ANALYSIS OF FINANCIAL STATEMENTS. DEFINITION FINANCIAL STATEMENT :- “AN ORGANISED COLLECTION OF DATA ACCORDING TO LOGICAL AND CONSISTENT ACCOUNTING PROCEDURES”

ANALYSIS OF FINANCIAL STATEMENTS

ANALYSIS OF FINANCIAL STATEMENTS

DEFINITIONDEFINITION

• FINANCIAL STATEMENT :-

“AN ORGANISED COLLECTION OF DATA ACCORDING TO LOGICAL AND CONSISTENT ACCOUNTING PROCEDURES”

TYPESTYPESFINANCIAL STATEMENT

INCOMESTATEMENT

(P&L A/C)

BALANCE SHEET

STATEMENTOF RETAINED

EARNINGS(P&L

APPROPRIATION)

STATEMENTOF

CHANGESIN

FINANCIALPOSITION

A FLOW REPORT

FINANCIALPOSITION

AS ON DATECHANGING WORKINGCAPITAL (FUND FLOW)

CHANGE IN CASHPOSITION (CASH FLOW)

CHANGES IN FINANCIAL POSITION)

FACTORSFACTORS

* FINANCIAL STATEMENTS ARE INDICATORS OF TWO

SIGNIFICANT FACTORS :-

– PROFITABILITY.

– FINANCIAL SOUNDNESS.

DEFINITIONDEFINITION

• ANALYSIS & INTERPRETATION :-

“SUCH TREATMENT OF THE INFO CONTAINED IN THE INCOME STATEMENT AND BALANCE SHEET SO AS TO AFFORD FULL DIAGNOSIS OF THE PROFITABILITY AND FINANCIAL SOUNDNESS OF THE BUSINESS”.

ANALYSIS AND

INTERPRETATION

ANALYSIS AND

INTERPRETATION• ANALYSIS :-

– METHODICAL CLASSIFICATION :- PUT IN A SIMPLIFIED FORM.

• INTERPRETATION :-– EXPLAIN MEANING & SIGNIFICANCE OF THE ANALYSED DATA.

• INTERPRETATION REQUIRES ANALYSIS. ANALYSIS WITHOUT INTERPRETATION IS MEANINGLESS.

TYPESTYPESANALYSIS

MATERIAL USED

EXTERNALBY

OUTSIDERSBALANCE SHEETS

INTERNALBY

EXECUTIVES/EMPLOYEESBOOKS OF ACCOUNTS

MODUS OPRANDI

HORIZONTAL *No OF YEARS(DYNAMIC)

VERTICAL *VARIOUS

ITEMSIN THE

FIN STATS(STATIC)

* CAN BE DONE SIMULTANEOUSLY

STEPS IN ANALYSISSTEPS IN ANALYSIS

• METHODICAL CLASSIFICATION

(LIQUID ASSETS, CURRENT

ASSETS, CURRENT

LIABILITIES, PROVISIONS &

NET WORKING CAPITALS).

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• COMPARATIVE FINANCIAL STATEMENTS.

• COMMON SIZE FINANCIAL STATEMENTS.

• TREND PERCENTAGES.

• FUND FLOW ANALYSIS.

• CASH FLOW ANALYSIS.

• COST - VOLUME - PROFIT (CVP) ANALYSIS.

• RATIO ANALYSIS.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• COMPARATIVE FINANCIAL STATEMENTS :-

– FIGURES OF TWO OR MORE PERIODS ARE PLACED SIDE BY SIDE. (COMPARATIVE INCOME STATEMENTS ; COMPARATIVE BALANCE SHEET).

– ABSOLUTE INCREASE ; PERCENTAGEINCREASE.

• COMMON SIZE FINANCIAL STATEMENTS :-

“FIGURES ARE CONVERTED TO PERCENTAGES TO SOME COMMON BASE ”.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• TREND PERCENTAGE :-

“CALCULATES % AGE RELATIONSHIP THAT EACH ITEM BEARS TO THE SAME ITEM IN THE BASE YEAR. THE BASE YEAR SHOULD BE A NORMAL YEAR. ITEMS HAVING LOGICAL RELATIONSHIP ONLY SHOULD BE COMPARED. ABSOLUTE FIGURES MUST BE CONSIDERED SINCE %AGE MAY BE MISLEADING”.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• FUND FLOW ANALYSIS :-

“REVEALS THE CHANGES IN WORKING CAPITAL POSITION. TELLS ABOUT THE SOURCES FROM WHICH WORKING CAPITAL WAS OBTAINED AND THE PURPOSES FOR WHICH IT WAS USED”.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• COST-VOLUME-PROFIT ANALYSIS :-

“TOOL OF PROFIT PLANNING. STRICTLY

SPEAKING IT IS NOT A TOOL OF ANALYSIS OF

FINANCIAL STATEMENTS. DATA IS PROVIDED

BOTH BY COST AND FINANCIAL RECORDS”.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• RATIO ANALYSIS :-

“MOST IMPORTANT TOOL AVAILABLE. AN

ACCOUNTING RATIO SHOWS THE

RELATIONSHIP IN MATHEMATICAL TERMS

BETWEEN TWO INTER-RELATED ACCOUNTING

FIGURES”.

TECHNIQUES OF FINANCIAL ANALYSIS

TECHNIQUES OF FINANCIAL ANALYSIS

• FINANCIAL ANALYSIS IS ONLY A MEANS NOT THE END.

• PREPARED ON THE CONCEPT OF HISTORICAL COSTS NOT CURRENT COST.

• DISCLOSES ONLY MONETARY FACTS.

• INFLUENCE OF PERSONNEL JUDGEMENT/PREJUDICES.

• SUBJECTIVE ACCOUNTING CONCEPTS.

• COMPARATIVE INCOME STATEMENT (P&L A/Cs) :-

– SHOWS ABSOLUTE FIGURES FOR TWO OR MORE PERIODS, THE ABSOLUTE CHANGE OVER THE PERIOD AND CHANGE IN TERMS OF PERCENTAGES.

• COMPARATIVE BALANCE SHEET :-

– AS ON TWO OR MORE DATES TO COMPARE ASSETS & LIABILITIES AND DETERMINE CHANGES OR TRENDS.

– USEFUL TO STUDY TRENDS IN AN ENTERPRISES (NPF).

• COMMON - SIZE FINANCIAL STATEMENTS :-

– ALL THE ABSOLUTE FIGURES ARE CONVERTED INTO %AGES TO COMMON BASE. FOR EXAMPLE AS A %AGE OF SALES (BASE 100).

– THIS SHOWN THE %AGE OF EACH ITEM TO THE TOTAL IN EACH PERIOD BUT NOT THE VARIATIONS FROM PERIOD TO PERIOD.

– USEFUL FOR COMPARING TWO SIMILAR COMPANIES/BUSINESS/NPFs.

• TREND PERCENTAGES :-

– INVOLVES CALCULATION OF %AGE RELATIONSHIP THAT EACH ITEM BEARS TO THE SAME ITEM IN THE BASE YEAR (USUALLY THE EARLIEST YEAR) TAKEN AS 100.

– HELPS COMPARATIVE STUDY OF FINANCIAL STATEMENTS FOR SEVERAL YEARS.

– USUALLY CALCULATED FOR MAJOR ITEMS AND NOT ALL ITEMS OF THE FINANCIAL STATEMENTS.

• TREND PERCENTAGES (Cont’d) :-

CARE SHOULD BE TAKEN WITH REGARD TO THE FOLLOWING :-

ACCTG PRINCIPLES. & PRACTICES IS CONSTANT OVER THE ENTIRE PERIOD.

NOT TO BE USED FOR ITEMS NOT HAVING LOGICAL RELATIONSHIP WITH

ONE ANOTHER. ABSOLUTE FIGURES MUST ALSO BE

GIVEN DUE CONSIDERATION. INFLATION AND OTHER CHANGES NEED

TO BE FEATURED.

RATIO ANALYSISRATIO ANALYSIS

• DEFINITION :-

“ ONE OF THE TECHNIQUES OF FINANCIAL ANALYSIS WHERE ARE USED AS A YARDSTICK FOR EVALUATING THE FIANANCIAL CONDITION AND PERFORMANCE OF A FIRM”

• TYPES :-

– RATIOS CAN BE EXPRESSED IN 2 WAYS :-

RATIO ANALYSISRATIO ANALYSIS

(a) TIMES = ONE VALUE IS DIVIDEDBY ANOTHER.

(b)PERCENTAGE = THE ‘TIMES’ QUOTIENTIS MULTIPLIED BY

100

• CLASSIFICATION OF ACCTG RATIOS :-

– ON THE BASIS OF THE FINANCIAL STATEMENTS TO WHICH THE DETERMINANTS OF A RATIO BELONGS (TRADITIONAL).

– P & L A/C RATIOS (FOR EXAMPLE - STOCK TURNOVER RATIO).

– BALANCE SHEET RATIOS (FOR EXAMPLE -DEBIT EQUITY RATIO).

– INTER STATEMENT (COMPOSITE) RATIOS ( FOR EXAMPLE - FIXED ASSET TURNOVER RATIO).

RATIO ANALYSISRATIO ANALYSIS

• CLASSIFICATION OF ACCTG

RATIOS (Cont’d) :-

– FUNCTIONAL (TO STUDY THE PFOFITABILITY AND SOLVENCY).

– PROFITABILITY RATIO

(ROLE-RETURN ON CAPITAL EMPLOYED).

OP PROFIT X 100CAPITAL EMPLOYED

RATIO ANALYSISRATIO ANALYSIS

– COVERAGE RATIO. – TURNOVER RATIO.– FINANCIAL RATIOS.

LIABILITY RATIO STABILITY RATIO

RATIO ANALYSIS

• PROFITABILITY :-

“IS AN INDICATION OF THE

EFFICIENCY WITH WHICH THE OP OF

THE BUSINESS IS CARRIED ON”