Faculty of Business Studies

Course Title: Financial Statement Analysis & Valuation

Submitted to:
Name: Ms. Nilufar Sultana
Assistant Professor
Department of Finance
Faculty of Business Studies

Submitted by:
Mohammed Fahad Hossain
ID No: 1603410109008
Semester 7th,

Program BBA (Finance), Sec: A

Premier University
Date of Submission: 7-August-2020
 Answer to the question no.1
Financial Statement-

Financial statements show the financial performance of a company. A financial

statement is the combination of the three major reports on a business. It will
contain the cash flow statement, the income statement and the balance sheet of
the business. All three together produce an overall picture of the health of the
business.

Financial Statement Analysis-

The term ‘financial analysis’, also known as analysis and interpretation of financial
statements’, refers to the process of determining financial strengths and
weaknesses of the firm by establishing strategic relationship between the items of
the balance sheet, profit and loss account and other operative data.

“Analyzing financial statements,” according to Metcalf and Titard, “is a process of

evaluating the relationship between component parts of a financial statement to
obtain a better understanding of a firm’s position and performance.”

Answer to the question no-02

Financial statement information is one of many information sources available to

users. One competing source of information includes company oriented releases
such as dividend releases and production reports. Another competing source of
information has to do with industry oriented releases such as a new wage
contracts with unions. A third competing source of information is related to
economy oriented releases such as money supply announcements. There are
several grounds on which financial statements may have a comparative
advantage over these competing sources.
Another reason why financial statements may have a comparative advantage over
competing sources of information may be due to differences of opinion between
buyers and sellers about the future earnings.

Answer to the question no-03

A company pursues a number of activities in a desire to provide a saleable

product or services and in yield a satisfactory return on investment. These
activities can divided into three-

 Financing Activities
 Investing Activities
 Operating Activities

1. Financing Activities: A company require financing to carry out its business

plan. financing activities are the means companies use to pay for these
ventures. A company must take care in acquiring and managing its financial
resources because of both their magnitude and their potential to
determine success or failure. Decisions concerning the financing activities
depend on condition existing in financial markets. Financial markets are
potential sources of financing. There are two main sources of business
financing:
1: Equity investors (referred to as owner financing)
2: Creditors (referred to as non-owner financing)

2. Investing Activities: Once the company has raised cash through financing
activities , it will then use that cash in investing activities. Investing activities
involve the purchase of the resources/assets a company needs in order to
operate. Assets include land, building, equipment, legal rights(patents,
licenses and copyright), inventories, human capital( managers and
employees) accounting systems and all components necessary for the
company to operate such assets are called Operating assets.
Investing decisions involve several factors such as type of investment
necessary (including technological and labor intensity), amount required,
 acquisition timing, asset location, and contractual agreement (purchase,
land, lease). Investment in short-term assets are called current assets.
These assets are expected to be converted to cash in the short-term.
Investment in long-term assets are called noncurrent assets or fixed assets.

3. Operating Activities: Once a business has the assets it needs to get started, it
can begin its operation. Operating activities represents the carrying out of the
business plan, give necessary financing and investing. These activities involve
several basic functions such as research, purchasing, production, marketing, and
labor. Operating activities are a company’s primary sources of income. Income
measures a company’s success in buying from input markets and selling in ouput
markets. How well a company does in devising business plans and strategies, and
with decisions on elements comprising the mix of operating activities, determines
its success or failure.

Answer to the question no.4 (A)

Common size balance sheet for ABC Ltd and XYZ Ltd.

Particular TK ABC LTD TK XYZ LTD % ABC % XYZ

(A) (B) LTD LTD
Asset:
Fixed asset:
Plant asset 229500 255000 61.61 57.30

Current asset:

Cash 36800 35625 9.88 8.00

Account receivable 49200 62500 13.21 14.04
Merchandise inventory 53000 82500 14.23 18.54
Prepaid expense 4000 9375 1.07 2.11
Total current asset: 143000 190000 38.39 42.69
Total asset 372500 445000 100 100

Liabilities:
 Share capital:

Common Stock, $10 Par 162500 162500 43.62 36.52

Retained earnings 78250 104750 21.00 23.53
Total share capital and 240750 267250 64.62 60.05
Retained earnings

Liabilities
Account payables 49,250 75,250 13.22 16.91
Long term note payables 82,500 102,500 22.15 23.03
Total Liabilities 131750 177750 35.37 39.94

Total Liabilities and Equity 372500 445000 100 100

4(B)
For company A

We know,

Current ratio=Current Assets/Current Liabilities

Current ratio =143000/49250

=2.9ঃ1

For company B

We know,

Current ratio =Current Assets/Current Liabilities

Current ratio =190000/75250

=2.52ঃ1
For company A

We know

Acid Test Ratio= Current Asset – Stock-Prepaid Expense/Current Liabilities-Bank Overdraft

Acid Test Ratio=143000-53000-4000/49250-0

 =1.74ঃ1

For company B

We know

Acid Test Ratio= Current Asset – Stock - Prepaid Expense / Current Liabilities - Bank Overdraft

Acid Test Ratio=190000-82500-9375/75250-0

=1.30ঃ1

For company A

We know

Return on equity (ROE)

= (Net income – preferred dividend / average common stockholder’s equity)*100

= (85500-0/162500)*100

=52.61%

For company B

We know

Return on equity (ROE)

= (Net income – preferred dividend / average common stockholder’s equity)*100

= (65250-0/162500)*100

= 40.15%

For company A

We know

Return on Asset (ROA) = (Net profit after tax / Total Asset)*100

Return on Asset (ROA) = (85500/372500)*100

=22.95%

For company B

We know
Return on Asset (ROA) = (Net profit after tax / Total Asset)*100

Return on Asset (ROA) = (65250/445000)*100

=14.66%

For company A

We know

Debt Ratio=Total Liabilities / Total Asset *100

Debt Ratio=131750/372500*100

=35.36%

For company B

We know

Debt Ratio=Total Liabilities / Total Asset *100

Debt Ratio=177750/445000*100

=39.94%

4(C)
Compare the Liquidity and profitability positions of the two companies on the
basis of ratios.

Liquidity ABC LTD XYZ Profitability ABC LTD XYZ LTD

Ratio (A) LTD Ratio (A) (B)
(B
Current ratio 2.9 2.52 Return on Equity 52.61% 40.15%
Acid test ratio 1.74 1.30 Return on Asset 22.95% 14.66%
Debt ratio 35.36% 39.94%

On the basis of the ratio, the ABC LTD company liquidity and profitability is better than the XYZ
LTD Company.

Answer to the question no.5

Balance Sheet
As at December 31, 2018
 Accounts Payable(Balance 30000 Cash (Note-10) 8000
Figure) 20000 Debtors (Note-6) 12000
Long term debt (Note-8) 50000 Inventory (Note-5) 30000
Shareholders’ Equity Fixed Assets (Balance 50000
Figure)
Total 100000 Total (Note-3)
100000

Note-1:
Gross Profit Tk. 60000

Gross Profit Margin 20%

∴ Sales = Gross Profit / Gross ProfitMargin

=60000/0.20

=300000

Note-2:
Credit Sales to Total Sales = 80%

∴ Credit Sales = Tk. 300000×0.80 = Tk. 240000

Note-3:
Total Assets Turnover= Total sales / Total Asset

3 =300000/Total asset

Total Asset=300000/3

=100000

Note-4
Sales – Gross Profit = COGS

∴ COGS = Tk. 300000 – 60000 = Tk.240000

Note-5
Inventory turnover ratio=cost of goods sold/average Inventory
 8 =240000 /average Inventory

Average Inventory=240000/8

=30000

Note-6
Receivable Turnover= Credit sales/Average net receivable

20 =240000/ Average net receivable

Average net receivable=240000/20

=12000

Note-7
Current Ratio=Debtors+ Inventory+ Cash/Current liabilities

1.6 =12000+ 30000 +cash/current liabilities

1.6(current liabilities)=42000+cash

Note-8
Long term debt to equity=40%

Shareholder’s fund=50000

Long term debt=50000*40%

=20000

Note-9
Account payable (Balance Figure) = 100000-(50000+20000)

=30000

Note-10
1.6(current liabilities) = 42000+cash (From note 7)

=1.6*30000=42000+cash

48000-42000=cash

Cash=6000