FINANCIAL STATEMENT ANALYSIS

 Financial statement are Trading and Profit &

Loss account and balance sheet.
 It is compulsory to prepare financial statement
according to companies act 1956.
 Profit position and financial strength.

 Useful for owner, creditor and general public.

Financial statement analysis is concerned with the
process of determining the financial strength and
weakness of a concern. It also establishes the
strategic relationship between various accounts in
the financial statement
OBJECTIVES OF FINANCIAL
ANALYSIS
(i) To assess the profitability of the concern;
(ii) To examine the operational efficiency of the
concern as a whole and of its various parts or
departments;
(iii) To measure the short-term and long-term
solvency of the concern for the benefit of the
debenture holders and trade creditors;
(iv) To undertake a comparative study in regard to
one firm with another firm or one department
with another department; and
(v) To assess the financial stability of a business
concern
ADVANTAGES
 Owner of the company
 Investor

 Management

 suppliers
METHODS OF FINANCIAL STATEMENT
ANALYSIS

 Comparative statements
 Common size statements

 Trend analysis

 Ratio analysis

 Fund flow analysis

 Cash flow analysis

COMPARATIVE STATEMENTS
 It deals with the comparison of different items of profit
and loss account and balance sheet of two or more
period.
 It helps in corrective action for future.
Comparative income statement
 It gives details about the profit of the company. Profit
is explained in three stages gross profit, operating
profit and net profit.
 It shows there is any improvement in the profitability
over the period of time.
 If the profitability is low when compared to the
previous year then the management will take
corrective actions
Comparative balance sheet
 It gives details about the financial condition of the
company.
 Various items of balance sheets of two different
periods are normally compared through comparative
balance sheet .
 Assets are separately analyzed as current asset and
fixed asset. Liabilities are classified into current
liabilities, long term liability and equity
COMMON-SIZE FINANCIAL STATEMENTS
 Common-size Financial Statements are those in
which figures reported are converted into
percentages to some common base.
 In the Income Statement the sale figure is
assumed to be 100 and all figures are expressed
as a percentage of sales.
 Similarly in the Balance sheet the total of assets
or liabilities is taken as 100 and all the figures
are expressed as a percentage of this total.
COMMON SIZE INCOME STATEMENT
 In the case of Income Statement, the sales figure
is assumed to be equal to 100 and all other
figures are expressed as percentage of sales.
 Relationship between items of Income Statement
and volume of sales, it would be helpful in
evaluating operational activities of the concern.
 The selling expenses will certainly go up with
increase in sales. The administrative and
financial expenses may go up or may remain at
the same level.
 In case of decline in sale, selling expenses should
definitely decrease.
COMMON SIZE BALANCE SHEET
 For the purpose of common size Balance Sheet,
the total of assets or liabilities is taken as 100
and all the figures are expressed as percentage of
the
total.
 In other words, each asset is expressed as
percentage to total assets/liabilities and each
liability is expressed as percentage to total
assets/liabilities.
 This statement will throw light on the solvency
position of the concern by providing an analysis
of
pattern of financing both long-term and working
TREND ANALYSIS
 This is immensely helpful in making a comparative
study of the financial statements of several years.
 Under this method trend percentages are calculated
for each item of the financial statement taking the
figure of base year as 100.
 The starting year is usually taken as the base year.
 The trend percentages show the relationship of each
item with its preceding year's percentages.
 This will exhibit the direction, (i.e., upward or
downward trend) to which the concern is proceeding.
 These trend ratios may be compared with industry
ratios in order to know the strong or weak points of a
concern.
CASH FLOW STATEMENT
 A cash flow statement shows an entity's cash receipts
classified by major sources and its cash payments
classified by major uses during a period.
 It provides useful information about an entity's
activities in generating cash from operations to repay
debt, distribute dividends or reinvest to maintain or
expand its operating capacity;
 financing activities - both debt and equity
 Investment activities - fixed assets or current assets
other than cash.
 The depiction of all possible sources and application of
cash in the cash flow statement helps the financial
manager in short term financial planning in a
significant manner because the short term business
obligations such as trade creditors, bank loans,
interest on debentures and dividend to shareholders
can be met out of cash only.
RATIO ANALYSIS
 A ratio is a simple arithmetical expression of the
relationship of one number to another.
 This relationship can be expressed as (i)
percentages, say, net profits are 20 per cent of
sales (assuming net profits of Rs. 20,000 and
sales of Rs. 1,00,000)
 Ratio analysis helps in financial forecasting,
making comparisons, evaluating solvency
position of a firm, etc.
FUND FLOW STATEMENT
 The term 'flow' means movement and includes both 'inflow'
and 'outflow'.
 The term 'flow of funds' means transfer of economic values
from one asset or equity to another.
 Flow of funds is said to have taken place when any
transaction makes changes in the amount of funds
available before happening of the transaction.
 effect of transaction results in the increase of funds -
source of funds
 Effect of transaction results in the decrease of funds -
application of funds.
 working capital concept of funds, the term 'flow of funds‘
refers to the movement of funds in the working capital.
Transaction results in the increase in working capital -
source or inflow of funds and
Transaction results in the decrease of working capital -
application or outflow of funds.
PREPARE A COMPARATIVE INCOME STATEMENT OF G LTD FOR THE FOLLOWING
P&L A/C FOR THE YEAR ENDED 31ST MAR 2009.
Profit & Loss Account for the year ended 31st Mar 2008
& 2009

Particulars 2008 Rs 2009 Particular 2008 Rs 2009 Rs

Rs s

To Cost of goods 900000 1000000 By sales 1230000 1390000

sold
To operating 110000 150000
expenses: 70000 50000
Administrative 150000 190000
Exp
Seling exp
To Net Profit
1230000 1390000 1230000 1390000
COMPARATIVE INCOME STATEMENT
Particulara 2008 2009 Change Percenta
(Rs) (Rs) (Rs) ge
Sales 1230000 1390000 160000 13.01

(-) cost of goods sold 900000 1000000 100000 11.11

Grossprofit 330000 390000 60000 1.82

Operating Expenses:
Administration expenses 110000 150000 40000 36.36

Selling Expenses 70000 50000 - 20000 - 33.33

Tot Operating Expenses 180000 200000 20000 11.11

Net Profit 150000 190000 40000 26.67

PREPARE A COMPARATIVE INCOME
STATEMENT FROM THE FOLLOWING
Particulars 31st Mar 2008 31st Mar 2009 Rs.
Rs.
Sales 2500000 3000000
Cost of goods sold 1400000 1550000
Operating
expenses: 350000 290000
Administrative
expenses 270000 360000
Selling expenses
Non operating
expenses: 160000 140000
Interest 170000 330000
Income tax
COMPARATIVE INCOME STATEMENT
Particulara 2008 2009 Change Percenta
(Rs) (Rs) (Rs) ge
Sales 2500000 3000000 500000 20
(-) cost of goods sold 1400000 1550000 150000 10.71
Grossprofit 1100000 1450000 350000 31.82
Operating Expenses:
Administration expenses 350000 290000 -60000 -17.14
Selling Expenses 270000 360000 90000 33.33
Tot Operating Expenses 620000 650000 30000 4.84
Operating profit 480000 800000 320000 66.67
(-) Non operating
expenses 160000 140000 -20000 -12.50
Interest

Net profit before Tax 320000 660000 340000 106.25

Tax 170000 330000 160000 94.12
FROM THE FOLLOWING BALANCE SHEETS OF RAM LTD. AS ON 31ST DECEMBER,
2000 AND 2001, PREPARE A COMPARATIVE BALANCE SHEET FOR THE CONCERN :

Balance Sheet of Ram Ltd. as on

Liabilities 2000 (Rs.) 2001(Rs.) Assets 2000 (Rs.) 2001(Rs.)

Equity share 5,00,000 6,00,000 Land & 4,00,000 3,50,000

capital Building
Reserves & 2,00,000 1,00,000 Plant & 2,40,000 2,90,000
surpluses Machinery
Debentures 1,00,000 1,50,000 Furniture 25,000 30,000
Mortgage loan 80,000 1,00,000 Bills 75,000 45,000
Bills Payable 30,000 25,000 receivables
S. Creditors 50,000 60,000 S. Debtors 1,00,000 1,25,000
Other current 5,000 10,000 Stock 1,13,000 1,72,000
Liabilities Prepaid 2,000 3,000
Expenses
Cash & Bank 10,000 30,000
Balance