War22e Ch17 Indonesia

1
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Financial
Statement
Analysis
1
7
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to
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Master
title
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After studying this chapter, you should
be able to:
1. List basic financial statement
analytical procedures.
2. Apply financial statement analysis to
assess the solvency of a business.
3. Apply financial statement analysis to
stress the profitability of a business.
4. Describe the contents of corporate
annual reports.

Objective
Objective 11
171
List basic financial

statement analytical
procedures.
3
Horizontal Analysis
171
The percentage analysis of

increases and decreases in
related items in comparative
financial statements is called
horizontal analysis.
4
Exhibit 1 Comparative Balance Sheets

PT Latuconsina
Comparative Balance Sheet
December 31, 2008 and 2007
2008
Assets (in 000 Rp)

Current assets
550,000
Long-term investments
95,000
Prop., plant, and equip. (net)
444,500
Intangible assets
50,000
Total assets
1,139,500
Liabilities (in 000 Rp)
Current liabilities
210,000
Long-term liabilities
100,000
Total liabilities
310,000
Stockholders Equity (in 000 Rp)
Preferred 6% stock, Rp100 par
150,000
Common stock, Rp10 par
500,000
Retained earnings
179,500
Total stockholders equity
829,500
Total liab. & stockholders eq.
1,139,500
2007
171
Increase (Decrease)
Amount
Percent
533,000
177,500
470,000
50,000
1,230,500
17,000
(82,500)
(25,500)
3.2%
(46.5%)
(5.4%)
(91,000)
(7.4%)
243,000
200,000
443,000
(33,000)
100,000)
(133,000)
(13.6%)
(50.0%)
(30.0%)
150,000
500,000
137,500
787,500
1,230,500
42,000
42,000
(91,000)
30.5%
5.3%
(7.4%)
55

PT Latuconsina
2008
2007
171
Increase (Decrease)
Amount
Percent
Assets (in 000 Rp)

Current assets
550,000
533,000
17,000
95,000
177,500
(82,500)
444,500
470,000
(25,500)
Horizontal
Intangible assets
50,000Analysis:
50,000
Total assets
1,139,500
1,230,500
(91,000)
Difference
Rp17,000
Current liabilities
210,000
243,000
(33,000) =
100,000(2007)
200,000
100,000)
Base year
Rp533,000
Total liabilities
310,000
443,000 (133,000)
150,000
150,000

500,000
500,000
Retained earnings
179,500
137,500
42,000
829,500
787,500
42,000
1,139,500
1,230,500
(91,000)
3.2%
(46.5%)
(5.4%)
(7.4%)
(13.6%)
3.2%
(50.0%)
(30.0%)
30.5%
5.3%
(7.4%)
66

PT Latuconsina
2008
2007
171
Increase (Decrease)
Amount
Percent
Assets (in 000 Rp)

Current assets
550,000
533,000
17,000
95,000
177,500
(82,500)
444,500
470,000
(25,500)
Intangible assets
50,000
50,000
Horizontal
Analysis:
Total assets
1,139,500
1,230,500
(91,000)
Current liabilities
210,000
243,000
(33,000)
Difference
Rp(82,500)
100,000
200,000
100,000)
=
Base year
(2007) Rp177,500
Total liabilities
310,000
443,000 (133,000)
150,000
150,000

500,000
500,000
Retained earnings
179,500
137,500
42,000
829,500
787,500
42,000
1,139,500
1,230,500
(91,000)
3.2%
(46.5%)
(5.4%)
(7.4%)
(13.6%)
(50.0%)
(46.5%)
(30.0%)
30.5%
5.3%
(7.4%)
77
Exhibit 2 Comparative Schedule of

Current Assets
171
PT Latuconsina
Comparative Schedule of Current Assets
December 31, 2008 and 2007 (in 000 Rp)
Cash
Marketable securities
Accounts receivable (net)
Inventories
Prepaid expenses
Total current assets
2008
90,500
75,000
115,000
264,000
5,500
550,000
2007
64,700
60,000
120,000
283,000
5,300
533,000
Increase (Decrease)
Amount Percent
25,800
39.9%
15,000
25.0%
(5,000)
(4.2%)
(19,000)
(6.7%)
200
3.8%
17,000
3.2%
88
171
PT Latuconsina
Comparative Schedule of Current Assets
Increase (Decrease)
2008
2007
Amount Percent
Cash
90,500
64,700
25,800
39.9%
75,000
60,000
15,000
25.0%
Accounts receivable (net)Horizontal
115,000 Analysis:
120,000 (5,000)
(4.2%)
Inventories
264,000 283,000 (19,000)
(6.7%)
Prepaid expenses
5,500
5,300
200
3.8%
Difference
Rp25,800
550,000 533,000
17,000 = 39.9%
3.2%
Base year (2007) Rp64,700
99
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Exhibit 3 Comparative Income Statement
PT Latuconsina
Comparative Income Statement
For the Year Ended December 31, 2008 and 2007 (in 000 Rp)
Increase (Decrease)
2008
2007
Amount
Percent
Sales
Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Total operating expenses
Income from operations
Other income
Other expense (interest)
Income before income tax
Income tax expense
Net income
1,530,500
32,500
1,498,000
1,043,000
455,000
191,000
104,000
295,000
160,000
8,500
168,500
6,000
162,500
71,500
91,000
1,234,000
34,000
1,200,000
820,000
380,000
147,000
97,400
244,400
135,600
11,000
146,600
12,000
134,600
58,100
76,500
296,500
(1,500)
298,000
223,000
75,000
44,000
6,600
50,600
24,400
(2,500)
21,900
(6,000)
27,900
13,400
14,500
24.0%
(4.4%)
24.8%
27.2%
19.7%
29.9%
6.8%
20.7%
18.0%
(22.7%)
14.9%
(50.0%)
20.7%
23.1%
19.0%
171
1010
11
PT Latuconsina
For the Year Ended December 31, 2008 and 2007 (in 000 Rp)
Increase (Decrease)
2008
2007
Amount
Percent
Current assets
1,530,500
1,234,000
296,500
24.0%
Sales returns and allowances
32,500
34,000
(1,500)
(4.4%)
Net sales
1,498,000
1,200,000
298,000
24.8%
Cost of goods sold
1,043,000
820,000
223,000
27.2%
Gross profit
455,000
380,000
75,000
19.7%
Selling expenses
191,000
147,000
44,000
29.9%
Horizontal Analysis:
104,000
97,400
6,600
6,.8%
295,000
244,400
50,600
20.7%
160,000 Rp296,500
135,600
24,400
18.0%
Increase amount
Other income
8,500
11,000
(2,500)
= 24.0%(22.7%)
168,500 Rp1,234,000
146,600
21,900
14.9%
Base year (2007)
6,000
12,000
(6,000)
(50.0%)
162,500
134,600
27,900
20.7%
Income tax expense
71,500
58,100
13,400
23.1%
Net income
91,000
76,500
14,500
19.0%
171
1111
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Exhibit 4 Comparative RE Statement
PT Latuconsina
Comparative Retained Earnings Statement
171
A percentage analysis that

Increase (Decrease)
shows the relationship
each Percent
2008
2007 ofAmount
Retained earnings, Jan. 1
137,500 100,000
37,500
37.5%
component
to
the
total
within
Net income for year
91,000
76,500
14,500
19.0%
Total
228,500 176,500
52,000
29.5%)
a single statement
is called
Dividends:
analysis.
On preferred stock vertical
9,000
9,000
On common stock
Total
40,000
49,000
179,500
30,000
39,000
137,500
10,000
10,000
42,000
33.3%
25.6%
30.5%
12
12
13
Exhibit 4 Comparative RE Statement
PT Latuconsina
Comparative Retained Earnings Statement
171
A percentage analysis that

Increase (Decrease)
shows the relationship
each Percent
2008
2007 ofAmount
Retained earnings, Jan. 1
137,500 100,000
37,500
37.5%
component
to
the
total
within
Net income for year
91,000
76,500
14,500
19.0%
Total
228,500 176,500
52,000
29.5%)
a single statement
is called
Dividends:
analysis.
On preferred stock vertical
9,000
9,000
Horizontal Analysis:
On common stock
40,000
30,000
10,000
33.3%
Total
49,000
10,000
25.6%
Increase
amount39,000
Rp37,500
179,500 137,500
42,000
30.5%
= 37.5%
Base year (2007) Rp100,000
13
13
14
171
Example Exercise 17-1
The comparative cash and accounts receivable for a

company are provided below:
2008
2007
Cash
62,500,000 50,000,000
Accounts receivable (net) 74,400,000 80,000,000
Based on this information, what is the amount and
percentage of increase or decrease that would be shown
in a balance sheet with horizontal analysis?
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171
Follow My Example 17-1
Cash
12,500,000 increase (62,500,000
50,000,000), or 25%
Accounts
Receivable Rp5,600,000 decrease (Rp74,400,000
Rp80,000,000), or 7%
For Practice: PE 17-1A, PE 17-1B
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Vertical Analysis
171
A percentage analysis used to

show the relationship of each
component to the total within a
single statement is called
vertical analysis.
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17
Vertical Analysis of Balance Sheet
171
In a vertical analysis of the balance

sheet, each asset item is stated as a
percent of the total assets. Each
liability and stockholders equity item
is stated as a percent of the total
liabilities and stockholders equity.
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PT Latuconsina
For the Years Ended December 31, 2008 and 2007
2008
2007
Amount Percent
Amount Percent
Assetsm (in 000 Rp)
Current assets
550,000
48.3%
533,000
43.3%
95,000
8.3
177,500
14.4
Property, plant, & equip. (net)
444,500
39.0
470,000
38.2
Intangible assets
50,000
4.4
50,000
4.1
Total
assets
1,139,500
100.0%
1,230,500 100.0%
Total
assets
1,139,500
100.0% $1,230,500100.0%
Current liabilities
210,000
18.4%
243,000
19.7%
100,000
8.8
200,000
16.3
Total liabilities
310,000
27.2%
443,000
36.0%
150,000
13.2%
150,000
12.2%
2.2% Common stock, Rp10 par
500,000
43.9
500,000
40.6
Retained earnings
179,500
15.7
137,500
11.2
829,500
72.8%
787,500
64.0%
Totalliab.
liab.&&stockholders
Stockholdersequity
equity 1,139,500
1,139,500
100.0%
1,230,500 100.0%
Total
100.0% $1,230,500100.0%
171
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18
19
171
To demonstrate how vertical

analysis percentages are
calculated for the balance sheet,
lets see how the 48.3 percent
was calculated for the 2008
current assets in the next slide.
19
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PT Latuconsina
For the Years Ended December 31, 2008 and 2007
2008
2007
Amount Percent
Amount Percent
Assets (in 000 Rp)
Current assets
550,000
48.3%
533,000
43.3%
95,000
8.3
177,500
14.4
Property, plant, & equip. (net)
444,500
39.0
470,000
38.2
Intangible assets
50,000
4.4
50,000
4.1
Total
assets
1,139,500
100.0%
1,230,500 100.0%
Total
assets
$1,139,500
100.0% $1,230,500100.0%
Current liabilities
210,000
18.4%
243,000
19.7%
100,000
8.8
200,000
16.3
Total liabilities
310,000
27.2%
443,000
36.0%
Stockholders
Equity (in 000 Rp)
Vertical Analysis:
150,000
13.2%
150,000
1
2.2%
Common stock,
Rp10 par
500,000
43.9
500,000
40.6
Current
assets
Rp550,000
Retained earnings
179,500 =15.7
48.3% 137,500 11.2
Total
stockholders
829,500
72.8%
787,500
64.0%
Total
assetsequity Rp1,139,500
Totalliab.
liab.&&stockholders
Stockholdersequity
equity $1,139,500
1,139,500
100.0%
1,230,500 100.0%
Total
100.0% $1,230,500100.0%
171
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Vertical Analysis of Income Statement
171
In a vertical analysis of the

income statement, each item is
stated as a percent of net sales.
As an example, lets see how the
percent of 12.8% was calculated
for 2008 selling expenses.
21
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PT Latuconsina
For the Years Ended December 31, 2008 and 2007 (in 000 Rp)
2008
2007
Amount Percent
Amount
Percent
Sales
1,530,500 102.2%
1,234,000
102.8%
Sales returns and allow.
32,500
2.2
34,000
2.8
Net sales
1,498,000 100.0%
1,200,000
100.0%
Cost of goods sold
1,043,000
69.6
820,000
68.3
Gross profit
455,000
30.4%
380,000
31.7%
Selling expenses
191,000
12.8%
147,000
12.3%
104,000
6.9
97,400
8.1
295,000
19.7%
244,400
20.4%
160,000
10.7
135,600
11.3%
Other income
8,500
0.6
11,000
0.9
168,500
11.3%
146,600
12.2%
6,000
0.4
12,000
1.0
162,500
10.9%
134,600
11.2%
Income tax expense
71,500
4.8
58,100
4.8
Net income
91,000
6.1%
76,500
6.4%
171
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PT Latuconsina
For the Years Ended December 31, 2008 and 2007 (in 000 Rp)
2008
2007
Amount Percent
Amount
Percent
Sales
1,530,500 102.2%
1,234,000
102.8%
Sales returns and allow.
32,500
2.2
34,000
2.8
Net sales
1,498,000 100.0%
1,200,000
100.0%
Cost of goods sold
1,043,000
69.6
820,000
68.3
Gross profit
455,000
30.4%
380,000
31.7%
Selling expenses
191,000
12.8%
147,000
12.3%
104,000
6.9
97,400
8.1
295,000
19.7%
244,400
20.4%
160,000
10.7
135,600
11.3%
Other income
8,500
0.6
11,000
0.9
168,500
11.3%
146,600
12.2%
Other expense
(interest)
6,000
0.4
12,000
1.0
Vertical
Analysis:
162,500
10.9%
134,600
11.2%
Selling
expenses
Rp191,000
Income tax
expense
71,500
4.8
58,100
4.8
=6.1%
12.8% 76,500
Net income
91,000
6.4%
Net sales
Rp1,498,000
171
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Common-Size Statements
171
In a common-sized statements, all

items are expressed as a percentage.
Common-sized statements are
useful in comparing the current
period with prior periods, individual
businesses, or one business with
with industry percentages.
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Common-Size Income
171
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171
Income statement information for PT Rinawati is

provided below:
PT Rinawati
Sales
Rp100,000,000
Cost of goods sold
65,000,000
Gross profit
Rp 35,000,000
Prepare a vertical analysis of the income statement for
PT Rinawati.
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171
Amount
Percentage
Sales
Rp100,000,000100% (Rp100,000,000/Rp100,000,000)
Cost of goods
sold
Rp65,000,000
65 (Rp65,000,000/Rp100,000,000)
Gross profit
35,000 35% (Rp35,000,000/Rp100,000,000)
27
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Objective
Objective 22
172
Apply financial
statement analysis to
assess the solvency
of a business.
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Solvency Analysis
172
The ability of a business to meet

its financial obligations (debts)
is called solvency.
The ability of a business to earn
income is called profitability.
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30
Current Position Analysis
172
Using measures to assess a

businesss ability to pay its
current liabilities is called
current position analysis. Such
analysis is of special interest to
short-term creditors.
30
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Working Capital
172
The excess of current assets of a

business over its current liabilities
is called working capital. The
working capital is often used in
evaluating a companys ability to
meet currently maturing debts.
31
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172
PT Latuconsina (in 000 Rp)

Current asset:
Cash
Inventories
Prepaid expenses
a.
Total current
assets
Working
capital (a
b)
b. Current liabilities
Rp 90,500
75,000
115,000
264,000
5,500
Rp550,000
Rp340,000
210,000
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Current Ratio
172
The current ratio, sometimes

called the working capital
ratio or bankers ratio, is
computed by dividing the total
current assets by the total
current liabilities.
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172

a. Current assets
Working capital (a b)
Current ratio (a/b)
2008
2007
Rp550,000 Rp533,000
210,000
243,000
Rp340,000 Rp290,000
2.6
2.2
34
34
35
Quick Ratio
172
A ratio that measures the

instant debt-paying ability
of a company is called the
quick ratio or acid-test ratio.
35
36
Quick
Quickassets
assetsare
arecash
cash
and
andother
othercurrent
currentassets
assets
that
thatcan
canbe
bequickly
quickly
converted
convertedtotocash
cash..
172
PT Latuconsina
2008
Quick assets:
Cash
a. Total quick assets
Quick ratio (a/b)
2007
Rp 90,500 Rp 64,700
75,000
60,000
115,000
120,000
Rp280,500 Rp244,700
Rp210,000 Rp243,000
1.3
1.0
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172
The following items are reported on a companys

balance sheet:
Cash
Inventory
Accounts payable
Rp300,000,000
100,000,000
200,000,000
200,000,000
400,000,000
Determine (a) the current ratio and (b) the quick ratio.
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to
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style
172
a. Current Ratio = Current Assets/Current Liabilities

Current Ratio = (Rp300,000,000 + Rp100,000,000 +
Rp200,000,000 + Rp200,000,000)/Rp400,000,000
Current Ratio =
2.0
b. Quick Ratio = Quick Assets (cash, marketable securities, and

accounts receivable)/Current Liabilities
(accounts payable)
Quick Ratio = (Rp300,000,000 + Rp100,000,000 +
Rp200,000,000)/Rp400,000,000
Quick Ratio = 1.5
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Accounts Receivable Turnover
172
The relationship between sales and

accounts receivable may be stated as
the accounts receivable turnover.
The ratio is to assess the efficiency of
the firm in collecting receivables and
in the managing of credit.
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40

2008
a. Net sales
Rp1,498,000
Accounts receivable (net):
Beginning of year
Rp 120,000
End of year
115,500
Total
Rp 235,000
b. Average (Total/2)
Rp 117,500
Accounts receivable turnover
(a/b)
12.7
172
2007
Rp1,200,000
Rp 140,000
120,000
Rp 260,000
Rp 130,000
9.2
40
40
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Number of Days Sales in

Receivables
172
The number of days sales in

receivables is an estimate of the length
of time (in days) the accounts
receivable have been outstanding.
Comparing this measure with the credit
terms provides information on the
efficiency in collecting receivables.
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title
(in 000
Rp) style
a. Average (Total/2)
Net sales
b. Average daily sales on
account (Sales/365)
Number of days sales in
receivables (a/b)
172
2008
2007
Rp 117,500 Rp 130,000
Rp1,498,000 Rp1,200,000
Rp
4,104 Rp
3,288
28.6
39.5
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172
A company reports the following:

Net sales
Rp960,000,000
Average accounts receivable (net) 48,000,000
Determine (a) the accounts receivable turnover and (b)
the number of days sales in receivables. Round to one
decimal place.
43
43
44
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to
edit
Master
title
style
172
a. Accounts Receivable Turnover = Sales/Average accounts

receivable
Accounts Receivable Turnover = Rp960,000,000/Rp48,000,000
Accounts Receivable Turnover = 20.0
b. Number of Days Sales in Receivables = Average accounts
receivable/Average
daily sales
Number of Days Sales in Receivables = Rp48,000,000/
(Rp960,000,000/365)
Number of Days Sales in Receivables = 48,000,000/2,630,000
Number of Days Sales in Receivables = 18.3 days
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Inventory Turnover
172
The relationship between the

volume of goods (merchandise)
sold and inventory may be stated
as the inventory turnover. The
purpose of this ratio is to assess
the efficiency of the firm in
managing its inventory.
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172
2008
2007
Rp1,043,000 Rp 820,000
a. Cost of goods sold

Inventories:
Beginning of year Rp 283,000

Rp 311,000
End of year
264,000
283,000
Inventory turnover (a/b)
Rp 594,000
Total Rp 547,000
3.8
2.8
Rp 273,500 Rp 297,000 46
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Number of Days Sales in Inventory
172

a. Average (Total/2)
Cost of goods sold
b. Average daily cost of goods
sold (COGS/365 days)
Number of days sales in
inventory (a/b)
2008
2007
Rp 273,500 Rp 297,000
Rp1,043,000 Rp 820,000
Rp2,858
95.7
Rp2,247
132.2
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48
172

Cost of goods sold
Rp560,000,000
Average inventory
112,000,000
Determine (a) the inventory turnover and
(b) the number of days sales in inventory.
Round to one decimal place.
48
48
49
172
a. Inventory Turnover = Cost of Goods Sold/Average

Inventory
Inventory Turnover = Rp560,000,000/Rp112,000,000
Inventory Turnover = 5.0
b. Number of Days Sales in Inventory = Average Inventory/
Average Daily Cost
of Goods Sold
Number of Days Sales in Inventory = Rp112,000,000/
(Rp560,000,000/365)
Number of Days Sales in Inventory
=Rp112,000,000/Rp1,534,000
49
49
Number of Days Sales in Inventory = 73.0 days
50
Ratio of Fixed Assets to Long-Term

Liabilities
172
The ratio of fixed assets to longterm liabilities is a solvency measure

that indicates the margin of safety of
the noteholders or bondholders. It
also indicates the ability of the
business to borrow additional funds
on a long-term basis.
50
51

a. Fixed assets (net)
b. Long-term liabilities
172
2008
2007
Rp444,500 Rp470,000
Rp100,000 Rp200,000
Ratio of fixed assets to

long-term liabilities (a/b)
4.4
2.4
51
51
52
Ratio of Liabilities to Stockholders

Equity
172
The relationship between the

total claims of the creditors and
ownersthe ratio of liabilities to
stockholders equityis a
solvency measure that indicates
the margin of safety for creditors.
52
53
172

2008
2007
a. Total liabilities
Rp310,000 Rp443,000
b. Total stockholders equity Rp829,500 Rp787,500
Ratio of liabilities to
stockholders equity (a/b)
0.4
0.6
53
53
54
172
The following information was taken from Acme

Companys balance sheet:
Fixed assets (net)
Rp1,400,000,000
400,000,000
Total liabilities
560,000,000
1,400,000,000
Determine the companys (a) ratio of fixed assets to
long-term liabilities and (b) ratio of liabilities to
stockholders equity.
54
54
55
172
a. Ratio of Fixed Assets to Long-Term Liabilities = Fixed Assets/

Long-Term
Liabilities
Ratio of Fixed Assets to Long-Term Liabilities =
Rp1,400,000,000/Rp400,000,000
Ratio of Fixed Assets to Long-Term Liabilities = 3.5
b. Ratio of Liabilities to Total Stockholders Equity = Total
Liabilities/Total Stockholders Equity
Ratio of Liabilities to Total Stockholders Equity =
Rp560,000,000/Rp1,400,000,000
Ratio of Liabilities to Total Stockholders Equity = 0.4
55
55
56
Number of Times Interest Charges

Earned
172
Corporations in some industries

normally have high ratios of debt to
stockholders equity. For such
corporations, the relative risk of the
debtholders is normally measured as the
number of times interest charges are
earned (during the year), sometimes
called the fixed charge coverage ratio.
56
57


a. Add interest expense
b. Amount available to meet
interest charges
Number of times interest
charges earned (b/a)
172
2008
2007
Rp162,500 Rp134,600
6,000
12,000
Rp168,500 Rp146,600
28.1
12.2
57
57
58
172

Rp250,000,000
Interest expense
100,000,000
Determine the number of times interest charges
are earned.
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58
59
172
Number of Times Interest Charges are Earned =

(Income Before Income Tax + Interest Expense)/
Interest Expense
Number of Times Interest Charges are Earned =
(Rp250,000,000 + Rp100,000,000)/Rp100,000,000
Number of Times Interest Charges are Earned = 3.5
59
59
60

Objective
Objective 33
173
Apply financial
statement analysis to
assess the profitability
of a business.
60
61
Profitability Analysis
Profitability is the ability of an entity to earn

profits.
This ability to earn profits depends on the
effectiveness and efficiency of operations as
well as resources available as reported in the
balance sheet.
Profitability analysis focuses primarily on
the relationship between operating results
reported in the income statement and
resources reported in the balance sheet.
173
61
62
Ratio of Net Sales to Assets
173
The ratio of net sales to assets

is a profitability measure that
shows how effectively a firm
utilizes its assets.
62
63

a. Net sales
Total assets:
Beginning of year
End of year
Total
173
2008
2007
Rp1,498,000 Rp$1,200,000
Rp1,053,000 Rp1,010,000
1,044,500
1,053,000
Rp2,097,500 Rp2,063,000
Rp1,048,750 Rp1,031,500
Excludes
Excludes long-term
long-term investments
investments
63
63
64

a. Net sales
Total assets:
Beginning of year
End of year
Total
173
2008
2007
Rp1,498,000 Rp1,200,000
Rp1,053,000 Rp1,010,000
1,044,500
1,053,000
Rp2,097,500 Rp2,063,000
Rp1,048,750 Rp1,031,500
Ratio of net sales to assets (a/b)
1.4
1.2
64
64
65
173

Net sales
Rp2,250,000,000
Average total sales
1,500,000,000
Determine the ratio of net sales to assets.
Ratio of Net Sales to Total Assets = Net Sales/Average Total

Assets
Ratio of Net Sales to Total Assets =
Rp2,250,000,000/Rp1,500,000,000
Ratio of Net Sales to Total Assets = 1.5
65
65
66
Rate Earned on Total Assets
173
The rate earned on total

assets measures the
profitability of total assets,
without considering how the
assets are financed.
66
67

Net income
Plus interest expense
a. Total
Total assets:
Beginning of year
End of year
Total
Rate earned on total
assets (a/b)
173
2008
2007
Rp 91,000 Rp 76,500
6,000
12,000
Rp 97,000 Rp 88,500
Rp1,230,500 Rp1,187,500
1,139,500
1,230,500
Rp2,370,000 Rp2,418,000
Rp1,185,000 Rp1,209,000
8.2%
7.3% 67
67
68
173
A company reports the following income statement and

balance sheet information for the current year:
Net income
Rp 125,000,000
Interest expense
25,000,000
Average total assets
2,000,000,000
Determine the rate earned on total assets.
68
68
69
173
Rate Earned on Total Assets = (Net Income + Interest

Expense)/Average Total
Assets
Rate Earned on Total Assets =
(Rp125,000,000 +Rp25,000,000)/Rp2,000,000,000
Rate Earned on Total Assets = 7.5%
69
69
70
Rate Earned on Stockholders Equity
173
The rate earned on

stockholders equity measure
emphasizes the rate of income
earned on the amount invested
by the stockholders.
70
71

173
2008
2007
Rp 91,000 Rp 76,500
a. Net income
Stockholders equity:
Beginning of year
Rp 787,500 Rp 750,000
End of year
829,500
787,500
Total
Rp1,617,000 Rp1,537,500
Rp 808,500 Rp 768,750
Rate earned on stockholders
equity (a/b)
11.3%
10.0%
71
71
72
Leverage
173
The difference in the rate

earned on stockholders equity
and the rate earned on total
assets is called leverage.
72
73
Exhibit 8
Leverage
11.3%
10%
8.2%
Leverage
3.1%
173
10.0%
7.3%
Leverage
2.7%
5%
0%
2008
Rate earned on
total assets
2007
Rate earned on
stockholders equity
73
73
74
Rate Earned on Common

Stockholders Equity
173
The rate earned on common

stockholders equity focuses
only on the rate of profits
earned on the amount invested
by the common stockholders.
74
75
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(in 000title
Rp) style
173
2008
2007
91,000 Rp 76,500
9,000
9,000
82,000 Rp 67,500
Net income
Rp
Less preferred dividends
a. Remaindercommon stock Rp
Common stockholders equity:
Beginning of year
Rp 637,500 Rp 600,000
End of year
679,500
637,500
Total
Rp1,317,000 Rp1,237,500
Rp 658,500 Rp 618,750
Rate earned on common
stockholders equity (a/b)
12.5%
10.9%
75
75
76
173

Net income
Rp 125,000,000
Preferred dividends
5,000,000
Average stockholders equity 1,000,000,000
Average common stockholders
equity
800,000,000
Determine (a) the rate earned on stockholders equity
and (b) the rate earned on common stockholders
equity.
76
76
77
173
a. Rate Earned on Stockholders Equity = Net Income/Average

Stockholders Equity
Rate Earned on Stockholders Equity =Rp125,000,000/Rp1,000,000,000
Rate Earned on Stockholders Equity = 12.5%
b. Rate Earned on Common Stockholders Equity = (Net

Income Preferred Dividends)/Average
Common
Stockholders Equity
Rate Earned on Common Stockholders Equity =
(Rp125,000,000 Rp5,000,000)/Rp800,000,000
Rate Earned on Common Stockholders Equity = 15%
77
77
78
Earnings per Share on Common Stock
173
One of the profitability

measures often quoted by the
financial press is earning per
share (EPS) on common stock.
It is also normally reported in
the income statement in
corporate annual reports.
78
79

2008
Rp 91,000
9,000
173
2007
Rp 76,500
9,000
Net income
Preferred dividends
a. Remainderidentified with
common stock
Rp 82,000 Rp 67,500
b. Shares of common stock
50,000
50,000
Earnings per share on common
stock (a/b)
Rp1.64
Rp1.35
79
79
80
Price-Earnings Ratio
173
Another profitability measure

quoted by the financial press
is the price-earnings (P/E)
ratio on common stock. The
price-earnings ratio is an
indicator of a firms future
earnings prospects.
80
81
173
PT Latuconsina
2008
2007
Market price per share of

common stock
Rp41,000 Rp27,000
Earnings per share on common
stock
1,640 1,350
Price-earnings ratio on
common stock
25
20
81
81
82
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to
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Master
title
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Net income
Rp250,000,000
Preferred dividends
Rp15,000,000
Shares of common stock
outstanding
20,000,000
common stock
Rp35,000
a. Determine the companys earnings per share on
common stock.
b. Determine the companys price-earnings ratio.
Round to one decimal place.
173
82
82
83
173
(a) Earnings Per Share of Common Stock = (Net

Income Preferred Dividends)/Shares of
Common Stock Outstanding
Earnings per Share of Common Stock =
(Rp250,000,000 Rp15,000,000)/20,000,000
Earnings per Share of Common Stock =
Rp11,750
(Continued)
83
83
84
173

(b) Price-Earnings Ratio = Market Price per Share of
Common Stock/Earnings per
Share on Common Stock
Price-Earnings Ratio = Rp35,000/Rp11,750
Price-Earnings Ratio = 3.0
84
84
85
Dividends per Share
173
Dividends per share can be reported

with earnings per share to indicate the
relationship between dividends and
earnings. Comparing these two per
share amounts indicates the extent to
which the corporation is retaining its
earnings for use in operations.
85
86
Exhibit 9: Dividends and Earning per

Share of Common Stock
173
PT Latuconsina
Rp2,000
Rp1,640
Per
share
Rp1,500
Rp1,000
Rp1,350
Rp800
Rp600
Rp500
Rp0
2008
Dividends
2007
Earnings
86
86
87
Dividend Yield
173
The dividend yield on common

stock is a profitability measure
that shows the rate of return to
common stockholders in terms
of cash dividends.
87
88
173
PT Latuconsina
2008
Dividends per share of
common stock
common stock
Dividend yield on
common stock
2007
Rp 800
Rp 600
41,000
27,000
2.0%
2.2%
88
88
89
174
Objective
Objective 44
Describe the
contents of corporate
annual reports.
89
90
Corporate Annual Reports
174
In addition to the financial statements and

the accompanying notes, corporate annual
reports usually include the following
sections:
Management Discussion and Analysis
Report on fairness of financial statements
90
91
Management Discussion and

Analysis
174
The Management Discussion and Analysis

(MD&A) includes an analysis of the results
of operations and discusses managements
opinion about future performance. It
compares the prior years income statement
with the current years. It also contains an
analysis of the firms financial condition.
91
92
Report on Adequacy of
Internal Control
174
Management for listed firm is required by

Bapepam to provide a report stating their
responsibility for establishing and
maintaining internal control. In addition, the
report must state managements conclusion
concerning the effectiveness of internal
controls over financial reporting.
92
93
Report on Fairness of Financial

Statements
174
All publicly held corporations are

required to have an independent audit
(examination) of their financial
statements. The CPAs who conduct the
audit render an opinion on the fairness
of the statements.
93

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1

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List basic financial

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The percentage analysis of

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Exhibit 1 Comparative Balance Sheets

Assets (in 000 Rp)

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Assets (in 000 Rp)

Common stock, Rp10 par

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Assets (in 000 Rp)

Common stock, Rp10 par

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Exhibit 2 Comparative Schedule of

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Base year (2007) Rp64,700

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Exhibit 3 Comparative Income Statement

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Exhibit 4 Comparative RE Statement

A percentage analysis that

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Exhibit 4 Comparative RE Statement

A percentage analysis that

Base year (2007) Rp100,000

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Example Exercise 17-1

The comparative cash and accounts receivable for a

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Follow My Example 17-1

For Practice: PE 17-1A, PE 17-1B

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A percentage analysis used to

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Vertical Analysis of Balance Sheet

In a vertical analysis of the balance

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To demonstrate how vertical

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Vertical Analysis of Income Statement

In a vertical analysis of the

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In a common-sized statements, all

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Example Exercise 17-2

Income statement information for PT Rinawati is

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Follow My Example 17-2

For Practice: PE 17-2A, PE 17-2B

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The ability of a business to meet

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Current Position Analysis

Using measures to assess a

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