Financial Statement Analysis
Question1
Mr Raj joined the company named Kamat Ltd as an accounts executive. On the very first day, his senior gave him the task of designing the Common-Size Statements with adequately structuring its types for the financial statements. Discuss about common size statement and its types. Also, how Comparative statements and common size statement differs. (10 marks)
Ans :
Introduction:
One of the essential instruments for performing financial analysis is the use of common-size statements, which allow investors and financial analysts to comprehend and compare various organizations’ financial conditions and performance. It is a financial statement representing each line item as a % of a base figure.
Concepts and the Applications:
Preparing accurate financial statements is a fundamental component of accurate financial reporting for any organization. It is helpful to have an understanding of the company’s financial status as well as its performance and liquidity. One sort of financial statement analysis is known as common-size statements. These statements display the financial data as a percentage of the company’s total assets, liabilities, or equity.
Conclusion:
In conclusion, common-size statements are a vital instrument for economic research since they enable investors and financial analysts to evaluate various organizations’ financial status and performance. It is easier to discern trends and patterns in a company’s financial performance over time when each item is expressed as a daily percentage.
Question2
Amrita intends to make a stock market investment. She fits the description of an investor who seeks risk, but she also thinks that prior to investing, it’s crucial to have a solid understanding of market ratios. Before making any investing decisions, Amrita should consider certain crucial market ratios, discuss any five of them (10marks)
Ans :
Introduction:
Investing in the stock market can be a great way to grow your wealth, but it also involves taking risks. Before making any investment decisions, it is crucial to have a solid understanding of the market and its various ratios. This essay will discuss five crucial market ratios that Amrita should consider before making any stock market investments.
Concepts and Applications:
Price-to-Earnings Ratio (P/E Ratio): The P/E ratio measures the price of a stock compared to its earnings per share. It is calculated by dividing a company’s current stock price by its earnings per share. A higher P/E ratio indicates that the market has higher expectations for the company’s future earnings potential.
For example, if a company’s stock is trading at $100 per share, and its earnings per share are $5, its P/E ratio would be 20.
Price-to-Sales Ratio (P/S Ratio): The P/S ratio measures a company’s stock price relative to its sales revenue. It is calculated by dividing a company’s market capitalization by its total revenue. A lower P/S ratio indicates that the company’s stock is undervalued, while a higher P/S ratio indicates that the stock is overvalued.
Conclusion:
In conclusion, there are many different market ratios that Amrita should consider before making any stock market investments. These ratios can help her determine the value of a company’s stock, its level of debt, its profitability, and its ability to generate income for investors.
Question3
Following are the particulars available for Z and X, LLP
Particulars |
(Rs in ‘000) |
retained earnings |
860 |
accounts receivable |
250 |
supplies |
150 |
salaries payable |
150 |
equipment |
1500 |
unearned revenue |
200 |
accounts payable |
540 |
cash |
550 |
prepaid insurance |
300 |
common stock |
1000 |
-
Prepare Vertical Form Balance Sheet out of the details as shared in the table. (5 Marks)
Ans :
A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a particular point in time. The vertical form of the balance sheet lists the assets, liabilities, and equity in a top-to-bottom format.
Using the particulars provided in the table, the vertical form of the balance sheet for Z and X, LLP would be:
Amount (Rs in ‘000) |
|
Assets: |
|
Cash |
550 |
Accounts Receivable |
250 |
Supplies |
150 |
Equipment |
1500 |
Prepaid Insurance |
300 |
Total Assets |
2750 |
Liabilities and Equity: |
|
Accounts Payable |
540 |
Salaries Payable |
150 |
Unearned Revenue |
200 |
Total Liabilities |
890 |
Common Stock |
1000 |
Retained Earnings |
860 |
Total Equity |
1860 |
Total Liabilities and Equity |
2750 |
In summary, the vertical form of the balance sheet for Z and X, LLP presents the company’s financial position as at a particular date, providing a snapshot of the assets, liabilities and equity. This information can be useful for stakeholders such as investors, creditors, and management in making decisions.
Define and calculate the current ratio, discuss its significance.
Ans :
Introduction:
Financial ratios are tools used to analyze the financial performance of a company. These ratios are essential for investors, creditors, and other stakeholders to evaluate a company’s financial health.
Definition of Current Ratio:
The current ratio is a liquidity ratio that measures a company’s ability to pay its short-term liabilities with its short-term assets. It is also known as the working capital ratio, and it is calculated by dividing a company’s current assets by its current liabilities. Mathematically, the current ratio can be expressed as:
Current Ratio = Current Assets / Current Liabilities
In the case of Z and X, LLP, the current ratio can be calculated as follows:
Current Ratio = (250 + 150 + 550 + 300 + 1000) / (150 + 150 + 200 + 540)
= 2250 / 1040
= 2.16
Conclusion:
In conclusion, the current ratio is an essential financial ratio that measures a company’s ability to pay off its short-term obligations with its short-term assets. It is an essential tool for investors, creditors, and other stakeholders to evaluate a company’s financial health.
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