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    1.financial Statment Interpretaion

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    Rana Ammar waheed
    The document discusses the interpretation of financial statements by various users and criticisms of financial reporting. It outlines the information needs and items of interest for different users including investors, employees, lenders, suppliers, customers, and the general public. It then discusses criticisms such as financial statements providing little insight into the future, unrecognized assets and liabilities, excessive information cluttering statements, and use of estimates and historical cost. Finally, it outlines various financial and non-financial performance measures used to analyze company performance.

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    1.financial Statment Interpretaion

    Uploaded by

    Rana Ammar waheed
    9 views7 pages
    The document discusses the interpretation of financial statements by various users and criticisms of financial reporting. It outlines the information needs and items of interest for different users including investors, employees, lenders, suppliers, customers, and the general public. It then discusses criticisms such as financial statements providing little insight into the future, unrecognized assets and liabilities, excessive information cluttering statements, and use of estimates and historical cost. Finally, it outlines various financial and non-financial performance measures used to analyze company performance.

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    1.Financial Statment Interpretaion

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    The document discusses the interpretation of financial statements by various users and criticisms of financial reporting. It outlines the information needs and items of interest for different users including investors, employees, lenders, suppliers, customers, and the general public. It then discusses criticisms such as financial statements providing little insight into the future, unrecognized assets and liabilities, excessive information cluttering statements, and use of estimates and historical cost. Finally, it outlines various financial and non-financial performance measures used to analyze company performance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views7 pages

    1.financial Statment Interpretaion

    Uploaded by

    Rana Ammar waheed
    The document discusses the interpretation of financial statements by various users and criticisms of financial reporting. It outlines the information needs and items of interest for different users including investors, employees, lenders, suppliers, customers, and the general public. It then discusses criticisms such as financial statements providing little insight into the future, unrecognized assets and liabilities, excessive information cluttering statements, and use of estimates and historical cost. Finally, it outlines various financial and non-financial performance measures used to analyze company performance.

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    © All Rights Reserved
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    of 7

    1.

    Interpretation of financial statements


    User Information needs Items of interest
    Investors/ potential investors Risks and returns relating to Trend analysis revenue, costs
    their investment and profits over the past few
    Security of dividend payments years
    Information to make decisions Dividend cover
    about buying, selling or holding Events and announcements
    shares after the reporting period
    Future growth prospects Share price
    Corporate governance
    reports.

    Employees Stability of the company (job Profitability and cash position


    security and job prospects) Increases in salaries (%)
    relative to increases in profit
    Information about the and dividends
    company’s ability to pay Directors’ remuneration
    bonuses or higher salaries
    Lenders (banks, bondholders) Whether the entity has Total borrowing by the entity:
    sufficient cash flow to repay financial gearing
    loans Interest cover
    The entity’s ability to pay New charges created over the
    interest entity’s assets
    The adequacy of collateral/ Cashflows
    security for loans and bonds
    Suppliers The entity’s ability to settle its Net current assets
    liabilities The entity’s ability to Growth record
    survive and continue as a
    customer

    Customers The entity’s ability to survive Growth record


    and continue as a supplier Cash flow

    Government The entity’s contribution to Revenue and profit


    the economy Market share
    Regulation of activities
    Taxation
    Obtaining government
    statistics

    General public Environmental and social Environmental and social


    awareness reports
    Contributions to the local Directors’ report
    economy Narrative business review

    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 1


    2. Criticisms of financial reporting
    2.1 Historical information

    Little insight into future

    2.2 Unrecognized assets and liability

    Goodwill, reputation, employee, skills

    2.3 Clutter

    Lot of general information in disclosure, financial statements become


    increasingly clutter with extensive information so it’s harder to find general
    information

    2.4 Financial and non-financial information

    Current and past profits, cashflows are not the only determinate of future
    success.

    Other factors like governance, management style, risk to which entity is


    exposed are also important for long term success, but financial statements say
    little about these factors

    2.5 Estimates /professional judgement

    Use of estimates are subjective which makes comparison difficult with other
    entities financial statements, use of estimates gives an opportunity of window
    dressing

    2.6 Use of historic cost

    Some standards allow historic cost and in case of inflation carrying values
    become outdated in some years and users would be unable to understand the
    financial position of business

    2.7 Choice of accounting policy

    Choice makes financial statement comparison difficult.

    2.8 Scope of the audit

    Audit is performed on sample basis rather than full financial statements

    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 2


    3.Performance measures

    1) Financial (Ratios)
    Compare with
    2) Non-Financial • Previous years
    • Competitors
    3) Alternative • Industry average
    performance measures • Benchmarks
    (APMs) • Forecast(budgets)

    3.1 Financial Ratios


    Financial performance

    Profitability Efficiency

    Gross profit Asset turnover Investors


    Net profit margin Non-current asset turnover Earnings per share (EPS)
    Return on capital employed Price/Earnings (P/E ratio)
    Return on equity Profit retention ratio
    Dividend payout ratio
    Dividend yield
    Dividend cover

    Financial position

    Liquidity Working capital management Financial leverage

    Current ratio Inventory holding period Gearing


    Acid-test ratio Receivable’s collection period Interest cover
    Payable’s payment period

    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 3


    Profitability ratios
    Favorable Reasons

    Gross Profit % = G.P/Sales x 100 Increase in Selling price


    Decrease in cost/ unit

    Net Profit % = PBIT/Sales x 100 Increase in GP ratio


    Proper control over expenses
    = Expenses / sales x 100

    proper utilization of resources


    Asset turnover = Sales/Capital Employed
    for sales generation

    Increase in NP ratio (or) Asset


    ROCE = PBIT/Capital Employed*
    turnover ratio

    *Capital Employed = Equity + Long term liabilities (OR)


    Total assets – current liabilities

    ROCE is effected by:

    (i) Revaluation policy


    In case of revaluation gain, capital employed increases so ROCE will decrease

    (ii) In early years of investment


    ROCE will be lower as Capital employed will increase

    Liquidity & Solvency ratios

    (i) Liquidity ratios

    IDEAL
    Current Ratios = Current Assets / Current Liabilities 2:1

    Quick/Acid test Ratio 1:1


    = (C. Assets – Inventory – Prepayments) / C. Liabilities

    Favorable Reasons
    Inventory turnover period Increase in liquidity position
    = Avg. inventory / COS x 365 Decrease in inventory obsolescence chances
    Decrease in holding cost

    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 4


    Receivable Collection Period Increase in liquidity position
    = Avg. receivables / credit sales (or sales) x 365 Decrease in bad debts
    Less sales

    Payable Payment period


    = Avg. Payables/Purchases (COS) x 365 Increase in liquidity position

    ✓ Working Capital Cycle:

    Inventory days (holding period) xxx


    Receivable Collection Period xxx
    Payables Payment period (xxx)
    x/(x)

    (ii) Solvency ratios

    IDEAL
    Gearing Ratio = Long term debt / Long term debt + Equity x 100 50%
    (measures risk)

    Debt Equity ratio = Debt / Equity x 100 100%

    Interest cover = PBIT / Interest Expense Higher

    Investor’s ratios
    Favorable Reason
    EPS = Earnings (PAT) / weighted avg. no. of shares

    Price earnings ratio = MV of per share / EPS


    (or)
    P/E ratio = MV of total shares / PAT

    Earning yield = EPS / MV of shares

    Dividend yield = Dividend per share / MV of per share

    Dividend cover = PAT / Dividend

    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 5


    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 6
    Zubair Saleem SBR -Notes Interpretation SKANS School of Accountancy 7

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