Please enable JavaScript.
Coggle requires JavaScript to display documents.
Analysis of financial & non-financial info - Coggle Diagram
Analysis of financial & non-financial info
Limitations of ratio analysis
Inflation effects on the SFP amounts may distort the ratios as these amounts are based on historic amounts
Application of different accounting policies can render comparisons between entities meaningless
The industry average may not be the best measure for a high performing entity. Consider using industry leaders ratios
It's difficult to tell whether a ratio is good or bad as this is subjective
Ratio analysis is more useful when analyzing small focused entities instead of large diversified entities
Firms can manipulate their financial statements just to reflect a strong financial position @ year-end (window dressing or creative accounting)
Limitations of accounting data
Non-monetary items
Financial statements often does not reflect the value of non-monetary items, which may be substantial
Advanced
IFRS deals with the valuation of intangible assets.
Ensure that financial statements comply with IFRS will enable a more realistic analysis
Market forces
SPL & SFP does not disclose future expectations in the market
Advanced
Integrated report will include forecast projections, allowing users to draw a conclusion on its future prospects
Inflation
Financial statements are prepared on historical basis & inflation is seldom accounted for
Advanced
financial analysis should be based on market values instead of book values
Profitability ratios should compare actual growth rate to inflation and real growth rate
Accounting policies
Analysis often relay on comparison of entity's performance with other similar entities in the industry
Advance
When comparing results of different entities the difference in accounting policies will be taken into account
Analysis should be based on market values and not book values
Problem is that no 2 entities are the same not even their accounting policies
Techniques for analysis
Common size statements
Redraft SFP to express each item as % of total assets.
Redraft SPL to express each item as % of sales revenue
Indexed financial statements
Setting 1 year as the base year which should be @ the beginning of the period.
Non-financial analysis
Entities governance practices and environmental and social performance
Comparative financial statements
Comparison of financial statements over period of 5 - 10 years is carried out to establish a trend & project future income, expenses and financial position
Balance score card
4 perspectives
Customers
Internal business processes
Financial
Learning & growth
Processes
2) Communicating strategies up & down hierarchy
3) The business planning enables entity to combine its business & financial plans
1) Objectives & measures which defines the entity's success drivers are set based on vision, mission and strategy
4) Feedback & learning processes are enhanced by scorecard because short-term results can now be monitored and improved
Financial analysis
Ratios
Objectives & users
Analysis provide users with meaningful info to enable users to make informed decisions
Users
Investors / Shareholders
Financiers
Creditors
Employees
Management
Auditors
Other interested parties
Analysis is always based on comparison.