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Ratio Analysis

The document provides a template for conducting variance analysis, which involves comparing actual performance metrics to budgeted targets. It outlines a step-by-step process of setting a budget, gathering actual data, calculating variances, analyzing variances to identify causes, taking corrective actions, and monitoring performance. An example variance analysis of monthly sales data is also shown, with formulas to calculate dollar and percentage variances from the budget each month.

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27 views

Ratio Analysis

The document provides a template for conducting variance analysis, which involves comparing actual performance metrics to budgeted targets. It outlines a step-by-step process of setting a budget, gathering actual data, calculating variances, analyzing variances to identify causes, taking corrective actions, and monitoring performance. An example variance analysis of monthly sales data is also shown, with formulas to calculate dollar and percentage variances from the budget each month.

Uploaded by

devilscage1234
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Compan Year Net Gross Net Total Shareholders Total Cost of Inventor Current Interest EBIT

y Name Sales Profit Income Assets ' Equity Debt Goods y Liabilitie Expens
Sold s e

Compan 202 $500,00 $200,00 $50,000 $1,000,00 $500,000 $300,00 $300,00 $100,000 $200,000 $10,000 $70,000
yA 1 0 0 0 0 0

Compan 202 $450,00 $180,00 $40,000 $900,000 $400,000 $250,00 $250,00 $80,000 $150,000 $8,000 $60,000
yA 0 0 0 0 0

Compan 202 $700,00 $300,00 $100,00 $1,500,00 $600,000 $400,00 $400,00 $150,000 $250,000 $15,000 $120,00
yB 1 0 0 0 0 0 0 0

Compan 202 $600,00 $250,00 $80,000 $1,200,00 $500,000 $300,00 $350,00 $120,000 $200,000 $12,000 $90,000
yB 0 0 0 0 0 0

 Company Name: The name of the company.


 Year: The year for which the financial data is recorded.
 Net Sales: The total revenue generated from sales.
 Gross Profit: The difference between net sales and the cost of goods sold.
 Net Income: The company's profit after deducting all expenses.
 Total Assets: The total value of all assets owned by the company.
 Shareholders' Equity: The difference between total assets and total debt.
 Total Debt: The total amount of debt owed by the company.
 Cost of Goods Sold: The cost of producing or acquiring the goods sold.
 Inventory: The value of inventory held by the company.
 Current Liabilities: The short-term obligations due within one year.
 Interest Expense: The interest paid on borrowed funds.
 EBIT (Earnings Before Interest and Taxes): The company's earnings before deducting
interest and taxes.

1. Gross Profit Margin:


 Formula: (Gross Profit / Net Sales) x 100
In cell H2, enter the formula: =(D2/C2)*100
2. Net Profit Margin:
 Formula: (Net Income / Net Sales) x 100
In cell I2, enter the formula: =(E2/C2)*100
3. Return on Assets (ROA):
 Formula: (Net Income / Total Assets) x 100
In cell J2, enter the formula: =(E2/F2)*100
4. Return on Equity (ROE):
 Formula: (Net Income / Shareholders' Equity) x 100
In cell K2, enter the formula: =(E2/G2)*100
5. Current Ratio:
 Formula: Current Assets / Current Liabilities
In cell L2, enter the formula: =F2/(K2)
6. Quick Ratio (Acid-Test Ratio):
 Formula: (Current Assets - Inventory) / Current Liabilities
In cell M2, enter the formula: =(F2-I2)/K2
7. Debt-to-Equity Ratio:
 Formula: Total Debt / Shareholders' Equity
In cell N2, enter the formula: =H2/G2
8. Interest Coverage Ratio:
 Formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense
In cell O2, enter the formula: =M2/L2
9. Inventory Turnover:
 Formula: Cost of Goods Sold / Average Inventory
In cell P2, enter the formula: =I2/(0.5*J2)
10. Accounts Receivable Turnover:
 Formula: Net Credit Sales / Average Accounts Receivable
In cell Q2, enter the formula: =I2/(0.5*J2)
11. Asset Turnover:
 Formula: Net Sales / Average Total Assets
In cell R2, enter the formula: =C2/(0.5*F2)
Gross Debt-to- Interest Accounts
Profit Net Profit Current Quick Equity Coverage Inventory Receivable Asset
Margin Margin ROA ROE Ratio Ratio Ratio Ratio Turnover Turnover Turnover

40.00% 10.00% 5.00% 10.00% 2.5 1 0.6 7 3 3 2

40.00% 8.89% 4.44% 10.00% 2.67 1.07 0.63 7.5 3.13 3.13 2.5

42.86% 14.29% 6.67% 16.67% 3 1.2 0.67 8 2.67 2.67 2

41.67% 13.33% 6.67% 16.00% 3 1.35 0.6 7.5 2.92 2.92 2.5
Variance analysis is a technique used to analyze and understand the differences or
variances between planned or budgeted amounts and actual results. It helps identify the
reasons behind the deviations and provides insights into the performance of a business.
Here's a step-by-step approach for conducting variance analysis:

Set the Budget: Establish a budget or set target values for various financial metrics, such
as revenues, expenses, and profits. This budget serves as the benchmark against which
actual results will be compared.

Gather Actual Data: Collect the actual financial data for the period under analysis. This can
include revenues, expenses, production volumes, labor costs, material costs, and any
other relevant performance metrics.

Calculate Variances: Calculate the variances by subtracting the actual results from the
budgeted or planned amounts. Variances can be calculated for each line item or metric,
such as sales revenue, cost of goods sold, operating expenses, etc.
For example, variance = Actual Result - Budgeted Amount.
Analyze Variances: Analyze the variances to understand their nature and significance.
Categorize the variances into favorable (positive) or unfavorable (negative) based on their
impact on profitability or efficiency.

Investigate Causes: Identify and investigate the underlying causes of the variances. This
may involve analyzing factors such as changes in market conditions, pricing, production
volumes, input costs, efficiency levels, or any other relevant factors that may have
influenced the actual results.

Take Corrective Actions: Based on the analysis of variances and their causes, develop and
implement corrective actions to address any unfavorable variances or capitalize on
favorable variances. This can involve making adjustments to the budget, revising
operational processes, improving cost controls, or refining sales and marketing strategies.
Monitor and Review: Continuously monitor the performance and track the progress of
corrective actions. Regularly review and update the budget and variance analysis to
ensure ongoing improvement and effective decision-making.

Variance analysis is a dynamic process that requires regular monitoring and adjustment as
new data becomes available. By conducting a thorough analysis of variances, businesses
can identify areas for improvement, optimize performance, and make informed decisions
to achieve their financial goals.

Month Budgeted Sales Actual Sales


Jan $10,000 $9,500
Feb $12,000 $11,500
Mar $11,500 $10,800
Apr $9,800 $10,200
In cell D2, enter the formula to calculate the sales variance for January: =C2-B2.
Copy the formula from D2 and paste it into the remaining cells in column D to calculate
the sales variances for each month.

In cell D6, calculate the total sales variance by summing up the individual variances:
=SUM(D2:D5).

In cell E2, calculate the percentage variance for January: =(D2/B2)*100.

Copy the formula from E2 and paste it into the remaining cells in column E to calculate the
percentage variances for each month.

Analyze the variances:

Positive variance (actual sales > budgeted sales) indicates higher-than-expected sales,
which could be due to increased demand, better marketing efforts, or higher pricing.
Negative variance (actual sales < budgeted sales) suggests lower-than-expected sales,
which could be caused by reduced demand, competitive factors, or ineffective sales
strategies.
Format the cells as desired, add headings, and provide any additional analysis or
comments based on the variance results.

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