STRATHMORE BUSINESS SCHOOL

MBA8101: FINANCIAL AND MANAGERIAL ACCOUNTING

FINANCIAL STATEMENT ANALYSIS
BY
NAME:
REG NO.:
JULY 2014

ZED BANK
Income statement with vertical analysis for the year ended 31 Dec 2012

Sales
Cost of goods sold
Gross profit
Distribution costs
Administrative expenses
Total operating expenses
Operating income
Other expenses (interest)
Income before tax
Tax
Profit after tax
Dividend paid
Retained for the year
Retained profit b/f
Retained II c/d

ZETH LTD
AMOUNT
4,000
3,000
1,000
200
290
490
510
10
500
120
380
150
230
220
450

PERCENT
100%
75.0%
25.0%
5.0%
7.3%
12.3%
12.8%
0.3%
12.5%
3.0%
9.5%
3.8%
5.8%
5.5%
11.3%

OMEGAL LTD
AMOUNT PERCENT
6,000
100%
4,800
80.0%
1,200
20.0%
150
2.5%
250
4.2%
400
6.7%
800
13.3%
400
6.7%
400
6.7%
90
1.5%
310
5.2%
100
1.7%
210
3.5%
2,480
41.3%
2,690
44.8%

i.

Zeta Ltd seems to make higher net profit with 5.8% to sales compared to Omega Ltd,

ii.

with 3.5% to sales.

Zeta Ltd seems to have better share equity with 31.7% comparable to Omega ltd with

iii.

20.3%.
Zeta Ltd, should be given preference over Omega Ltd. For it has wider share market and
higher liquidity position clearly shown by higher current assets percentage of 42.9%
compared to Omega with current Assets percentage of 23.9%.

ZED BANK
Statement of financial position with Vertical Analysis as at 31st Dec 2003.
2

ASSETS
Current Assets
Non- current assets
Total Assets

ZETH LTD
AMOUNT
1,350
1,800
3,150

PERCENT
42.9%
57.1%
100%

OMEGAL LTD
AMOUNT PERCENT
1,880
23.9%
6,000
76.1%
7,880
100%

LIABILITIES
Current Liabilities
Long- term Liabilities
Total

1,200
500
1,700

38.1%
15.9%
54.0%

590
3,000
3,590

7.5%
38.1%
45.6%

1,000
450
1,450
3,150

31.7%
14.3%
46.0%
100%

1,600
2,690
4,290
7,880

20.3%
34.1%
54.4%
100%

SHAREHOLDERS EQUITY
Ordinary share
Retained profits
Total liabilities and Equity

1. a) Charles Forecasted income statement for the year ended Dec 2014, Dec 2015 and Dec
2016.

Sales

2013

2014

2015

2016

Sh.000

Sh.000

Sh.000

Sh.000

54,000

72,000

96,000

128,000

Opening inventory

9,000

15,000

20,850

23,962.5

Purchases

45,000

56,250

70,312.5

87,810.5

Closing inventory

(15,000)

20,850)

(23,962.5)

22,253)

Cost of sales

(39,000)

Gross Profit (0.3 x Sales)

15,000
3

(50,400)

(67,200)

(89,600)

21,600

28,800

38,400

Rates

(1170)

Bank Charges

(330)

Advertising expense

(720)

Wages

(4,200)

(1316.3-329.1)
(346.5)

(1480.0-370.2) (1665.9-416.5)

(363.8)

(1020 + 255)

(382)

(1,320 + 330)

(4,620)

(5,082)

(1,620 + 405)
(5,590.2)

Deprecation

(6,00)

(6,000)

(6,00)

(6,00)

Electricity

(900)

(1035)

(1190.3)

(1368.8)

Net Profit

7,080

12,736.3

18,803.3

27,184.6

b) Charles Forecasted Statement of Finnrcid Position As at Dec 2004, Dec 2005 and Dec
2006.
2013
Non-current assets

Sh.000

2014
Sh.000

2015
Sh.000

2016
Sh.000

Sh.000

Property, plant & equipment

Freehold con*****

24,000

Equipment

6,000

Depreciation

(4,200)

24,000
6,000

24,000
6,000

1,800

(4,800)

25,800

25,200

24,000
6,000

1,200 (5,400)600 (6,00)

24,600

24,000

23,962.5

22,252

Current assets
Inventory

15,000

Accounts Receivable 4,500

20,850
6,000

Prepayments:Rates

300

Cash in Bank

Cash in hand

264

Total Assets

45,864

8,000
329.1
764

53,143.1

Equity + Liabilities
5

10,667
370.2

416.5

1264

1764

58,196.7

75,598.2

Equity
Capital Opening

33,000

32,145

39,881.3

50,684.6

Profit

7,080

12.736.3

18.803.3

27,184.6

Drawings

(7,935)

(5,000)

(8,000)

(10,000)

Capital Closing

32,145

39,881.3

50,684.6

67,869.2

Accounting Payable

3,750

4,688

5,859

7,324

Accounts: Advertising

60

255

330

405

Bank Overdraft

9,909

8,318.8

1,323.1

53,143.1

58,196.7

75,598.2

Current Liabilities

Total Capital + Liabilities

i)

45,864

ii) MR CHARLES FINANCIAL STATEMENT ANALYSIS (2013,2014,2015

AND 2016) USING RELEVANT RATIOS

1.0 Introduction
For the purposes of this analysis the financial ratios were classified into three broad
classes namely:
a) Liquidity ratios
b) Leverage ratios
c) Profitability ratios
6

The ratio analysis shows improved performance over the years with increasing
profitability ratio, liquidity position as well as the financial position of the firm.

1.1 Significance of Each Ratio

Liquidity is the measure of how well you are positioned to meet your current obligations.
A liquidity ratio is a measurement of how fast your company can generate cash.
Profitability ratios measure the effectiveness of your work activity. The two most
prominent are gross profit and net profit.
Liquidity Ratios
ii)

Current ratio
Current ratio

Current Asset
Current Liability

2013
Current assets

20,064

2014
27,943.1

2015
33,596.7

2016
51,597.8

Current liabilities

13,719

13,261.8

7,512.1

7,729

Current ratio

1.5

2.1

4.5

6.7

Quick ratio
Quick ratio

C. A. Inventory
C. L

2013

2014

2015

2016

C. A. Inventory (20,064-15,000) (27,943.1-20,850) (33,596.7-23,962.5) (51,597.8-22,253)

C. L.

13,719

13,261.8

7,512.1

7729

Quick ratio

0.4

0.5

1.3

3.8

From the above trend it is evident that the liquidity position of Mr. Charles business will be
increasing over the years under review. This means the companys ability to pay its obligations
when they fall due will increase gradually over the period of review.

Financial/Leverage
a) Debt ratio
Debt ratio

Total debt
Total Assets
Debt ratio

=
2013
13,719
45,864
3.3

Total debt
Total Assets

13,719

2014
13,261.8
53,143.1
4.1

2015
7,512.1
58,196.7
7.7

2016
7,729
75,598.2
9.8

From the above analysis it is clear that the enterprise will be using more of debt than equity
in its finance operations. This might be due to the ambitious expansion plan to be adopted by
the enterprise. This may led to huge costs on interest expense which might have an impact
on the enterprises deteriorating finance performance.

Profitability
a) Gross Profit Margin
8

Gross Profit Margin =

Sales Cost of Sales

Sales

2013
Sales C.O.S.
15,000
Sales
54,000
Gross Profit Margin 0.3

b) Net Profit Margin

Net income
Sales
Net Profit ratio

2014
21,600
72,000
3.3

=
2013
7,080
54,000
0.1

2015
28,800
96,000
3.3

2016
38,400
128,000
3.3

Net Income
Sales
2014
12,736.3
72,000
0.17

2015
18,803.6
96,000
0.19

2016
27,184.6
128,000
0.21

From the presentation above, the profitability of the Mr. Charles business will increase
significantly over the period under review with the best being in year 2006 for it will
record the biggest reward. This might be as a result of expansion of the business.