1. ANALYSIS OF FINANCIAL STATEMENTS Dr. BALAMURUGAN MUTHURAMAN Chapter - 4 12015-2016

2. NATURE OF FINANCIAL STATEMENT The data exhibited by financial statements are affected by a)Recorded facts b)Accounting Concepts, Conventions & Principles c)Personal Judgment 22015-2016

3. ACCOUNTING PRINCIPLES Accounting concepts Accounting Conventions a)Entity Concepta)Disclosure b)Going Concern Conceptb)Materiality c)Accounting period conceptc)Consistency d)Money Measurement Conceptd)Conservatism e)Cost Concept f)Cost Attach Concept g)Dual Aspect Concept h)Accrual concept i)Periodic Matching of cost and Revenue Concept j)Realisation Concept k)Verifiable Objective Evidence Concept 32015-2016

4. ESSENTIAL QUALITIES OF FINANCIAL STATMENTS 1.Relevance 2.Understandability : 3.Reliability and Accuracy 4.Comparability 5.Completeness 6.Timeliness 42015-2016

5. LIMITATIONS OF FINANCIAL STATEMENTS 1.Lack of Precision 2.Lack of Exactness 3.Incomplete Information 4.Interim Reports 5.Hiding of Real Position or Window Dressing 6.Lack of Comparability 7.Historical Costs 52015-2016

6. ANALYSIS Analysis – To Analyse – to cut into pieces But only analyse – No – It means also Interpretation. Financial Statement Analysis means “Analysis, comparisons and interpretation of Financial data to achieve the desired result” 62015-2016

7. TOOLS OF FINANCIAL STATEMENT ANALYSIS 1.Comparative Statements 2.Common Size Statements 3.Trend Analysis 4.Ratio Analysis 5.Fund Flow Statement 6.Cash Flow Statement 72015-2016

8. TYPES OF FINANCIAL ANALYSIS 1.Intra-Firm Comparison 2.Inter-firm Comparison 3.Industry Average or Standard Analysis: 4.Horizontal Analysis 5.Vertical Analysis 82015-2016

9. INTERPRETATION The Analysis is of no use without interpretation The Company has to interpret the financial statement which it has analysed. The Analysis is made to serve the following purpose 1.Profitability Analysis 2.Liquidity Analysis 3.Solvency Analysis (To know the financial structure) 92015-2016

10. Interested Parties in Analysis of Financial Statements 1.Management 2.Investors (In the form of Shareholders or Debentureholders) 3.Banks and Financial Institution 4.Trade Creditors 5.Government and their Agencies 6.Employees 7.Customers 8.Public 9.Trade Association 10.Stock Exchange 102015-2016

11. COMPARATIVE FINANCIAL STATEMENTS Comparative Financial Statements is a statement of Financial Position of a business designed in such a way where a comparative study is undertaken of different accounting items, to measure the performance of a Business Activity. 112015-2016

12. TYPES OF COMPARISON There are 3 types of Comparison 1)Inter Firm Comparison 2)Intra Firm Comparison 3)Inter Period Comparison 122015-2016

13. MERITS OF COMPARISON 1)Indicate the Direction of Financial Position 2)Reveal Nature & Trend 3)Identifying Trouble Spots 132015-2016

14. DISADVANTAGES OF COMPARISON 1)Misleading picture, if consistency in accounting principle not followed. 2)Constant change in price level tender accounting statement useless for comparison. 3)Inter firm comparison is useless, unless all the firms are of the same age, size and follow the same principles. 4)If there exists any Abnormal Period between 2 successive accounting period then it will prove to be a pointless analysis. 142015-2016

15. COMMON SIZE STATEMENTS It is a Statement in Vertical Form in which every item of the Financial Statement is reduced to a common base. This was introduced with a view to overcome the limitation of Comparative Statement. 152015-2016

16. TYPES OF COMMON SIZE STATEMENTS. (1) Common Size Balance Sheet (2) Common Size Income Statement: 162015-2016

17. ADVANTAGES OF COMMON SIZE STATEMENT 1) It reveals Sources and Application of Funds in a nutshell which help in taking decision. (2) If common size statements of 2 or more years are compared it indicate the changing proportion of various components of Assets, Liabilities, Cost, Net Sale & Profit. (3) When Inter Firm Comparison is made with the help of Common size statement it helps in doing corporate evaluation and Ranking. 172015-2016

18. DISADVANTAGES OF COMMON SIZE STATEMENT (1)No Established Standard Proportion: Common Size Statements are regarded as useless as there is no established standard proportion of an asset to the total asset or an item of expense to the net sales. (2)Consistency Required:- If Financial Statement of a Particular business organization are not prepared year after year on a consistent basis comparative study of common size statement will be misleading 182015-2016

19. TREND ANALYSIS Trend Analysis is a statement in vertical form where the earliest year is taken as base year and the value of all the items in the financial statements will be related to the base year in terms of percentage where value of each item in base year will be considered as 100. Trend percentage analysis move in one directions either upward or downward progression or regression. 192015-2016