ANALYSIS OF FINANCIAL STATEMENTS

1. ANALYSIS OF FINANCIAL STATEMENTS

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

3. TYPES FINANCIAL STATEMENT STATEMENT OF CHANGES IN FINANCIAL POSITION INCOME STATEMENT (P&L A/C) STATEMENT OF RETAINED EARNINGS (P&L APPROPRIATION) BALANCE SHEET A FLOW REPORT FINANCIAL POSITION AS ON DATE CHANGING WORKING CAPITAL (FUND FLOW) CHANGE IN CASH POSITION (CASH FLOW) CHANGES IN FINANCIAL POSITION)

4. FACTORS • FINANCIAL STATEMENTS ARE INDICATORS OF TWO SIGNIFICANT FACTORS :- • PROFITABILITY. • FINANCIAL SOUNDNESS.

5. DEFINITION • 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”.

6. ANALYSIS ANDINTERPRETATION • ANALYSIS :- • METHODICAL CLASSIFICATION :- PUT IN A SIMPLIFIED FORM. • INTERPRETATION :- • EXPLAIN MEANING & SIGNIFICANCE OF THE ANALYSED DATA. • INTERPRETATION REQUIRES ANALYSIS. • ANALYSIS WITHOUT INTERPRETATION • IS MEANINGLESS.

7. TYPES ANALYSIS MODUS OPRANDI MATERIAL USED VERTICAL * VARIOUS ITEMS IN THE FIN STATS (STATIC) HORIZONTAL * No OF YEARS (DYNAMIC) EXTERNAL BY OUTSIDERS BALANCE SHEETS INTERNAL BY EXECUTIVES/EMPLOYEES BOOKS OF ACCOUNTS * CAN BE DONE SIMULTANEOUSLY

8. STEPS IN ANALYSIS • METHODICAL CLASSIFICATION (LIQUID ASSETS, CURRENT ASSETS, CURRENT LIABILITIES, PROVISIONS & NET WORKING CAPITALS).

9. 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.

10. 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.

11. TECHNIQUES OF FINANCIAL ANALYSIS • COMMON SIZE FINANCIALSTATEMENTS :- • “FIGURES ARE CONVERTED TO PERCENTAGES TO SOME COMMON BASE ”.

12. 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”.

13. 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”.

14. 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”.

15. 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”.

16. LIMITATIONS • 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.

17. COMPARATIVE FINANCIAL STATEMENTS • 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.

18. COMPARATIVE FINANCIAL STATEMENTS • 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).

19. COMPARATIVE FINANCIAL STATEMENTS • 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.

20. COMPARATIVE FINANCIAL STATEMENTS • 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.

21. COMPARATIVE 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.

22. RATIO ANALYSIS • DEFINITION :- • “ ONE OF THE TECHNIQUES OF FINANCIAL ANALYSIS WHERE ARE USED AS A YARDSTICK FOR EVALUATING THEFIANANCIAL CONDITION AND PERFORMANCE OF A FIRM”

23. RATIO ANALYSIS • TYPES :- • RATIOS CAN BE EXPRESSED IN 2 WAYS :- • (a) TIMES = ONE VALUE IS DIVIDED • BY ANOTHER. • (b)PERCENTAGE = THE ‘TIMES’ QUOTIENT • IS MULTIPLIED BY 100

24. RATIO ANALYSIS • 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).

25. RATIO ANALYSIS • CLASSIFICATION OF ACCTG RATIOS (Cont’d) :- • FUNCTIONAL (TO STUDY THE PFOFITABILITY AND SOLVENCY). • PROFITABILITY RATIO (ROLE-RETURN ON CAPITAL EMPLOYED). OP PROFITX 100 CAPITAL EMPLOYED • COVERAGE RATIO. • TURNOVER RATIO. • FINANCIAL RATIOS. LIABILITY RATIO STABILITY RATIO

26. RATIO ANALYSIS • PROFITABILITY :- “IS AN INDICATION OF THE EFFICIENCY WITH WHICH THE OP OF THE BUSINESS IS CARRIED ON”