Financial Statements Financial Statement Analysis

Financial Statements - Meaning Financial Statements are summarised statements of accounting data produced at the end of an accounting process by an enterprise through which it communicates accounting information to the internal & external users

Financial Statements include: Balance Sheet Also known as the Position Statement Profit & Loss Account Also known as the Income Statement Schedules & Notes to Accounts Supporting Documents & Accounting Policies

Characteristics of Financial Statements Historical Documents – Relate to past period Expressed in Monetary Terms Show the Financial Position through Balance Sheet & Profitability through P/L

Nature of Financial Statements Recorded facts of business transactions Conventions followed to facilitate accounting techniques Accounting concepts followed Personal judgements have an important bearing on the financial statements (eg. Method of depreciation to be followed)

Financial Statements of a Company Contents of the Annual Report 7. Segment Report (AS-17) 6. Cash Flow Statement (AS-3) 5. Notes to accounts 4. P/L Account (Schedule VI Part II) 3. Balance Sheet (Schedule VI Part I ) 2. Auditors report to shareholders 1. Report by Board of Directors (Sec 217)

1. Directors’ Report 2. Auditors’ Report 3. Balance Sheet Report as per Sec 217 Directors Responsibility Statement Report on Corporate Governance Management Discussion & Analysis 2. Auditors’ Report Report to Shareholders as per Sec 227 3. Balance Sheet As per Section 211/Part I of Schedule VI of the Companies Act 1956 4. Profit & Loss Account As per Section 211/Part II of Schedule VI of the Companies Act 1956 5. Notes to accounts Accounting policies adopted by the company Explanatory notes explaining significant transactions Additional information required to be disclosed in terms of Part III Balance Sheet Abstract & Company’s Business Profile

6. Cash Flow Statement 7. Segment Report Statement showing flow of cash (inflow & outflow) during an accounting period As per Accounting Standard -3 Applicable to listed companies (turnover in excess of 50 crores or public deposits of 10 crores) 7. Segment Report Report containing financial information about different segments in which the company operates As per Accounting Standard -17

Balance Sheet – Horizontal Format Click for detailed format

Balance Sheet – Vertical Format Learn More..

Vertical Format - Detailed

Objectives of Financial Statements Provides financial data on economic resources & obligations Reveal implications of operating profit on the financial position Provide sufficient & reliable information to various parties Present true and fair view of the business To serve as the basis of future operations

Essentials of Financial Statements Accurate Information Understand-ability Comparable Verifiable Relevant Timeliness

Users of Financial Statements Internal Owners Management Employees & Workers External Banks & Financial Institutions Investors & Potential Investors Creditors Government / Authorities SEBI Researchers Consumers

Limitations of Financial Statements Cannot meet purpose of all parties Ignores Price Level Changes Ignores Qualitative Elements Diff Accounting Practices Affected by Personal Judgement Historical Records

Financial Statement Analysis

Meaning Financial Statement Analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and a study of trends of these factors, as shown in a series of statements ….Myer

What this means.. Relationship among financial factors Disclosed by a single set of statements Study of trends of these factors As shown in a series of statements

Tools of Financial Analysis Comparative Financial Statements Common-size Financial Statements Trend Percentages Ratio Analysis Fund Flow Statement Cash Flow Statement

Review Question Is Financial Analysis helpful in assessing the financial position of a company Yes No

Comparative Financial Statements Statements in which figures for 2 or more periods are placed side by side Change in figure in absolute terms & percentage terms are also presented to facilitate comparison

Common-size Financial Statements Click to learn more Common-size Financial Statements These express figures of a financial statement as a percentage of a common base For eg. sales assumed to be 100 in the Profit & Loss a/c & all other figures shown as a % of sales or total of assets & liabilities taken as 100 in the Balance Sheet

Trend Percentages Useful for making a comparative study of financial statements of several years Calculated as a percentage relationship that each item bears to the same item in the base year. Earlier year taken as base year

Ratio Analysis Example: Current Ratio=Current Assets / Current Liabilities Debt Equity Ratio = Debt (Long term loans) / Equity (Shareholders Funds) Expresses the relationship between two accounting figures taken from the financial statements of an accounting period in the form of a ratio

Fund Flow Statement Shows the changes in the working capital position Shows the sources & uses of the working capital

Cash Flow Statement Click to learn more Shows the changes in the cash position from one period to another Shows the sources from which cash was received an the purpose for which it was used

Types of Financial Statement Analysis Internal External Vertical (Static) Horizontal (Dynamic)

Internal External Vertical Horizontal Internal External Horizontal Ratio Analysis Inter-firm (for the same year) Cross-sectional Time Series Analysis Trend analysis Conducted by external persons (researchers etc) Conducted by management Internal External Vertical Horizontal Review & Analyse statements of # of years Review & analyse statements of 1 year Conducted by external persons (researchers etc) Conducted by management Internal External Horizontal Vertical

Comparative Balance Sheets, Comparative Income statements & Common size statements are Intra firm analysis Yes No

A horizontal analysis is also known as a ___________ Time series analysis Cross-sectional Analysis Inter-firm Analysis

Vertical Analysis is also known as Dynamic Analysis Static Analysis

Vertical Analysis is a comparison of one or more _______ over a period of time Firms Variables Years

Process of Financial Statement Analysis Rearrangement of Statements Comparison Analysis Interpretation

Purpose of Financial Analysis Judging Profitability Inter-firm Comparison Understanding Preparing Budgets Making Forecasts Judging Solvency Judging Managerial Efficiency

Uses of Financial Analysis Security Analysis –Useful for Investor to check dividend payment etc Debt Analysis – Used by firm to check borrowing capacity of prospective borrower Credit Analysis –Useful for firm to decide on extending credit Dividend Decision – helps decide on the rate of dividend Gen. Business Analysis – helps identify key profit drivers, business risk etc Security Analysis Debt Analysis Credit Analysis Dividend Decision Gen. Business Analysis