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Question:
Discuss about the for Business Accounting for Vertical and Horizontal Business Analysis.

 
Answer:

1) (a) Vertical Analysis of Income Statement of SIA Ltd.:

Vertical analysis of Income Statement of SIA Ltd. for period ending 31 March 2015 and 2014

 

2015

 

2014

 

 

Amount ($)

Percent (%)

Amount ($)

Percent (%)

Revenue

15,565.50

100%

15,243.90

100%

 

 

 

 

 

Expenditure

     

 

Staff costs

2,335.20

15.00%

2,336.70

15.33%

Fuel costs

5,579.70

35.85%

5,702.10

37.41%

Depreciation

1,538.80

9.89%

1,575.50

10.34%

Impairment of property, plant and equipment

1.5

0.01%

20.2

0.13%

Amortization of intangible assets

25.9

0.17%

25.7

0.17%

Aircraft maintenance and overhaul costs

668.6

4.30%

641.8

4.21%

commission and incentives

375.6

2.41%

346.6

2.27%

Landing, parking and overflying charges

747.9

4.80%

716.6

4.70%

Handling charges

1,066.20

6.85%

1,038.70

6.81%

Rentals on leased aircraft

839.5

5.39%

649.5

4.26%

Material cost

176.7

1.14%

223.1

1.46%

In flight meals

553.5

3.56%

549.1

3.60%

Advertising and sales costs

258.5

1.66%

257.6

1.69%

Insurance expenses

44.9

0.29%

41.5

0.27%

Company accommodation and utilities

119.5

0.77%

119.1

0.78%

Other passenger costs

175

1.12%

173.3

1.14%

Crew expenses

146.4

0.94%

144.7

0.95%

Other operating expenses

502.7

3.23%

422.8

2.77%

 

15,156.10

97.37%

14,984.60

98.30%

Operating profit (Revenue - Expenditures)

409.4

2.63%

259.3

1.70%

Finance charges

-49.6

-0.32%

-37.3

-0.24%

Interest income

74.9

0.48%

62.7

0.41%

Surplus on disposal of aircraft, spares and spare engines

51.9

0.33%

51.2

0.34%

Dividends from long-term investments

13.2

0.08%

19.6

0.13%

Other non-operating items

-14.3

-0.09%

1.9

0.01%

Share of profits of joint venture companies

52

0.33%

94

0.62%

Share of losses of associated companies

-129.1

-0.83%

-45.2

-0.30%

Profit before exceptional items

408.4

2.62%

406.2

2.66%

Exceptional items

34.5

0.22%

-38.3

-0.25%

Profit before taxation

442.9

2.85%

367.9

2.41%

Taxation

-36.2

-0.23%

56.5

0.37%

Profit for the financial year

406.7

2.61%

424.4

2.78%

Note: All amounts are in million $ (Annual report of Singapore airlines, 2015).

Vertical analysis of income statement shows relation between all available items of profit and loss account. All items in income statement represents as a percent of total revenue or sale (Albrecht, Albrecht, Albrecht & Zimbelman, 2011)

As per the vertical analysis of income statement of SIA limited, revenue increases in 2015 while percentage of expenses decreases and profit for the year decreases due to taxation in 2015 with compare to 2014. It shows that company’s performance is not good.

Company’s expenses are high so it is getting low profits. Although SIA Ltd reduces expenses in 2015 but percentage of reduction of expenses is low so company should reduce its expenses more to getting high profits. It will also improve the performance of company.

(b) Horizontal Analysis of Income Statement and Balance Sheet of SIA Ltd.:

Horizontal analysis of Income Statement of SIA Ltd. for period ending 31 March 2015 and 2014

 

2015

2014

Decrease / Increase

 

 

Amount ($)

Amount ($)

Amount ($)

Percent (%)

Revenue

15,565.50

15,243.90

321.60

2.11%

 

 

 

 

 

Expenditure

     

 

Staff costs

2,335.20

2,336.70

-1.50

-0.06%

Fuel costs

5,579.70

5,702.10

-122.40

-2.15%

Depreciation

1,538.80

1,575.50

-36.70

-2.33%

Impairment of property, plant and equipment

1.5

20.2

-18.70

-92.57%

Amortization of intangible assets

25.9

25.7

0.20

0.78%

Aircraft maintenance and overhaul costs

668.6

641.8

26.80

4.18%

commission and incentives

375.6

346.6

29.00

8.37%

Landing, parking and overflying charges

747.9

716.6

31.30

4.37%

Handling charges

1,066.20

1,038.70

27.50

2.65%

Rentals on leased aircraft

839.5

649.5

190.00

29.25%

Material cost

176.7

223.1

-46.40

-20.80%

In flight meals

553.5

549.1

4.40

0.80%

Advertising and sales costs

258.5

257.6

0.90

0.35%

Insurance expenses

44.9

41.5

3.40

8.19%

Company accommodation and utilities

119.5

119.1

0.40

0.34%

Other passenger costs

175

173.3

1.70

0.98%

Crew expenses

146.4

144.7

1.70

1.17%

Other operating expenses

502.7

422.8

79.90

18.90%

 

15,156.10

14,984.60

171.50

1.14%

Operating profit (Revenue - Expenditures)

409.4

259.3

150.10

57.89%

Finance charges

-49.6

-37.3

-12.30

32.98%

Interest income

74.9

62.7

12.20

19.46%

Surplus on disposal of aircraft, spares and spare engines

51.9

51.2

0.70

1.37%

Dividends from long-term investments

13.2

19.6

-6.40

-32.65%

Other non-operating items

-14.3

1.9

-16.20

-852.63%

Share of profits of joint venture companies

52

94

-42.00

-44.68%

Share of losses of associated companies

-129.1

-45.2

-83.90

185.62%

Profit before exceptional items

408.4

406.2

2.20

0.54%

Exceptional items

34.5

-38.3

72.80

-190.08%

Profit before taxation

442.9

367.9

75.00

20.39%

Taxation

-36.2

56.5

-92.70

-164.07%

Profit for the financial year

406.7

424.4

-17.70

-4.17%

Note: All amounts are in million $.

Horizontal analysis of income statement shows increase or decrease in amount or percent of current year, on the basis of previous year (Gibson, 2012). 

Horizontal analysis shows that revenue increases by 2.11% while expenditures increases only 1.14% and profit for the year decreases by 4.17% in 2015 with compare to 2014 of SIA Ltd. Company should reduce its expenditures to increasing revenue. Profits of the company reducing due to charges of taxation.

Horizontal analysis of Balance Sheet of SIA Ltd. as at 31 March 2015 and 2014

 

2015

2014

                    Increase / Decrease

 

 

Amount ($ millions)

Amount ($ millions)

Amount ($ millions)

Percent (%)

Equity attributable to owners of the Parent

     

 

Share capital

1,856.10

1,856.10

0.00

0.00%

Treasury shares

-326.3

-262.2

-64.10

24.45%

Other reserves

10,049.50

10,518.20

-468.70

-4.46%

 

11,579.30

12,112.10

-532.80

-4.40%

Non-controlling interests

                       -

                      -

                      -

                      -

Total equity

11,579.30

12,112.10

-532.80

-4.40%

Deferred account

115.1

213.1

-98.00

-45.99%

Deferred taxation

1,325.50

1,516.20

-190.70

-12.58%

Long-term liabilities

1,001.00

800

201.00

25.13%

Provisions

682.9

555.8

127.10

22.87%

Defined benefit plans

152.4

162

-9.60

-5.93%

 

14,856.20

15,359.20

-503.00

-3.27%

Represented by:

     

 

Property, plant and equipment

     

 

Aircraft, spares and spare engines

7,700.30

8,378.10

-677.80

-8.09%

Land and buildings

59.9

64.9

-5.00

-7.70%

Others

2,146.20

1,815.90

330.30

18.19%

 

9,906.40

10,258.90

-352.50

-3.44%

Intangible assets

159.4

157.9

1.50

0.95%

Subsidiary companies

3,364.70

2,021.60

1,343.10

66.44%

Associated companies

472.4

313.5

158.90

50.69%

Joint venture companies

     

 

Long-term investments

1,100.20

1,045.10

55.10

5.27%

Other receivables

17.9

92.2

-74.30

-80.59%

Deferred account

36.3

                       -

36.30

                       -

Current assets

     

 

Inventories

131.7

169.2

-37.50

-22.16%

Trade debtors

993.7

1,113.20

-119.50

-10.73%

Deposits and other debtors

22.5

20.3

2.20

10.84%

Prepayments

92.9

83.5

9.40

11.26%

Amounts owing by subsidiary companies

311.5

599.9

-288.40

-48.07%

Investments

102.7

233.3

-130.60

-55.98%

Derivative assets

107

133.3

-26.30

-19.73%

Cash and bank balances

4,646.50

4,623.80

22.70

0.49%

Assets held for sale

                           -

                     -

                 -

             -

 

6,408.50

6,976.50

-568.00

-8.14%

Less: Current liabilities

     

 

Sales in advance of carriage

1,328.60

1,376.40

-47.80

-3.47%

Deferred revenue

612.5

572.9

39.60

6.91%

Current tax payable

111.4

161.8

-50.40

-31.15%

Trade and other creditors

2,088.60

2,287.40

-198.80

-8.69%

Amounts owing to subsidiary companies

1,048.70

1,034.80

13.90

1.34%

Finance lease commitments

                           -

                           -

                          -

               -

Loans

                           -

                           -

                          -

               -

Notes payable

300

                           -

                          -

               -

Provisions

138

44

94.00

213.64%

Derivative liabilities

981.8

29.2

952.60

3262.33%

 

6,609.60

5,506.50

1,103.10

20.03%

Net current assets/(liabilities)

-201.1

1,470.00

-1,671.10

-113.68%

 

14,856.20

15,359.20

-503.00

-3.27%

Horizontal analysis of balance sheet represents increase or decrease in assets or liabilities in current year, on the basis of previous year (Hermanson, Edwards & Ivancevich, 2006).

Horizontal analysis of balance sheet of SIA limited shows that company’s financial position is not good. As company’s total equity reducing by 4.40% and current assets are decreasing by 8.14% while current liabilities increasing by 20.03% so net current assets decreasing with 113.68% which is too high decrement. So it is advised to company that liabilities should be decreases to improve the financial position of organisation.

3) Ratio Analysis: Ratio analysis is a process of determining relation between two figures of financial statements. It is beneficial to know financial position of company. Ratios are useful in identify company’s performance by comparing data of two or more years.

Calculation of Ratio analysis:

Particulars

Ratio Calculation

2015

2014

Liquidity Ratios

   

 

Current Liabilities

 

6,609.60

5,506.50

Current Assets

 

6,408.50

6,976.50

Current Ratio

Current Assets / Current Liabilities

0.969574558

1.266957232

Stock

 

131.7

169.2

Prepaid Expenses

 

92.9

83.5

Liquid Assets

Current Assets - Stock & Prepaid Expenses

6,183.90

6,723.80

Liquid Ratio

Liquid Assets / Current Liabilities

0.935593682

1.221066013

Cash and bank balances

 

4,646.50

4,623.80

Marketable securities / Short term investment

 

102.7

233.3

Absolute Liquid Assets

Cash in hand + Cash at bank + Marketable securities

4,749.20

4,857.10

Absolute Liquid Ratio

Absolute liquid assets / Current liabilities

0.718530622

0.882066649

 

   

 

Expenses

 

15,156.10

14,984.60

Revenue

 

15,565.50

15,243.90

Efficiency Ratio

Expenses / Revenue

0.973698243

0.982989917

 

 

 

 

Stock Turnover Ratio

Net Sales / Inventory

118.1890661

90.09397163

Receivable turnover ratio

Net credit sales / Average account receivable

15.66418436

13.69376572

Working Capital

Current Asses - Current Liabilities

-201.10

1,470.00

Working Capital Turnover Ratio

Net Sales / Working Capital

-77.40179015

10.37

Tangible Assets

 

9,906.40

10,258.90

Intangible Assets

 

159.4

157.9

Fixed Assets

Tangible + Intangible Assets

10,065.80

10,416.80

Fixed Assets Turnover Ratio

Net Sales / Fixed Assets

1.546374853

1.463395669

Capital Turnover Ratio

Sales / Capital Employed

1.344252243

1.258567878

 

   

 

Profitability Ratio

   

 

Operating Profit

 

409.4

259.3

Operating Profit Ratio

(Operating Profit / Net Sales) * 100

2.630175709

1.701008272

Net profit after tax

 

406.7

424.4

Net Profit Ratio

(Net profit after tax / Net Sales) * 100

2.612829655

2.784064445

Shareholder's fund / Equity / Capital Employed

 

11,579.30

12,112.10

Return on Investment Ratio

[Net profit (after interest and tax) / Shareholder's fund] * 100

3.512302125

3.503934082

Fixed Assets

 

9,906.40

10,258.90

Gross capital employed

Fixed Assets + Current Assets

16,314.90

17,235.40

Return on capital employed Ratio

(Net profit after taxes / Gross capital employed) * 100

2.492813318

2.462373951

No. of equity shares

 

1,199,851,018

1,199,851,018

Earnings per share ratio

Net profit after tax and preference dividend / no. of equity shares

338.958749

353.7105804

 

   

 

Solvency Ratio

   

 

Long Term Liabilities

 

1001

800

Debt - Equity Ratio

External Equity / Internal Equity or                           Long term debt / Shareholder's Fund

0.086447367

0.066049653

Total Assets

(14856.20+6609.60) and (15359.2+5506.5)

21,465.80

20,865.70

Proprietary Ratio

Shareholder's Fund / Total Assets

0.539430163

0.580478968

Equity share capital

 

1,856.10

1,856.10

Fixed Interest Bearing Funds

Debentures + Preference Share Capital + Other Long Term Loan

1001

800

Capital Gearing Ratio

Equity share capital / Fixed Interest Bearing Funds

1.854245754

2.320125

As per ratio analysis, company’s liquidity ratios are decreasing in 2015 with compare to 2014 while turnover ratios are increasing in 2015. Earnings per share are decreasing in 2015. It shows company’s financial position is not strong.  

 

4) Comment on business’s performance and financial position from the viewpoint of a director:

By analysis of income statement, it is found that company’s revenue, expenditures, operating profit and profit before tax are increased in 2015 from 2014. But final profit for the year decreases due to adjustment of taxation.

Singapore airlines’ financial position is not good. In 2014 currents assets are more than current liabilities but in 2015, current assets are less than current liabilities.

The standard current ratio for strong company must be 2:1. Means current assets should be double of current liabilities. In 2014, current ratio is 1.27:1 whether in 2015 it falls down to 0.97:1. This shows that company’s current assets are less than its current liabilities. It shows, Singapore airlines find difficulty to pay its liabilities.

The satisfactory quick or liquid ratio must be 1:1. Singapore airlines’ liquid ratio in 2014 was 1.22:1 which falls to 0.94:1 in 2015. It reflects that company’s liquidity position falls down which is not good.

If absolute liquid ratio is 1:2, then it is optimal. Singapore airlines’ absolute liquid ratio in 2014 was 0.88 and in 2015 was 0.72. It is quite satisfactory because optimum value is 50%, while absolute liquid ratio is higher than optimum value.

Relation between net sales or revenue and other items (like inventory, working capital, fixed assets and capital employed) is known as turnover / efficiency / performance / activity ratio. These ratios can help in improving efficiency or performance of business.

Stock turnover tells, whether investment in stock is efficiently utilized or not. It also indicates, how many times the inventory turnover in business during a financial year. In 2014, it is 90.09 times which increases in 2015 to 118.19 times. It reflects that investment in stock is utilized effectively.

Working capital turnover ratio tells about the effective utilization of working capital. If working capital ratio is higher, it is good and shows proper utility of working capital. In 2014, it is 10.37 times which is good but in 2015, it is negative due to negative working capital. Working capital is negative in 2015 because current liabilities are higher than current assets.  

By the use of fixed assets turnover ratio, performance of asset management can be identified. Higher fixed asset turnover ratio shows effective utilization of fixed assets. Singapore airlines’ fixed asset turnover ratio increases in 2015 compare to 2014. It highlights utilization of fixed assets increases.

Efficiency in capital utilization can be identified by capital turnover ratio. In 2015, it is higher than 2014. So it tells, performance of business is good.

Profitability ratio shows profit earning capacity of business. Singapore airlines’ operating profit ratio increases in 2015 with compare to 2014 but net profit ratio decreases in 2015 with compare to 2014. This net profit ratio decreases due to adjustment of taxation.

Return on investment ratio and return on capital employed ratio increases in 2015 which shows good financial position of company and it is also beneficial for shareholders of company.

Solvency ratio is used to know the capacity of business to fulfill its short-term and long-term obligations. Ideal debt-equity ratio is 1:1. The company’s debt- equity ratio is less than 1 which is not good. Capital gearing ratio was better in 2014 with compare to 2015.

Finally as per financial statements and ratio analysis, overall business performance and financial position is good (Morris, McKay & Oates, 2009). 

 
References:

Albrecht, W. S., Albrecht, C. O., Albrecht, C. C. & Zimbelman, M. F. 2011. Fraud Examination. (e.d. 4). Cengage Learning

Axel, T. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet: RatioAnalysis.net

Gibson, C. H. 2012. Financial Reporting and Analysis. (e.d. 13). Cengage Learning

Hermanson, R. H., Edwards, J. D. & Ivancevich, S. H. 2006. Managerial Accounting. (e.d. 8). Freeload Press, Inc.

Morris, G. D., McKay, S. & Oates, A. 2009. Finance Director’s Handbook. Elsevier

Peterson, P. P. & Fabozzi, F. J. 2012. Analysis of Financial Statements. (e.d. 2). John Wiley & Sons

Singapore airlines. 2015. The Path of Progress Annual Report. Retrieved on 22 Aug 2016 from https://www.singaporeair.com/en_UK/sg/about-US/information-for-investors/annual-report/

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