57.03125
7.692307
Earning per share Net profit/Equity 10/130*100 6923

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