Financial Statements Preparation and Analysis: Structure and Ratios
This domain tests the structure of the financial statements under K-IFRS and the ratios used to analyze them. You should be able to move from an adjusted trial balance to a complete set of statements and compute liquidity, leverage, and profitability ratios.
Core rules
- A complete set comprises the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of changes in equity, the statement of cash flows, and the notes.
- Closing transfers profit for the year to retained earnings; dividends reduce retained earnings.
- Cash flows are classified as operating, investing, or financing. Under K-IFRS, interest paid may be operating or financing; interest and dividends received may be operating or investing; dividends paid are financing.
- Ratios: current ratio = current assets ÷ current liabilities; quick ratio = (cash + short-term investments + receivables) ÷ current liabilities; debt ratio = total liabilities ÷ total assets; net margin = net profit ÷ revenue.
Worked example
Current assets are ₩300,000,000 including inventory of ₩120,000,000; current liabilities ₩200,000,000; total liabilities ₩500,000,000; total assets ₩800,000,000; revenue ₩1,000,000,000; net profit ₩60,000,000. Current ratio = 300 ÷ 200 = 1.5. Quick ratio = (300 − 120) ÷ 200 = 0.9. Debt ratio = 500 ÷ 800 = 62.5%. Net margin = 60 ÷ 1,000 = 6%. The quick ratio below 1 shows reliance on inventory to meet short-term obligations.
Traps
- Treating a bank overdraft as cash; it is usually a current liability.
- Classifying dividends paid as operating cash flow rather than financing.
- Averaging balances when the question supplies only year-end figures.
- Forgetting that a share split changes per-share figures but not totals.