Naval Base Secondary School

Principles of Accounts
Topic 16 – Financial Statements Analysis (Textbook Pg. 289 – 308)
Notes

Shirin Ruchti
Name: ______________________ ( 224-16Apr2024
) Class:______ Date:______________

. 16.1 Financial Statements Analysis (Textbook Pg. 291)

Financial statements analysis  Profitably

one

· me
in

in
paper!,
paper 2
S  Liquidity
 efficiency of inventory management
 efficiency of trade receivables management
Absolute figures 1. to be compared across time

Financial ratios 1. Express a

relationship between at least 2

absolute figures.
time
2. To be compared across

3. To be compared against another business

16.2 Profitability (Textbook Pg. 292 to 296)

Profitability  The ability of a business to

generate excess

income to cover its expenses

Absolute figures 1. sales revenue ($)

2. service fee revenue ($)
3. cost of sales ($)
4. Gross profit ($)
5. Profit for the
year the period ($)
Financial ratios 1. Gross profit margin (0)
2. Mark-up on cost ( %)
3. Profit margin ( %)
4. Return on
quality ( %%)

Absolute Figures

Profit
Gross (or loss)
Netsales revenue cost of sales
=

…………………………………………………………………………………………………….
-

1
Ways to improve profitability
sell goods at
higher selling price
1. ………………………………………………………………………………………………..
lower cost price leg buy in bulk
Buy goods
2. ……………………………………………………………………………………………….. ; change suppliers)
at

Increase sources of other income (eg subrent out the extra

3. ……………………………………………………………………………………………….. space ; cash discounts)
Reduce operating expenses
4. ………………………………………………………………………………………………..

Importance of profit
Sustain the daily operations (eg salaries)
1. ………………………………………………………………………………………………..
compensate the investors (eg dividends)
2. ………………………………………………………………………………………………..
.

Reinvest in the business (eg research & development ; expansion)

3. ………………………………………………………………………………………………..
.

4. ………………………………………………………………………………………………..
Compete with competitors

Worked Example: Textbook page 294 Example 16.1

4 possible 2
answers
Profitability Ratios

Refer to table 16.2 in Textbook page 295

Profitability Ratio Formula

Gross Profit
margin ( %) profit evenue
-ross + 100

Mark-up
profits
Cross
on

X 100
cost (v)

Profit rofit for the period

I c 100
margin (0)
X
net sales revenue

Return Profit for period

on
~
the
x 100
equity ( %) Average equity

Worked Example: Workbook page 207 Exercise 1 Question 1

Gross profit
Q1) (a) mark-up cost
Costofsales - 100
……………………………………………………………………………………………………
on =

200 000

……………………………………………………………………………………………………
↓ 100 -
=
298000

67 11 %
……………………………………………………………………………………………………
= .

……………………………………………………………………………………………………
(b) Gross profitmargin Gross
……………………………………………………………………………………………………
=
-
profiavenue x100

200008
* 100
……………………………………………………………………………………………………
= -

498000

% = 40 16
……………………………………………………………………………………………………
.

……………………………………………………………………………………………………
Profit for the period
(c) Profit Margin x 100
……………………………………………………………………………………………………
-L
saleset
=
revenue
80 00 0
498000X106
……………………………………………………………………………………………………
--

16 06 %
……………………………………………………………………………………………………
= .

……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………

3
 - 5 marks !
3

>Worked Example: Workbook page 211 Exercise 1 Question 8

& 8)(a) Through the years the absolute gross profit have improved
…………………………………………………………………………………………………… , by
$21, 000 from $135 000 in 2013 to $143280 in 20x4 to $15
6 000 in 2015
,

…………………………………………………………………………………………………… .

This be attributed to the higher increase in absolute net sales

……………………………………………………………………………………………………
can

revenue of $100 , 000 from $660, 000 in 2013 to $760, 000 in 20x5 as
……………………………………………………………………………………………………
compared to the modest increase of the absolute cost of sales of
……………………………………………………………………………………………………
$) &7000 from $525000 in 2013 to $612000 in 2015
. The absolute
……………………………………………………………………………………………………
profit for the years have improved by $4300 from $70500 in 2013
……………………………………………………………………………………………………
to $71208 in 20x4 to $74800 in 2015
……………………………………………………………………………………………………. This is the resultant of the

higher increase in absolute gross profit of $21 000 from $135 000 in
……………………………………………………………………………………………………
,

20x3 to $156000 in 2015 and the comparatively modest increase of

……………………………………………………………………………………………………
the absolute operating expenses of $16700 from $64500 in 2013
……………………………………………………………………………………………………
to $81200 in 20x5
…………………………………………………………………………………………………… .

……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………

Mark-up on cost
30 November 20X3 30 November 20X4 30 November 20X5

185000 143208
=

525000
x 100 -

558782
X 100 -
-56000x100
= 25 71 % .

= 25 .
63 % = 25 49 % .

Gross profit margin

30 November 20X3 30 November 20X4 30 November 20X5

135000
143208
= x 100
= -

702100
X 100 =
15000
-
X 100

= 20 45 % 20 40 %
. = .
=
20 . 31 %

Profit margin
30 November 20X3 30 November 20X4 30 November 20X5
70500

o
-
71208
X 100
-

- -
X108
- -
- 100
660000 70200

= 10 . 68 % = 10 . 14 % = 9 74 %
.

4
(b) The mark-up on cost of Goodness Pharmacy has worsened from 25 71 %
…………………………………………………………………………………………………… .

in 2013 to 25 63 % in 20x4 to 25 49 % in 2015

…………………………………………………………………………………………………… This
may be because
.
.
.

Goodness Pharmacy is lower

selling price on its products or purchases
……………………………………………………………………………………………………
setting a

its goods at higher cost price over the three years. The gross profit margin
……………………………………………………………………………………………………
a

of Goodness Pharmacy has worsened from 20 45 % in 2013

…………………………………………………………………………………………………… . 20 40 % in 2014
to .

to 20 31 % in 2015
. The
profit margin of Goodness Pharmacy has worsened
……………………………………………………………………………………………………
.

from 10 68 % in 2013 to 10 14 % in 20x4 to 9 74 % in 20xS

……………………………………………………………………………………………………
.
.
.
.

……………………………………………………………………………………………………
(c) The worsening trend can be attributed to the increase in
…………………………………………………………………………………………………… operating
expenses
. This shows that in addition
over the three years
…………………………………………………………………………………………………… to
worsening gross profits
over the
years the business is also less able to manage its expenses
……………………………………………………………………………………………………
,

over the three years contributing to the declining profit margins over the
……………………………………………………………………………………………………
,

three . Goodness trading has become less profitable over the 3 years
……………………………………………………………………………………………………
years
.

……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………

5
 Worked Example: Workbook page 212 Exercise 1 Question 10

Mark-up on cost
Hitech Pte Ltd Ele-city Pte Ltd

4130
125 000
<
,
=
I - X 100 X 100
500008 000

= 25 % = 17 . 65 %

Gross profit margin

Hitech Pte Ltd Ele-city Pte Ltd
125000
I - X 100
625 000 I

=
20 00 %
%
15 00
.

= .

Profit margin
Hitech Pte Ltd Ele-city Pte Ltd

x100 =
-
X 100
30

= 2 31 %
. =
1 . 66 %

(b) The mark-up on cost of Hitech Pte L+d at 25 00 % is better than that of
……………………………………………………………………………………………………
.

Ele-city Pre L+d at 17 65 %. It may be because Hitech Pre Lid is able to set a
…………………………………………………………………………………………………… .

higher selling price as compared to Ele-city Pre (+6. The gross profit margin
……………………………………………………………………………………………………
of Hitech Pre L+d at 20 00 % is better than that of Ele-city Pte L+d
…………………………………………………………………………………………………… .

at 15 00 %. The
profit margin of Hitech Pre L+6 at 2 31 % is better than that
……………………………………………………………………………………………………
. .

of Ele-city Pte LtD at 1 66 % This suggests that Hitech Pte L+d is better
…………………………………………………………………………………………………… .

able to as compared to
……………………………………………………………………………………………………
manage its expenses Ele-city Pte L+d In all .

Hitech Pte (+) is more

profitable than Ele-city Pte L+d
…………………………………………………………………………………………………… .

……………………………………………………………………………………………………
(c) Andy should invest in Hitech Pte (4) as it is more profitable than
……………………………………………………………………………………………………
Ele-City Ple (++
……………………………………………………………………………………………………-

……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
…………………………………………………………………………………………………….
.……………………………………………………………………………………………………

Assignment 16.1: Workbook pg 207, Ex 1 Qn 2, 3.

Assignment 16.2: Workbook pg 211, Ex 1 Qn 9.
Assignment 16.3: Workbook pg 213, Ex 1 Qn 11.
6
 WC CA CL

-
= -

16.3 Liquidity (Textbook Pg. 297 to 301)

Liquidity  The ability of a business to convert current assets

into cash to pay current liabilities .

Absolute figures 1. working capital ($)

Financial ratios 1.
2.

Absolute Figures

……………………………………………………………………………………………………

Ways to improve liquidity

increase sources of cash (eg cash contribution from owners;
1. ……………………………………………………………………………………………..… long-term borrowings;
sell excess non-current assets for cash)
…………………………………………………………………………………………….....
manage cashflow (eg negotiate for better credit terms)
2. ………………………………………………………………………………………………..

Importance of remaining liquid

Need cash for daily operations & unforeseex emergency
1. ……………………………………………………………………………………………….. .

Need to settle immediate debts (eg credit suppliers bank loan interest)
2. ……………………………………………………………………………………………….. ;

Liquidity Ratios

Refer to table 16.4 in Textbook page 299

Liquidity Ratio Formula

current total
current assets

ratio total current liabilities

Quick
Ratio ( total current assets
-
-

-
inventory
prepayments
(
-

t otal current liabilities

7
 Worked Example: Workbook page 214 Exercise 2 Question 1

(a)
working capital total current assets total current liabilities
……………………………………………………………………………………………………
= -

$94000 $21800
……………………………………………………………………………………………………
= -

$72200
……………………………………………………………………………………………………
=

(b)
……………………………………………………………………………………………………
current ratio
I

4000
……………………………………………………………………………………………………
I

31 = 4
……………………………………………………………………………………………………
.

total current assets -

prepayments -

inventory
(c) Quick ratio -
……………………………………………………………………………………………………
total current liabilities
94000 -
(6200 + 2400) -

50000

……………………………………………………………………………………………………
-
21800

62 =
1
……………………………………………………………………………………………………
.

Worked Example: Workbook page 217 Exercise 2 Question 8

Year Working Working Capital

20X5 ($40725 + $27845 + $6225 + $18030

+ $1425) -

($30000 + $16500 $46500

20X6 ($82170 + $27105 + $9030 + $6045

$1050) $79800
+ -

($30000 $15600) +

20X7 ($163508 + $24285 + $9750 + $465) $148500

-

($30000 + $16230 + $3270)

Year Working Current ratio

20X5
($40275 + $27845 + $6225 + $18030
2 00
$1425)/($30000
.

+ + $16500)

20X6
($8210 + $27185 + $9875 + $6045 +
2 75
$1050)/($30000
.

+ $15600)

20X7
($163500 $24285
+ + $9750 +
$465)/ 4 08
.

($30000 + $16230 + $3270)

8
 Year Working Quick ratio
20X5 ($27845 + $18030 + $1425)/($30000 +
1 00
$16500)
.

20X6 ($27105 + $6045 + $1050)/($30000

0 75
$15600)
.

20X7 ($24285 +
$465)/($30000 +

$16230 + $3270) 0 .

50

The of
Dazzling Home Supplies has improved from $46500 in
……………………………………………………………………………………………………
working capital
20x5 to $79800 in 20Xs to $148500 . This shows that the business
……………………………………………………………………………………………………
20x7 in

has increased excess of current assets over current liabilities over the 3
……………………………………………………………………………………………………
years hence the business is more
able and ready in
…………………………………………………………………………………………………… settling its immediate
debt
……………………………………………………………………………………………………
.

The current ratio of Dazzling Home Supplies has

(c)
…………………………………………………………………………………………………… improved from 2 00 .

in 20X5 to 2 75 in 2016 to 4 00 in 20x7

……………………………………………………………………………………………………
.
All the current ratios are . .

above the general benchmark of 2 and it shows increasing trend

…………………………………………………………………………………………………… an

3 years , indicating that the business has more than

……………………………………………………………………………………………………
over the

sufficient current assets over the years to repay its immediate debts
…………………………………………………………………………………………………… .

However the quick ratio of Dazzling Home Supplies worsened from has
……………………………………………………………………………………………………
,

100 in 2015 to 0
75 in 2016 to 0 50 in 2017
……………………………………………………………………………………………………
.
.

……………………………………………………………………………………………………
()) the
quick ratios in 2016 and 2017 are below the
…………………………………………………………………………………………………… general benchmark
of 1 and shows declining trend indicating that the business has lesser
……………………………………………………………………………………………………
a
,

quick assets the years to cover its immediate debts This may be
……………………………………………………………………………………………………
over .

a result of the
worsening inventory position since inventory has
……………………………………………………………………………………………………
increased from $40275 in 2015 to $82170 in 20x6 to $163500
……………………………………………………………………………………………………
. In addition
in 2017 its cash position deteriorated from $18030 in
…………………………………………………………………………………………………… ,

bank overdraft
20X5 to $6045 in 2016 to
…………………………………………………………………………………………………… position of $3270 in
a

20x7 In conclusion
Dazzling Home Supplies' liquidity has worsened
……………………………………………………………………………………………………
.

the three years

……………………………………………………………………………………………………
over .

……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
……………………………………………………………………………………………………
9
 Worked Example: Workbook page 217 Exercise 2 Question 10

Business Working Working Capital

Innovative ($68000 $11 1 000
+ + $4900 + $14025
6) 128400
Technology + $3375) $72900
-

A Global ($348550 + $88200 + $6525 + $5200 +

$348450
$1425) -

($76450 + $25000)

Business Working Current ratio

Innovative ($68000 + $11 1 000 + $4900 + $14025 +
2 76
$3375)/$72900
.

Technology
A Global ($348500 + $88200 + $6525 + $5200 +

$1425)/$76450

Business Working Quick ratio

Innovative ($11 1 000 + $14025 + $3375)/$72900 1 .
76
Technology
A Global ($08200 + $5200 $1425)/($76450 $25000
+ +
0 . 93

The working capital of A Global of $348450 is better than that of Innovative

……………………………………………………………………………………………………
Technology at $128400. The current ratio of A Global of 4 43 is better than
…………………………………………………………………………………………………… .

that of Innovative Technology at 2 76

. The current ratios of both businesses are
…………………………………………………………………………………………………… .

above the general benchmark of 2 which indicates that both businesses have
……………………………………………………………………………………………………
sufficient current assets to pay for its short-term debts
…………………………………………………………………………………………………… . However the
quick ratio ,

of Innovative Technology of 1 76 is better than that of A Global at 0 93

……………………………………………………………………………………………………
.
. The quick .

ratio of Innovative Technology is above the general benchmark of 1

…………………………………………………………………………………………………… but

. ? (incomplete)
2
……………………………………………………………………………………………………
(b)
This
suggests that while Innovative Technology has sufficient quick assets to
……………………………………………………………………………………………………
pay for its immediate debts A Global may not be able to pay for its immediate
……………………………………………………………………………………………………
,

insufficient quick assets. This may be due to A Global having its

debts due
……………………………………………………………………………………………………
to

funds tied up in inventory as it is holding significantly higher amounts of

……………………………………………………………………………………………………
inventory at $348550 as compared to that of Innovative Technology at
……………………………………………………………………………………………………
5) 68
, 000 In addition A Global's current liabilities have increased due to
……………………………………………………………………………………………………
.

part of a long-term loan which would be repaid within a year .

……………………………………………………………………………………………………
……………………………………………………………………………………………………

Assignment 16.4: Workbook pg 214, Ex 2 Qn 2, 3.

Assignment 16.5: Workbook pg 217, Ex 2 Qn 9.
Assignment 16.6: Workbook pg 217, Ex 2 Qn 11.
10