1. FINANCIAL STATEMENT ANALYSIS
SWARNAM S
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

2. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
FINANCIAL STATEMENT
Financial Statement are known as Trading, Profit & Loss Account and Balance Sheet
It is compulsory for a concern to prepare the financial statements according to the Companies Act 1956
Necessity for Assessment of Tax
It is useful for creditors, owners and general public
But it wont be sufficient for the financial planning and decision making
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

3. FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis is concerned with the process of determining financial strength and weakness
It establishes relationship between various accounts in the financial statements
DEFINITION: “Financial Statement Analysis is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firm’s position and performance”
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

4. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
DEFINITION
“The analysis and interpretation of financial statements are an attempt to determine the meaning and significance of financial statement data so that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability and sound dividend policy”
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

5. Analysis and Interpretation
Classification of data given in the financial statements
Explaining the meaning and significance of relationship between various factors
Comparison of these relationships.
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

6. OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
To find out the operating performance of a company (expense ratios, sales performance)
To find out the financial performance of a company (financial health)
To compare performance with different periods
To find the find out the solvency and liquidity position
To compare the performance with other companies in the industry
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

7. ADVANTAGES OR USES OF FINANCIAL STATEMENT ANALYSIS
Advantages to the owners – strength, weakness and profit
Advantages to the investors
Advantages to the management (movement and utilisation of funds)
Advantages to the suppliers
(It helps to decide quantum of credit)
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

8. DISADVANTAGES OF FINANCIAL STATEMENTS
Financial statement are only interim reports.
Items are based on personal judgement (example: method of depreciation)
Non-monetary factors are excluded
Ignores the changes in price level
It is records of past events only
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

9. TYPES OF FINANCIAL STATEMENT ANALYSIS
1. According to Material Used
Internal Analysis
-- Analysis by the owners, management and employees
-- Carried out to find the strength and weakness of the company
-- To find the growth rate of the company
-- To carry out the future actions
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

10. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
External Analysis
-- Analysis done by the external parties by investors, financial analysts, lenders, and general public
-- The purpose is to know the financial and operating performance
-- To know about the credit worthiness
-- To know about the safety of their investment
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

11. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
2. According to Modus Operandi
Horizontal Analysis
-- Analysis of financial statements for different periods is called horizontal analysis
-- It explains whether there is a growth over a period of years
-- This analysis may be conducted for two years or any number of years
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

12. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
Vertical Analysis:
-- Analysis of Financial Statements for one period only
-- It analysis the relationship of various items in the profit and loss account and balance sheet
-- Example: Current Assets and Current Liabilities, Working Capital etc..
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

13. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
On basis of Period
-- Long-Term Period: To evaluate the long-term solvency, profitability, financial health, earning capacity, debt servicing etc..
-- Short-Term Period: To determine the liquidity position of the firm
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

14. Procedure for Financial Statement Analysis
The purpose for which the analysis is conducted is determined well in advance
On the basis of the purpose the items should be identified
If the analysis is carried out for income statement, the items should be clearly arranged on basis of sales
If the analysis is carried out for balance sheet, the items should be classified as fixed assets and current assets for asset side and current liabilities, debt and equity for liability side
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

15. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
After classification of the items in the Income statements and Balance sheet increase or decrease of each items for one period to another should be calculated
Comparison on basis of percentage of sales for income statement and total assets and liabilities for balance sheet
Interpretation after the analysis to provide information for managerial decision making
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

16. Methods of Financial Statement Analysis
Comparative Balance Sheet
Comparative Income Statement
Common-size Statements
Cash Flow Analysis
Trend Analysis
Fund Flow Analysis
Ratio Analysis
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

17. Comparative Balance Sheet
The comparative balance sheet shows the value of assets and liabilities of two different dates
In this statement, assets are separately analyzed as current assets and fixed assets
The liabilities are analyzed as current liabilities, Debts (long term loans) and Equity (Share Capital and Reserves)
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

18. Procedure for Preparation of Comparative Balance Sheet
The statement should prepared with five columns
The first column is for particulars
Second and third column for periods
Fourth Column for Increase or Decrease of items
Fifth Column for the percentage increase or decrease
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

19. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
When assets is taken for Analysis, it should be separated as current assets and fixed assets. The values should be recorded in the second and third column and increase or decrease in the fourth column and percentage in fifth column
Then liabilities side should be analyzed should be classified as current liabilities, debts and equity. The values should be recorded respective columns
After analysis, interpretation should be given
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

20. Comparative Income Statement
As income statement shows operating results of a business
Its compares the sales, profit and other expenses of two different period
It has five columns
The first column is for particulars
Second and third column for periods
Fourth Column for Increase or Decrease of items
Fifth Column for the percentage increase or decrease
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

21. Procedure for calculation of Comparative Income Statement
First of all, analysis about the gross profit should be made
Next increase or decrease in operating profit should be analyzed. The operating profit is the differences between gross profit and operating expenses. The operating expenses are selling , administrative and distribution expenses
After analysis of Gross profit, operating profit should be analyzed.
Operating profit is calculated by adjusting operating expenses
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

22. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
Net profit is calculated by adjusting non-operating expenses and non-operating income with operating profit
Non-operating expenses like interest, loss on sale of fixed assets, write off goodwill and preliminary expenses , payment of tax etc.. should be deducted with operating profit
The non-operating income like dividend received, interest received, profit on sale of fixed assets should be added with operating profit
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

23. SWARNAM S/ MBA/ ACCOUNTS/ UNIT I
Contd..
The increase or decrease should be identified
After preparing the analysis, the interpretation about the analysis should be stated clearly for further action of management
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I

24. Common Size Statements
The statement which reports the figures as a percentage of some common base are called common size statements
Common Size statements are prepared by common size income statement and common-size balance sheet
Sales is taken as the common base for common size income statement
In common size balance sheet, total assets or liabilities are taken as the common base
SWARNAM S/ MBA/ ACCOUNTS/ UNIT I