Accounting and Finance Foundations

Unit 11

Accounting and Finance Foundations Unit 11: Financial Analysis 826

Financial Analysis

Lesson 23.3

ABC Company

Income Statement

For the Year Ended December 31, 20XX

Amount Percent

Sales $1,530,500 102.2%

Sales Returns and Allowances 32,500 2.2%

Net Sales $1,498,000 100.0%

Cost of Goods Sold 1,043,000 69.6%

Gross Profit $455,000 30.4%

Selling Expenses 191,000 12.8%

Administrative Expenses 104,000 6.9%

Total Operating Expenses $295,000 19.7%

Income from Operations $160,000 10.7%

Other Income 8,500 0.6%

$168,500 11.3%

Other Expenses 6,000 0.4%

Income Before Tax $162,500 10.9%

Income Tax Expense 71,500 4.8%

Net Income $91,000 6.1%

Key Performance Indicators &

Industry Comparison

A ratio analysis shows the proportionate relationship between two different amounts, allowing for easy

comparisons. Ratios may be computed using values in one statement, such as the income statement, or in

two different statements, such as the income statement and the balance sheet. Some of the most common-

ly analyzed ratios, referred to as key performance indicators, include profit margin, debt ratio, current

ratio, return on assets, inventory turnover, earnings per share, and price-earnings ratio.

Profit margin is the net income or profit expressed as a percentage of sales. For example, if a company has

a profit margin of 10% for every dollar of sales, 10% of those sales dollars represent profit. Profit margin

is used to measure a company’s profitability.

Profit Margin (%) = Net Income / Sales

The debt ratio is the degree (%) to which assets are purchased through debt (liabilities). Most companies

finance their assets in one of two ways: either through debt or through stock. The debt ratio is a primary

measure used to gauge the extent to which a company is leveraged or financed through debt.

Debt Ratio (%) = Total Debt / Total Assets

Chapter 23

Student Guide