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ANALYSIS OF FINANCIAL STATEMENT

INTRODUCTION A financial statement is an official document of the firm, which explores the entire financial information of the firm. The main aim of the financial statement is to provide information and understand the financial aspects of the firm. Hence, preparation of the financial statement is important as much as the financial decisions. MEANING AND DEFINITION According to Hamptors John, the financial statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of financial aspects of a business firm. It may show a position at a moment of time as in the case of a balance-sheet or may reveal a service of activities over a given period of time, as in the case of an income statement. Financial statements are the summary of the accounting process, which provides useful information to both internal and external parties. John N. Nyer also defines it Financial statements provide a summary of the accounting of a business enterprise, the balance-sheet reflecting the assets, liabilities and capital as on a certain data and the income statement showing the results of operations during a certain period. Financial statements generally consist of two important statements: (i) Income Statement or Profit and Loss Account. (ii)Balance sheet A part from that, the business concern also prepares some of the other parts of statements, which are very useful to the internal purpose such as: (i) Equity Statement or Statement of Owners Equity (ii)Cash Flow Statement Income Statement Income statement is also called as profit and loss account, which reflects the operational position of the firm during a particular period. Normally it consists of one accounting year. It determines the entire operational performance of the concern like total revenue generated and expenses incurred for earning that revenue. It is statement in which revenues and expenditures are matched to arrive at a figure of profit or loss. The first part of income statement is trading account. In trading account revenue from selling goods is compared with direct cost of acquiring or producing the goods sold to arrive at a gross profit figure. From this, deductions are made in the second half of the statement (which we will call the income and expenses section) in respect of indirect cost (overheads) and additions for non-trading income.
Income Statement/Trading and Profit and Loss Account For the year ended 31st December Income from sales: $ $ Sales. Less: Sales return and allowances

Sales discount.. Net Sales. Cost of goods sold: Opening stock on 1st January + Purchases - Purchase return and discount - Closing stock on 31st December. Cost of goods sold Gross Profit.. ______ Operating Expenses: Selling expenses: Advertising expenses Insurance expenses Store supplies expenses Total selling expenses ______ General Expenses: Office salaries General insurance expense Office supplies expense Stationary Total general expenses ______ Total operating expenses Net profit from operations____ Other Income Other expenses Net profit before tax (Taxable profit) Taxation Net Profit.. ______ ____

______

______

Question.
The Trail Balance of Business Leaders on 31st December 2009 shows following picture: $ $ Cash 12,100 Debtors 10,000 Bills Receivable 8,500 Opening Stock 45,000 Buildings 50,000 Furniture 10,000 Short term investment 5,000 Plant and Machinery 15,500 Bills payable 9,000

Creditors Capital Drawings Sales Sales discount Purchases Freight in Purchase discount Sales salary expenses Advertising expenses Miscellaneous sales expenses Office salary expenses Misc. General expenses Interest income Interest expense Taxation

20,000 78,200 1,000 100,000 400 30,000 1,000 500 5,000 4,000 500 8,000 1,000

1,000 800 900 _______ _______ 208,700 208,700 st Note: Closing stock on 31 December 2009 was $ 10,000 Required: Prepare income statement/trading and profit and loss account of Business Leaders from the above trial balance for the period ended 31st December 2009

Business Leaders
Income Statement
Gross Sales Less: Sales discount Net Sales Cost of goods sold: Opening stock Purchases + Freight in Less: Purchases discount Net purchases For the period ending 31st December 2009 $ $ $ 100,000 (400) 99,600

45,000 30,000 1,000 31,000 (500) 30,500 75,500

Cost of goods available for sales Less: Closing stock (10,000) Cost of goods sold Gross Profit Operating Expenses: Selling Expenses: (65,500)

34,100

Sales salary expenses5,000 Advertising expenses 4,000 Misc. Selling expenses500 Total selling expenses:9,500 General Expenses: Office salary expense Misc. General expense

8,000 1,000

Total general expenses9,000 Total operating expenses: Net profit from operations Other expenses and incomes: Interest income 1,000 Less interest expense (800) Net increase Taxable Income Taxation Net Profit after tax

(18,500) 15,600

200 15,800 (900) 14,900

Balance Sheet A financial statement that lists the assets, liabilities and equity of a company at a specific point in time and is used to calculate the net worth of a business. In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". One of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities. A basic tenet of double-entry book-keeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance. Subtracting liabilities from assets shows the net worth of the business A basic tenet of double-entry bookkeeping is that total assets (what a business owns) must equal liabilities plus equity (how the assets are financed). In other words, the balance sheet must balance.

Business Leaders
ASSETS Balance Sheet As on 31st December. $ Current Assets: Cash Debtor/Accounts Receivables Note Receivables Prepayments Inventory Short Term Investment Total Current Assets $

Non-Current Assets: Tangible Assets Building Less: Depreciation on Building (..) Land Furniture Less: Depreciation on Furniture (..) Plant & Machinery Less: Depreciation on Plant & Machinery Intangible Assets Goodwill Less: Amortization Patents Investments: Long Term Investment Total Non-current Asset Total Assets LIABILITIES & SHAREHOLDERS EQUITY Current Liabilities: Trade Accounts Payable Accrued Expenses Bank Overdraft Proposed Dividend Interest Payable Note Payable Tax payable Unearned Revenues Total Current Liabilities

(..)

(..)

Long Term Liabilities: Long term obligations Total Long term Liabilities Shareholders equity: Share Capital Retained Earnings Revaluation Reserve Accrued Income Total Shareholders equity Total Liabilities and Shareholders Equity

...

Statement of Owners Equity It is also called as statement of retained earnings. This statement provides information about the changes or position of owners equity in the company. How the retained earnings are employed in the business concern. Nowadays, preparation of this statement is not popular and nobody is going to prepare the separate statement of changes in owners equity. Cash Flow Statement. A financial statement which reports the inflows and outflows of cash for a particular period for the operating, investing and financing activities undertaken by an entity.A financial statement also called statement of cash flows or funds flow statement that shows how changes in balance sheet and income statement affect cash and cash equivalents. Cash Flows are inflows and outflows of cash and cash equivalents. Cash Equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash.

There are three types of activities that generate cash: 1. Operating Activities 2. Investing Activities 3. Financing Activities Operating Activities: are the principal revenue-producing activities of the entity and other activities that are not investing activities or financing activities. Most of the components of cash flows from operating activities will be those items which determine the net profit or loss of the entity, i.e. they relate to the main revenue-producing activities of the entity. The standard gives the following as examples of cash flows from operating activities: Cash receipts from the sales of goods and the rendering of services. Cash from royalties, fees, commissions and other revenues. Cash payments to suppliers for goods and services. Cash paid to employees

Interest paid Taxation

Investing Activities: are the acquisition and disposal of non-current assets and other investments not included in cash equivalents. The cash flows classified under investing activities show the extent of new investment in assets which will generate future profit and cash flows. The standard gives the following examples of cash flows arising from investing activities: Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalized development costs and self-constructed property, plant and equipment. Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets. Cash payments to acquire shares or debentures of other entities. Cash receipts from sales of share or debentures of other entities. Cash advances and loans to other parties. Cash receipts from the repayment of advances and loans made to other parties. Dividend received Interest received

Financing Activities: are the activities that result in changes in the size and composition of the equity capital and borrowings of the entity. The standard gives the following examples of cash flows which might arise under these headings: Cash proceeds from issuing shares. Dividend payments. Cash proceeds from issuing debentures, loans, bond, and other short or long term loans. Principal repayment of amounts borrowed under finance lease.

Question 1. Cash Flow Statement Business Leaders commenced trading on 1st January 2001 with a medium term loan of $ 21,000 and a share issue which raised $ 35,000. The company purchased non-current assets for $ 21,000 cash, and during the year to 31 st December 2001 entered into the following transactions: a. b. c. d. e. f. Purchased goods from supplier cost $ 19,500, of which $ 2,550 was unpaid at the year end. Wages and salaries amounted to $ 10,500, of which $ 750 was unpaid at the year end. Interest on the loan of $ 2,100 was fully paid in the year and a repayment of $ 5,250 was made. Sales turnover was $ 29,400, including $ 900 receivables at the year end. Interest on cash deposits at the bank amounted to $ 75. A dividend of 4,000 was proposed as at 31 st December 2001.

You are requested to prepare a historical cash flow statement for the year ended 31st December 2001.

Question 2. Cash Flow Statement The managers of Business Leaders have the following information in respect of projected cash flows for the year to 31st December 2002: a. Non-current asset purchases for cash will be $ 3,000. b. Further expenses will be: i. ii. Purchases from suppliers- $ 18,750 ($4,125 owed at the year-end); Last years unpaid payments of amount $2,550 will be paid in this year. Wages and salaries - $11,250 ($ 600 owed at the year-end). Last years owed salaries will be paid in this year.

c. d. e. f. g. h.

Sales turnover will be $ 36,000 ($450 debtors at the year-end). Payment will be received from unpaid debtors. Interest on bank deposits will be $ 150. Interest will be paid of 1,575 A further capital repayment of $5,250 will be made on the loan. A dividend of $5,000 will be proposed and last years final dividend will be paid. Income taxes of $ 2,300 will be paid in respect of 2001.

Prepare the cash flow statement forecast for the year to 31 st December 2002. Solution 1. Business Leaders Cash Flow Statement For the Year ended 31st December 2001 Cash flows from operating activities $ Cash received from customers ($29,400 - $900) 28,500 Cash paid to suppliers ($19,500 - $2,550) (16,950) Cash paid to employees ($10,500 - $750) (9,750) Interest paid (2,100) Net cash flows from operating activities Cash flows from investing activities Purchase of non-current assets Interest received Net cash flows from investing activities Cash flows from financing activities Issue of shares Proceeds from medium term loan Repayment of medium term loan Net Cash from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at 1 st January 2001 Cash and cash equivalent at 31st December 2001 Note: Dividend is only proposed and so it is not related to cash flows in 2001. Answer 2. Business Leaders Forecasted Cash Flow Statement For the Year ended 31st December 2002 Cash flows from operating activities $ $

(300)

(21,000) 75 (20,925)

35,000 21,000 ( 5,250) 50,750 29,525 0 29,525

Cash received from customers ($36,000 + $900 $450) Cash paid to suppliers ($18,750 + $2,550 - $4,125) Cash paid to employees ($11,250 + $750 - $600) Interest paid Taxation Net cash flows from operating activities Cash flows from investing activities Purchase of non-current assets Interest received Net cash flows from investing activities Cash flows from financing activities Repayment of medium term loan Dividend paid Net Cash from financing activities Forecasted net increase/decrease in cash and cash equivalents Cash and cash equivalents at 1 st January 2002 Forecasted cash and cash equivalent at 31st December 2002

36,450 (17,175) (11,400) (1,575) (2,300) 4,000

(3,000) 150 (2,850)

(5,250) (4,000) (9,250) (8,100) 29,525 21,425

ANALYSIS OF FINANCIAL STATEMENT Analysis of Financial Statement is also necessary to understand the financial positions duringa particular period. According to Myres, Financial statement analysis is largely a study ofthe relationship among the various financial factors in a business as disclosed by a single setof statements and a study of the trend of these factors as shown in a series of statements. TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS Financial statement analysis is interpreted mainly to determine the financial and operational performance of the business concern. A number of methods or techniques are used to analyze the financial statement of the business concern. The following are the common methods or techniques, which are widely used by the business concern: Comparative Statement Trend Analysis Ratio Analysis

Comparative Statement Analysis Comparative statement analysis is an analysis of financial statement at different period of time. This statement helps to understand the comparative position of financial and operational performance at different period of time. Comparative financial statements again classified into two major parts such as comparative balance sheet analysis and comparative profit and loss account analysis. 1. Comparative Balance Sheet Analysis Comparative balance sheet analysis concentrates only the balance sheet of the concern at different period of time. Under this analysis the balance sheets are compared with previous

years figures or one-year balance sheet figures are compared with other years. This type of analysis helps to understand the real financial position of the concern as well as how the assets, liabilities and capitals are placed during a particular period. Exercise 1 The following are the balance sheets of XYZ Corporation., for the years 2007, 2008 and 2009 as on 31st March. Prepare a comparative balance sheet and discuss the operational performance of the business concern. Balance Sheet of XYZ Corporation As on 31st March 2009 (Base year 2007)

Comparative Balance Sheet


2007 2008 % of total Amounts % of total 2009 Amounts % of total

Assets
Current Assets Cash and Receivables Non-Current Assets Investments Building Equipments Land Retirement Asset Other Total Assets

Amounts

$70,000 454,775 520,000 130,000 160,000

5.0% 31.0% 36.0% 9.0% 11.0%

$90,000 454,775 520,000 130,000 160,000

6.0% 31.0% 35.0% 9.0% 11.0%

$90,000 454,775 520,000 130,000 160,000

6.0% 31.0% 35.0% 9.0% 11.0%

122,000 $1,456,775

8.0% 100.0% % of total 4.0% 3.0% 76.0% 17.0% 100.0% 79.2% 100.0%

122,000 $1,476,775

8.0% 100.0% % of total 4.0% 3.0% 76.0% 17.0% 100.0% 79.5% 100.0%

122,000 $1,476,775

8.0% 100.0% % of total 4.0% 3.0% 75.0% 17.0% 100.0% 79.4% 100.0%

Liabilities
Current Liabilities Creditors Non-Current Liabilities Long Term Loan Mortgages Other Debts Total liabilities Shareholder's Equity Total Liabilities and Equity

Amounts $11,250 10,500 229,000 52,500 $303,250 $1,153,525 $1,456,775

Amounts $11,250 10,500 229,000 52,500 $303,250 $1,173,525 $1,476,775

Amounts $12,000 10,500 229,000 52,500 $304,000 $1,172,775 $1,476,775

2. Comparative Profit and Loss Account Analysis Another comparative financial statement analysis is comparative profit and loss account analysis. Under this analysis, only profit and loss account is taken to compare with previous years figure or compare within the statement. This analysis helps to understand the operational performance of the business concern in a given period. Trend Analysis The financial statements may be analyzed by computing trends of series of information. It may be upward or downward directions which involve the percentage relationship of each and every item of the statement with the common value of 100%. Trend analysis helps to understand the trend relationship with various items, which appear in the financial statements. These percentages may also be taken as index number showing relative changes in the financial information resulting with the various period of time. In this analysis, only major items are considered for calculating the trend percentage. Exercise 2 Calculate the Trend Analysis from the following information of XYZ Corporation., taking 1999 as a base year and interpret them (in thousands).
Year 1999 2000 2001 2002 2003 2004 Deposits 2,05,59,498 2,66,45,251 3,19,80,696 3,72,99,877 4,08,45,783 4,40,42,730 Advances 97,14,728 1,25,50,440 1,58,83,495 1,77,26,607 1,95,99,764 2,11,39,869 Profit 3,50,311 4,06,287 5,04,020 5,53,525 6,37,634 8,06,755

Solution Trend Analysis (Base year 1999=100)


Year
1999 2000 2001 2002 2003 2004

Deposits Amounts
2,05,59,498 2,66,45,251 3,19,80,696 3,72,99,877 4,08,45,783 4,40,42,730

Advances Amounts
97,14,728 1,25,50,440 1,58,83,495 1,77,26,607 1,95,99,764 2,11,39,869

Profits Amounts
3,50,311 4,06,287 5,04,020 5,53,525 6,37,634 8,06,755

Trend %
100 129.6 155.5 181.4 198.7 214.2

Trend %
100 129.2 163.5 182.5 201.8 217.6

Trend %
100 115.9 143.9 150 182 230.3

Ratio Analysis. Ratio Analysis is most commonly used tool of financial statement analysis. Ratio is mathematical relationship between one numbers to another number. Ratio is used as index for evaluating the financial performance of business concern. An accounting ratio shows the mathematical relationship between two figures, which have meaningful relation with each other.

Ratio can be classified into various types. Classification from the point of view of financial management is as follows: 1. 2. 3. 4. 5. Liquidity Ratios Activity Ratios Solvency Ratios Profitability Ratios Shareholders Investment Ratios

Liquidity Ratio/Short Term Solvency Ratios It is also called the short term ratio. This ratio helps to understand the liquidity in a business which is the potential ability to meet obligations. This ratio expresses the relationship between current assets and current liabilities of a business concern during a particular period. The following are the major liquidity ratios: S. No 1 Ratio Current Ratio = Formula _Current Assets___ Current Liabilities = _Quick Assets ___ Current Liabilities Significant Level 2:1

Quick Ratio

1:1

Both the current and the quick ratio offer an indication of the companys liquidity position. 1. Current Ratio. The idea behind this is that a company should have enough current assets that give a promise of cash to come to meet its future commitments to pay off its current liabilities. Obviously, a ratio in excess of 1 should be expected. Otherwise there would be the prospect that the company might be unable to pay its debt on time. The significant current ratio is 2:1. 2. Quick Ratio. Companies are not able to convert all their assets into cash very quickly. In particular, some manufacturing companies might hold larger quantities of raw material stocks, which must be used in production to create finished goods. These might be warehoused for a long time, or sold on lengthy credit. In such businesses, where inventory turnover is slow, most inventories are not very liquid assets because the cycle is so long. For these reasons, we calculate an additional liquidity ratio; known as the quick ratio or acid test ratio. This ratio should ideally be at least 1 for companies with slow inventory turnover. For companies with a fast inventory turnover, a quick ratio can be comfortably less than 1 without suggesting that the company should be in cash flow trouble.

Activity Ratios/Turnover Ratios/Efficiency Ratios

It is also called turnover ratio or efficiency ratio. It measures the efficiency of current assets and current liabilities in the business concern during a particular period. This ratio helps to understand the performance of the business concern. Some of the efficiency ratios are given below: S. No Ratio Formula 1 Stock Turnover Period = _Inventory _ X 365 Days Cost of Sales = _Trade Receivables X 365 Days Sales = _Trade Accounts Payables Purchases

Debtors Collection Period

Accounts Payable Period

1. Stock Turnover Period. This is another measure of how vigorously a business is trading. A lengthening inventory turnover period from one year to the next indicates a slow down in trading; or a build up in inventory level, perhaps suggesting that the investment in inventories is becoming excessive. Generally the higher the inventory turnover is better, but several aspects of inventory holding policy have to be balanced. Seasonal fluctuations in orders Alternative uses of warehouse space Bulk buying discounts Likelihood of perishing or becoming obsolete.

2. Debtors Collection Period.The trend of the collection period over time is probably the best guide. If the collection period is increasing year on year, this is indicative of a poorly managed credit control function (and potentially therefore a poorly managed company). 3. Accounts Payable Period. The payment period often helps to assess a companys liquidity; an increase is often a sign of lack of long term finance or poor management of current assets, resulting in the use of external credit from suppliers, increased bank overdraft and so on. Solvency Ratios. It is also called the leverage ratio, which measures the long term obligation of the business concern. This ratio helps to understand, how the long term funds are used in the business concern. Some the solvency ratios are as follow: S. No Ratio Formula 1 Debt Ratio = _Total Debts ___ Total Assets = _Total Liabilities _ Shareholders equity

Debt Equity Ratio

Interest Cover Ratio

= Profit before interest and tax_ = Times Interest charges

1. Debt Ratio. It is the ratio of companys total debts to total assets. Assets consist of non-current assets at their balance sheet value, plus current assets. Debts consist of all payables, whether they are due within one year or after more than one year. There is no absolute guide to the maximum safe debt ratio, but as a very general guide, you might regard 50% as a safe limit to debt. In practice, many companies operate successfully with higher debt ratio than this, but 50% is nonetheless a helpful benchmark. In addition, if the debt ratio is over 50% and getting worse, the companys debt position will be worth looking at more carefully. 2. Debt/Equity Ratio. A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. 3. Interest Cover. The interest cover ratio shows whether a company is earning enough profit before interest and tax to pay its interest costs comfortably, or whether its interest costs are high in relation to the size of its profits, so that a fall in PBIT then have a significant effect on profits available for ordinary shareholders. The interest cover ratio tells us the safety margin that the business has in terms of being able to meet its interest obligations. That is, a high interest cover ratio means that the business is easily able to meet its interest obligations from profits. Similarly, a low value for the interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations. Profitability Ratios. Profitability ratio helps to measure the profitability position of the business concern. Some of the major profitability ratios are as under: S. No Ratio Formula 1 Gross Profit Ratio = _Gross Profit _ X 100 Net Sales = _Net Profit after interest and tax Net Sales = _Profit before interest and tax Net Sales = Net Profit after interest and tax Shareholders Equity = Net Profit after interest and tax Total Assets X 100 X 100 X 100 X 100

Net Profit Ratio

Operating Profit Ratio

Return on Equity

Return on Assets

1. Gross Profit Ratio.is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. 2. Net Profit Ratio.is the ratio of net profit to net sales. It is expressed as percentage. 3.`Operating Profit Ratio:Operating Profit means profit earned by the concern from its business operation and not from the other sources. While calculating the net profit of the concern all incomes either they are not part of the business operation like Rent from tenants, Interest on Investment etc. are added and all non-operating expenses are deducted. So, while calculating operating profits these all are ignored and the concern comes to know about its business income from its business operations. Operating Profit Ratio shows the relationship between Operating Profit and Net Sales. Operating Profit Ratio is expressed as: Operating Profit Ratio = Operating Profit/Net Sales x 100 Where Operating Profit = Gross Profit Operating Expenses Or Operating Profit = Net Profit + Non Operating Expenses Non Operating Incomes Net Sales = Total Sales Sales Return Operating Profit Ratio indicates the earning capacity of the concern on the basis of its business operations and not from earning from the other sources. It shows whether the business is able to stand in the market or not. 4. Return on Equity.The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. 5. Return on Assets.An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is expressed as:

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. Shareholders Investment Ratios/Key Performance Indicators. These ratios help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of a company. They are: S. No Ratio Formula 1 Earnings per share Dividend per share Dividend cover P/E ratio = = = Net Profit after Interest and Tax Preferred Dividend Average number of issued equity shares Dividends paid to equity shareholders Average number of issued equity shares = EPS DPS Market value per share EPS = times

1. Earning per share.Earnings per share is generally considered to be the single most important variable in determining a share's price. When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). 2. Dividend per share.The sum of declared dividends for every ordinary share issued. It is the amount of the dividend that shareholders have (or will) receive for each share they own. Dividend per share does not usually need to be calculated by investors as it is usually disclosed. Careless readers may sometimes confuse the final dividend with the total paid over the year. For example: ABC company paid a total of $237,000 in dividends over the last year of which there was a preferred dividend totaling $59,250. ABC has 2 million shares outstanding so its DPS would be ($237,000-$59,250)/2,000,000 = $0.0889 per share. 3. Dividend cover. It shows the proportion of profit on ordinary activities for the year that is available for distribution to shareholders that has been paid (or proposed) and what proportion

will be retained in the business to finance future growth. A dividend cover of 2 times would indicate that the company had paid 50% of its distributable profits as dividends, and retained 50% in the business to help finance future operations. 4. Price Earning Ratio. It is the ratio of companys current share price to the earning per share. A high P/E ratio indicates strong shareholder confidence in the company and its future, e.g. in profit growth, and a lower P/E ratio indicates lower confidence. The P/E ratio of one company can be compared with the P/E ratios of: Other companies in the same business sector Other companies generally It is often used in stock exchange reporting where prices are rapidly available. For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).