• Gives creditors, lenders, or investors an idea whether they should continue to do business or invest in that particular entity • supplements and complements the information provided in the financial statements. • Should meet the needs of the primary users • Presented in a format and language that is understandable, clear and straight forward. (CANADIAN PERFORMANCE REPORTING BOARD, N.D) 17
General Disclosure Principles on Management Discussion And Analysis (MD&A) General Disclosure Principles 1. Through the Eyes of Management 2. Integration with Financial Statements 3. Completeness and Materiality 4. Forward-Looking Orientation 5. Strategic Perspective 6. Usefulness (CANADIAN PERFORMANCE REPORTING BOARD, N.D) 18
Ways Of Analyzing Financial Statement 1. Horizontal analysis – evaluating a business’ financial statement over a period of time such as Year 1 compared to Year 2. Purpose is to show increase or decrease and can be expressed in either percentages or numbers 2. Vertical analysis- Common Size Analyses, comparing small business with large, each amount is presented as a percentage with some base amount. . Example: Stating all Income Statement items as percentages of Sales. . Stating all Balance Sheet items as percentages of total assets. . Shows trends in line items over time. . Comparisons between different firms. 19
Ways Of Analyzing Financial Statement 3. Ratio analysis- to assess how various line items in financial statements relate to each other and to measure relative performance. The ratio analysis uses accrual accounting. 4. Cash flow analysis – to evaluate liquidity and the management of operating, investing, and financing activities as they relate to cash flow. Cash flow analysis can provide further insights into operating, investing and financing activities. 20
Ratio Analysis Begins w ith the calculation of a set of financial ratios designed to show the relative strengths and weaknesses of a company as compared to: Other firms in the industry Leadings firms in the industry The previous year of the same firm • Ratio analysis helps to show whether the firm’s position has been improving or deteriorating • Ratio analysis can also help plan for the future 21
Types of Ratios 1. Liquidity Ratios • Current Ratio • Quick Ratio or Acid Test Ratio 2. Profitability Ratios • Profit Margin • Net Profit Margin • Return on Shareholder’s Equity (RONW) • Return on Assets (ROA) 3. Leverage Ratios • Debt to Equity • Interest Coverage Ratio 22
Types of Ratios (Continued) 4. Market-Based Ratios • Earnings per Share (EPS) • Price Earnings (PE) Ratio 5. Solvency Ratios • Inventory Turnover Ratio • Debtor Turnover Ratio • Working Capital Turnover • Total Asset Turnover 23
Comparative Analysis There are 2 common types of
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