1. Financial Statements Financial Statement Analysis

2. 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

3. 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

4. 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Historical Documents – Relate to past period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

5. 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)

6. 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)

7. 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

8. 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

9. Balance Sheet – Horizontal Format
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10. Balance Sheet – Vertical Format
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11. Vertical Format - Detailed

12. 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

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

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

15. 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

16. Financial Statement Analysis

17. 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

18. 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

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

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

21. 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

22. Common-size Financial Statements
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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

23. 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

24. 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

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

26. Cash Flow Statement
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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

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

28. 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

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

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

31. Vertical Analysis is also known as
Dynamic Analysis
Static Analysis

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

33. Process of Financial Statement Analysis
Rearrangement of Statements
Comparison
Analysis
Interpretation

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

35. 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