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ACS 208

Accounting for Financial Analysis

TU BBM · Semester 8 · BBM curriculum effective from 2021

Requirement
elective
Credits
3
Study Guide
6 units available

Chapter notes

Authoritative study guide across 6 syllabus units

Open a unit to read its study notes.

Unit 1: Introduction to Financial Analysis· 2 LHs· ~3 marks

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Difficulty: ★★★ | High-yield focus: Master definitions of Financial Analysis, Common-Size Analysis, and NFRS Impact in Part 1. Key exam mastery: Diagram the Financial Statement Analytical Architecture, contrast Horizontal vs Vertical Analysis in Part 3, and solve the Common-Size Balance Sheet ladder in Part 4.

Part 1: Core Concepts (2 Marks)

  • ★ Financial Statement Analysis: The critical evaluation and diagnostic examination of a firm’s past and present financial position and operational results to forecast future performance and creditworthiness.
  • ★ Common-Size (Vertical) Analysis: An analytical technique where all income statement items are expressed as a percentage of Net Sales, and all balance sheet items are expressed as a percentage of Total Assets.
  • Trend (Horizontal) Analysis: The comparative percentage evaluation of financial statement line items across multiple sequential fiscal years relative to a designated baseline year.

Part 2: Structural Frameworks (10 Marks)

The Core Toolkit of Financial Statement Analysis

  1. Horizontal Analysis (Comparative Statements):
    • Calculating absolute rupee change and percentage growth rates across consecutive financial periods.
  2. Vertical Analysis (Common-Size Statements):
    • Revealing structural cost composition (COGS % of sales) and asset allocation mixes (Fixed vs Current).
  3. Financial Ratio Analysis:
    • Synthesizing multidimensional operational data into standardized liquidity, leverage, turnover, and profitability metrics.
  4. Cash Flow and Free Cash Flow Modeling:
    • Stripping away non-cash accounting accruals to isolate real operating liquidity generation.

Part 3: Distinction Tables

Basis of Comparison Horizontal (Trend) Analysis Vertical (Common-Size) Analysis
Analytical Direction Longitudinal; examines changes in a single item over time across multiple years. Cross-sectional; examines proportions of items within a single year relative to a total base.
Benchmark Base A designated historical base year (e.g. FY 2078/79 = 100%). Net Sales (for Income Statement) or Total Assets (for Balance Sheet) = 100%.
Primary Insight Identifies growth momentum, revenue trajectories, and abnormal cost expansions. Identifies structural shifts in cost efficiency and capital allocation proportions.

Part 4: Worked Problems & Exam Traps

★ Construction of Common-Size Income Statement

Problem: A retail commercial enterprise in Kathmandu reports the following abbreviated Income Statement:

  • Gross Sales Revenue: NPR 50,000,000
  • Sales Returns: NPR 2,000,000
  • Cost of Goods Sold (COGS): NPR 28,800,000
  • Operating Administrative Expenses: NPR 7,200,000
  • Selling & Marketing Expenses: NPR 4,800,000
  • Income Tax (25%): NPR 1,800,000 Construct a Common-Size Income Statement expressing all items as a percentage of Net Sales Revenue.

Solution:

  1. Net Sales Revenue (Base = 100%):

    Net Sales=Gross Sales−Returns=50,000,000−2,000,000=NPR 48,000,000 (100.00%)\text{Net Sales} = \text{Gross Sales} - \text{Returns} = 50,000,000 - 2,000,000 = \text{NPR } 48,000,000 \text{ (100.00\%)}

  2. Common-Size Percentage Computations:

    COGS %=28,800,00048,000,000×100=60.00%\text{COGS \%} = \frac{28,800,000}{48,000,000} \times 100 = 60.00\%
    Gross Profit=48,000,000−28,800,000=NPR 19,200,000  ⟹  19,200,00048,000,000×100=40.00%\text{Gross Profit} = 48,000,000 - 28,800,000 = \text{NPR } 19,200,000 \implies \frac{19,200,000}{48,000,000} \times 100 = 40.00\%
    Admin Expenses %=7,200,00048,000,000×100=15.00%\text{Admin Expenses \%} = \frac{7,200,000}{48,000,000} \times 100 = 15.00\%
    Selling Expenses %=4,800,00048,000,000×100=10.00%\text{Selling Expenses \%} = \frac{4,800,000}{48,000,000} \times 100 = 10.00\%
    Operating Profit (EBIT)=19,200,000−7,200,000−4,800,000=NPR 7,200,000  ⟹  7,200,00048,000,000×100=15.00%\text{Operating Profit (EBIT)} = 19,200,000 - 7,200,000 - 4,800,000 = \text{NPR } 7,200,000 \implies \frac{7,200,000}{48,000,000} \times 100 = 15.00\%
    Income Tax %=1,800,00048,000,000×100=3.75%\text{Income Tax \%} = \frac{1,800,000}{48,000,000} \times 100 = 3.75\%
    Net Profit After Tax=7,200,000−1,800,000=NPR 5,400,000  ⟹  5,400,00048,000,000×100=11.25%\text{Net Profit After Tax} = 7,200,000 - 1,800,000 = \text{NPR } 5,400,000 \implies \frac{5,400,000}{48,000,000} \times 100 = 11.25\%

TU Exam Trap: In Common-Size Income Statement analysis, the 100% denominator base is Net Sales Revenue, NOT Gross Sales. Always deduct sales returns and allowances before computing percentages.

Students lose marks here because they divide income statement items by gross sales instead of net sales.