GRADE 10 LESSON

111

ANALYSIS OF FINANCIAL STATEMENTS

WORKSHEET 1

It is important for a business to measure its performance

A business has to assess whether they have been successful or not and to determine the
areas in which they can approve.

A business has to answer the following questions:

 How profitable is the business?

 How well does the business control its expenses?
 Should the owner be satisfied with the profit earned taking into account the amount
he invested in the business?
 Can the business pay off all its debts?
 Can the business pay off its debts without any problem in the short term?
 Did the business handle its working capital effectively?

It is essential for the owner to analyse the financial statements.

The aim of analysis and interpreting the financial statements of a business is to

determine the following:

Profitability How profitable is the business?

How well does it control its expenses?

Return Does the owner earn a good return on the capital he has invested in
the business?

Solvency Can the business pay off all its debts?

Liquidity Can the business pay off its short-term debts (current liabilities)
without any problems in the short term?
These current liabilities can be paid only from current assets that can
be converted to cash.

111 Accounting Grade 10 1

 WORKSHEET 2

How do we calculate these ratios?

PROFIBILITY RATIO’S (from the Income Statement)

Percentage gross profit on sales Gross profit x 100
Turnover =%

Percentage gross profit on cost of sales Gross profit x 100

(also the mark-up percentage) Cost of sales 1 =%

Percentage net profit on sales Net profit x 100

Turnover 1 =%

Percentage operating expenses on Operating expenses x 100

sales Turnover 1 =%

Percentage operating profit on sales Operating profit x 100

Turnover 1 =%

LIQUIDITY RATIO’S (from the Balance sheet)

Current assets : Current liabilities
Current ratio
= x:1

Current assets - inventories : Current liabilities

Acid-test ratio
= x:1

SOLVENCY RATIO (from the Balance sheet)

Total assets : Total liabilities
Solvency ratio
=x:1

RETURN ON INVESTMENT (from Income statement and Balance sheet)

Return on owner’s equity net profit 100

owner’s equity x 1 =%

111 Accounting Grade 10 2

 Where do we get our information from?
INCOME STATEMENT
Notes R
Sale 399 480 Grossprofit
Gross profiton
onsales
sales
profit profit
Gross x 100x 100
Cost of sales (200 000) sales
sales 11
Gross profit 199 480
Other operating income 341 988 Grossprofit
Gross profitononcost
costofofsales
sales
Rent income 332 260 Grossprofit
Gross profit x x 100
100
Costofofsales
Cost sales 11
Discount received 9 728

Gross operating income 541 468

NetNetprofit
profit
onon sales
sales
Operating expenses (165 140)
net profit x 100
net profit x 100
Stationery 6 860 salessales 1 1
Telephone 25 780
Water and electricity 22 100
Salaries 67 400
Operating expenses on
Depreciation 43 000 sales
Operating expenses x 100
Operating profit 376 328
sales 1
Interest income 100
Operating profit before interest expense 376 428
Operating profit on sales
Interest expense (52 200)
operating profit x 100
Net profit for the year 324 228
sales 1

BALANCE SHEET
ASSETS Returnon
Return oninvestment
investment
NON-CURRENT ASSETS 922 000 net
net profitprofit x x 100100
owner’s
owner’s equity equity 1 1
Tangible assets 3 912 000
Financial assets
Fixed deposit 10 000

CURRENT ASSETS 240 800

Inventories 4 200 200 CURRENT RATIO
CURRENT RATIO
Trade and other debtors 5 40 000
current assets
current assets :: current
current liabilities
liabilities
Cash and cash equivalents 6 600
TOTAL ASSETS 1 162 800

EQUITY AND LIABILITIES

Equity 7 904 300 SOLVENCYRATIO
SOLVENCY RATIO

NON-CURRENT LIABILITIES 200 000 totalassets

total assets: total
: totalliabilities
liabilities
Loan 200 000

CURRENT LIABILITIES 58 500

Trade and other creditors 8 40 500
Bank overdraft 18 000
TOTAL EQUITY AND LIABILITIES 1 162 800

111 Accounting Grade 10 3

 CHALKBOARD SUMMARY / TRANSPARENCY

ANALYSIS OF FINANCIAL STATEMENTS

Profitability Liquidity Solvency Return

Gross profit Current

on sales ratio

Gross profit
on Acid-test
cost of ratio
sales

Net profit
on sales

Operating
expenses
on sales

Operating
profit
on sales

111 Accounting Grade 10 4