Gives creditors lenders or investors an idea whether

•
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