a)Financial statement analysis is the process of reviewing and analyzing a company's financial
statements to make better economic decisions to earn income in future. These statements include
the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of
changes in equity (if applicable).
b)Efficiency ratios are metrics that are used in analyzing a company’s ability to effectively employ its
resources, such as capital and assets, to produce income. Or An efficiency ratio measures a company's
ability to use its assets to generate income. For example, an efficiency ratio often looks at various
aspects of the company, such as the time it takes to collect cash from customers or the amount of time
it takes to convert inventory to [Link] ratios serve as a comparison of expenses made to revenues
generated, essentially reflecting what kind of return in revenue or profit a company can make from the
amount it spends to operate its business.
The following are the types of efficiency ratio which are÷
i/Inventory Turnover Ratio ; The inventory turnover ratio is expressed as the number of times an
enterprise sells out of its stock of goods within a given period of time. The ratio is calculated by taking
the cost of goods sold over the average inventory for a particular time period (e.g., 1 year).
Formula;
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Example : Calculate Inventory Turnover Ratio from the following:
Opening Inventory 29,000
Closing Inventory 31,000
Revenue from Operations, i.e., Sales 3,20,000
Gross Profit Ratio 25%
Data given
Opening Inventory=29,000
Closing Inventory=31,000
Revenue from Operations, i.e., Sales= 3,20,000
Gross Profit Ratio=25%
Inventory turnover ratio =?
Solution
ITR= Cost of Goods Sold / Average Inventory
Gross profit =Gross profit ratio × Revenue
GP=0.25 × 320000
Gross profit =80000
Cost of Goods sold=Sales - Gross profit
COGS=320000-80000
COGS=240000
Average inventory =opening inventory + closing inventory ÷ 2
AI=(29000 +31000)÷2
AI=30000
Inventory turnover ratio = COGS ÷ AIR
ITR=240000 ÷ 30000
=8
Inventory turnover ratio is 8
ii/Account receivables turnover ratio : measures the number of times a company collects its average
accounts receivable balance. is calculated by dividing net sales by average account receivables. Net sales
is calculated as sales on credit - sales returns - sales allowances.
Formula,
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Example:XYZ Corp. had Net Credit Sales of $200,000 for the year 2021. The accounts receivable balance
at the beginning of the year was $30,000, and at the end of the year was $25,000. Calculate the
Accounts Rreceivable turnover ratio
Data given
Net Credit Sales = $200,000
Beginning Accounts Receivable = $30,000
Ending Accounts Receivable = $25,000
Accounts Receivable Turnover Ratio =?
Solution
Average Accounts Receivable = (Beginning AR + Ending AR) / 2
AAR= ($30,000 + $25,000) / 2
AAR = $27,500
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
ARTR= $200,000 / $27,500
ARTR= 7.27
The Accounts Receivable Turnover Ratio for XYZ Corp. in the year 2021 is 7.27. This means that the
company collected its accounts
iii/Accounts Payable Turnover Ratio ; It measures how many times a company can pay its creditors. A
high accounts payable turnover ratio typically indicates that a company pays its suppliers efficiently
Formula,
AP Turnover Ratio = Total Cost of Sales (or Total Purchases) / Average Accounts Payable
Example:ABC Corp had Cost of Goods Sold of $150,000 during the year. The accounts payable balance at
the beginning of the year was $12,000, and the ending accounts payable balance was $10,000. Calculate
the Accounts Payable Turnover Ratio for the year
Data given
Beginning AP=$12,000
Ending AP=$10,000
Cost of Goods Sold =$150,000
Account payable turnover ratio =?
Solution
Average Accounts Payable = (Beginning AP + Ending AP) / 2
AAP= ($12,000 + $10,000) / 2
AAP= $11,000
Accounts Payable Turnover Ratio = Cost of Goods Sold / Average Accounts Payable
APTR = $150,000 / $11,000
APTR ≈ 13.64
The Accounts Payable Turnover Ratio for ABC Corp for the year is approximately 13.64. This indicates
that, on average, the
iv/Assets turnover ratio ; Measures the efficiency with which a company uses its assets to produce
sales. The asset turnover ratio formula is equal to net sales divided by the total or average assets of a
company
Formula,Asset Turnover Ratio = Sales / Average Total Assets
Example;Company A reported beginning total assets of $199,500 and ending total assets of $199,203.
Over the same period, the company generated sales of $325,300 with sales returns of $15,[Link]
the asset turnover ratio
Data given
Beginning Total Assets = $199,500
Ending Total Assets = $199,203
Sales = $325,300
Sales Returns = $15,000
Asset turnover ratio =?
To calculate the Average Total Assets:
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
ATA= ($199,500 + $199,203) / 2
ATA = $398,703 / 2
Average Total Assets = $199,351.50
Asset Turnover Ratio = Sales / Average Total Assets
ART = ($325,300 - $15,000) / $199,351.50
ART = $310,300 / $199,351.50
Asset Turnover Ratio ≈ 1.55
Therefore, the Asset Turnover Ratio for Company A is approximately 1.55. This indicates that for every
dollar of average
V/Day's Sale in Inventory (DSO): is calculated by dividing the inventory balance (including work-in-
progress) by the amount of cost of goods sold. The number is then multiplied by the number of days in a
year, quarter, or month.
Formula,
Day's Sale in Inventory (DSI)=(Ending inventory/Cost of goods sold) x 365
Example :Calculate the Days Sales in Inventory (DSI) for a fictional company called XYZ Corp. using the
provided information.
Beginning Inventory: $20,000
Ending Inventory: $30,000
Cost of Goods Sold: $100,000
Number of Days in the Period: 365 days
Data given
Beginning Inventory=$20,000
Ending Inventory=$30,000
Cost of Goods Sold =$100,000
Number of Days in the Period=365 days
Days sales in inventory =?
Solution
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
AI= ($20,000 + $30,000) / 2
AI = $50,000 / 2
Average Inventory = $25,000
Days Sales in Inventory (DSI)= (Average Inventory / Cost of Goods Sold) x Number of Days
DSI = ($25,000 / $100,000) x 365
DSI = 0.25 x 365
DSI = 91days