Business Accounting for Vertical and Horizontal Business Analysis

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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