Chapter-02

Basic Analysis Procedure of Financial

Statement Analysis
1. Types of Financial Statements Analysis and Interpretations
The analysis and interpretation of financial statements can be classified into different
categories depending upon:
I. The Materials Used
II. Modus Operandi (Methods of Operations to be followed)
1. On the basis of Materials Used:
a. External Analysis.
b. Internal Analysis.
II. On the basis of Modus Operandi
a. Vertical Analysis.
b. Horizontal Analysis.

The following chart shows the classification of financial analysis:

Financial Statement Analysis

!
! 1
On the Basis of Materials Used On the Basis of Modus Operandi
! !
1 1
External Internal Horizontal Vertical
Analysis Analysis Analysis Analysis

I. On the Basis of Materials Used

On the basis of materials used the analysis and interpretations of financial statements may
be classified into (a) External Analysis and (b) Internal Analysis.
a. External Analysis

This analysis meant for the outsiders of the business firm. Outsiders may be investors,
creditors, suppliers, government agencies, shareholders etc. These external people have to
rely only on these published financial statements for important decision making. This
analysis serves only a limited purpose due to non-availability of detailed information.
b. Internal Analysis
1
Internal analysis performed by the persons who are internal to the organization. These internal
people who have access to the books of accounts and other information related to the business.
Such analysis can be done for the purpose of assisting managerial personnel to take corrective
action and appropriate decisions.

II. On the basis of Modus Operandi

On the basis of Modus operandi, the analysis and interpretation of financial statements may
be classified into: (a) Horizontal Analysis and (b) Vertical Analysis.
a. Horizontal Analysis

Horizontal analysis is also termed as Dynamic Analysis. Under this type of analysis,
comparison of the trend of each item in the financial statements over the number of years
are reviewed or analyzed. This type of comparison helps to identify the trend in various
indicators of performance. In this type of analysis, current year figures are compared
with base year for figures are presented horizontally over a number of columns.
b. Vertical Analysis

Vertical Analysis is also termed as Static Analysis. Under this type of analysis, a number
of ratios used for measuring the meaningful quantitative relationship between the items
of financial statements during the particular period. This type of analysis is useful in
comparing the performance, efficiency and profitability of several companies in the
same group or divisions in the same company.

2. Rearrangement of Income Statements

Financial statements should be rearranged for proper analysis and interpretations of these
statements. It enables to measure the performance of operational efficiency and profitability of a
concern during particular period. The items of operating revenues, non-operating revenues,
operating expenses and non-operating expenses are rearranged into different heads and sub-
heads are given below:
Income Statement (Operating Statement)
for the year endings . . • ...
Particulars Amount Rs. Amount Rs.

Opening stock of Raw Materials ...

Add: Purchases ...
Less: Purchases Returns .. . ...
Freight and Carriage ...
Less: Closing Stock of Raw Materials ...
.. .
Raw Materials Consumed (1) ...
Add: Direct wages (Factory) ...
Factory Rent and Rates ...
Power and Coal ...
Depreciation of Plant and Machinery ...
Depreciation of Factory Building ...
Work Manager's Salary ...
Other Factory Expenses ... . ..
2
 .. .
Add: Opening Stock of working progress ...
Opening Stock of Finished goods ...
.. .
Less: Closing Stock of work in progress ...
Closing Stock of Finished goods ... . ..
Cost of Goods Sold (2) ...
Less: Net Sales (Less sales return and Sales tax) (3) ...
Gross Profit: (4) = (3 - 2) ...
(Net Sales - Cost of Goods Sold)
Less: Operating Expenses: (5)
Office Expenses ...
Administrative Expenses ...
Selling Expenses ...
Distribution Expenses s. . ..
Net Operating Profit: (6) =(4-5) ...
Add: Non-Operating Income : (7) ...
Interest Received ...
Discount Received ...
Dividend Received ...
Income Form Investment .. . •
Interest on Debenture ...
Any other Non-Trading Income .. . ...
. ..

Less: Non.Operating Expenses : (8)

Discount on Issue of Shares Written off ...
Interest on Payment on Loan and Overdraft ...
Loss on Sale of Fixed Assets ... . ..
.. .
Net Profit Before Interest and Tax (9) ...
Less: Interest on Debenture (10) ...
Net Profit Before Tax (11) = (9 - 10) ...
(Net Profit Before Interest and Tax-Interest on Debenture)
Less: Tax Paid (12) ...
Net Profit After Interest and Tax (13) ...
or Net Loss After Interest and Tax
(Transferred to Capital Account)

Income Statement Equations

From the above rearrangement of operating statements, the following accounting equations may be given:

(1) Net Sales = Cost of Sales + Operating Expenses

+ Non-Operating Expenses
(2) Gross Profit = Net Sales - Cost of Goods Sold
(3) Operating Expenses = Office and Administrative Expenses
+ Selling and Distribution Expenses
(or)

(4) Operating Expenses = Gross Profit - Net Operating Profit

(5) Sales - Net Operating Profit = Cost of Sales + Operating Expenses
3
 (6) Net Operating Profit = Gross Profit - Operating Expenses
(7) Net Profit Before Interest and Tax = Net Operating Profit - Non-Operating Expenses
(8) Sales = Cost of Sales + Operating Expenses
+ Non-Operating Expenses
(9) Net Profit = Net Sales - (Cost of Sales + Operating Expenses
+ Non-Operating Expenses)

3. Rearrangement of Balance Sheet

Balance sheet is a statement consisting of assets and liabilities which reflected the financial
soundness of a concern at a given date. In order to judge the financial position qf a concern, it is
also necessary to rearrange the balance sheet in a proper set of form. For analysis and
interpretation, the figures in Balance Sheet rearranged in a Vertical Form and given below.

Balance Sheet as on 31"1 Dec.

Particulars Amount Rs. Amount Rs.
Cash in Hand ...
Cash at Bank ...
Bills Receivable ...
Sundry Debtors ...
Marketable Securities ...
Other Short-Term Investments .. . ...
Liquid Assets (1) ...
Add: Stock in Trade ...
(Closing Stock of Raw Materials
Closing Stock of Work in Progress
Closing Stock of Finished goods)
Prepaid Expenses ... . ..
Current Assets (2) ...
Less: Current Liabilities :
Bills Payable ...
Sundry Creditors ...
Bank Loans (Short-term) ...
Bank Overdraft ...
Outstanding Expenses ...
Accrued Expenses ...
Trade Liabilities ...
Other Liabilities Payable within year ... . ..
Total Current Liabilities : (3) ...
Add: Provisions: (4)
Provision for Tax ...
Proposed Dividend ...
Provision for Contingent Liabilities ...
Total Current Liabilities and Provisions (5) = (3 + 4) .. . ...
Net Working Capital (6) =(2 - 5) ...
(Current Assets - Total Current Liabilities & Provision)
Add: Fixed Assets : (6)
Goodwill ...
Land and Buildings ...
Plant and Machinery ...
Loose Tools ...
Furniture and Fixtures ...
Patents and Copyrights ...
Live Stock ...
Investment in Subsidies .. . ...
=
Capital Employed (7) (5 + 6) ...
(Net Working Capital + Fixed Assets)
Add: Other Assets : (8) ...
4
 InvestmeJ1! in Govt. Securities
Unquoted Investments ...
Other Non-Trading Investments ...
Advances to Directors ... . ..
Company's Net Assets (9) = (7 + 8) ...
(Capital Employed + Other Assets)

Less: Long-Term Liabilities (10)

Debenture ...
Long-Term Debt ...
Long-Term Loan from Bank}
& Financial Institutions ...
Long-Term Debt Raised by Issue of Securities}
& Public Deposits ...
Other Long-Term Loan payable after a year ... . ..
Share Holders Net Worth (11) = (9 - 10)
(or) Total Tangible Net Assets - Shareholders} ., .
Net Worth
Less: Preference Share Capital (12) ., .
Equity Shareholders Net Worth (13) = (11 - 12) ...
(Total Tangible Net Worth - Preference Share Capital)

Balance Sheet Equations :

From the above Balance Sheet the following accounting equations may be drawn:
(1) Liquid Assets = Current Assets - Stock and Prepaid Expenses

(2) Net Working Capital = Current Assets - Current Liabilities

(3) 'Current Assets = Net Working Capital - Current Liabilities
(4) Capital Employed = Net Working Capital + Fixed Assets
(or)

Capital Employed = (Current Assets - Current Liabilities) + Fixed Assets

(or)
Capital Employed = Total Assets - Current Liabilities
(5) Shareholders' Net Worth = Company's Net Assets - Shareholders' Net Worth
(6) Equity Shareholders' Net Worth = Total Tangible Net Worth - Preference Share Capital

4. Methods or Tools of Analysis and Interpretations

The following are the various techniques can be adopted for the analysis and interpretations
of financial statements.
(1) Comparative Financial Statements.
(2) Common Size Statements.
(3) Trend Analysis.
(4) Ratio Analysis.
(5) Fund Flow Analysis.
(6) Cash Flow Analysis.

5
 1. Comparative Financial Statements
Under this form of comparative financial statements both the comparative Profit and
Loss Account and comparative Balance sheet are covered. Such comparative statements
are prepared not only to the comparison of the vanous figures of two or more periods but
also the relationship between various elements embodied in profit and loss account and
balance sheet. It enables to measure operational efficiency and financial soundness of the
concern for analysis and interpretations. The following information may be shown in the
comparative statements:
a. Figures are presented in the comparative statements side by side for two or more
years.
b. Absolute data in money value.
c. Increase or Decrease between the absolute figures in money value.
d. Changes or trend in various figures in terms of percentage.

Illustration: 1
From the following Profit and Loss Account AVS Ltd., for the years 2002 and 2003, you are required to
prepare a Comparative Income Statement.
Statements of Profit and Loss Account
Particulars 2002 2003
Rs. Rs.
Net sales 4,000 5,000
Less " Cost of goods sold 3,000 3,750
Gross Profit 1,000 1,250
Less,' Operating Expenses
Office and Administrative Expenses 200 250
Selling and Distribution Expenses 225 300
Total Operating Expenses 425 550
Net Profit 575 700

Solution:

AVS Ltd.
Statements of Profit and Loss Account
Particulars 2002 2003 Increase or Decrease in 2003
Rs. Rs. Absolute Percentage
in 2003 Rs. (%)

Net sales 4,000 5,000 + 1,000 + 25

Less " Cost of Goods Sold 5,000 3,750 + 1,500 + 25
Gross Profit 1,000 1,250 + 250 + 25
Less " Operating Expenses :
Office and Administrative Expenses 200 250 + 50 + 25
Selling and Distribution Expenses 225 300 + 75 + 33.33
Total Operating Expenses 425 550 + 125 + 29.41
Net Profit (Gross Profit-Total Operating Expenses) 575 700 + 125 + 21.73

Interpretation:
From the above statement, it is observed that the sales has increased to the extent of 25%. The cost of goods sold
6
and its percentage increased by 25%. Administrative and selling & distribution expenses have been increased by 25% and
33.33% respectively. The rate of net profit is also increased to the extent of 21.73%. This indicates that the overall
profitability of the concern is good.

Illustration: 2

From the following Income Statement of X Ltd., for the years 2001 and 2002, you are required
to prepare a Comparative Income Statement and interpret the result.
Income Statement
For the Year ended 31st March
Particulars Taka Taka
Net sales 1370 1442
Less: Cost of goods sold 833 926
Gross Profit 532 516
Less,' Operating Expenses
Office and Administrative Expenses 94 92
Selling and Distribution Expenses 188 182
Total Operating Expenses 282 274
Operating Profit 250 242
Add: Other Income- Dividend 44 50
294 292
Less: Other Deductions-Interest Paid 44 44
Net Profit Before Tax 250 248
Less: Income Tax 124 124
Net Profit After tax 126 124

Solution:

Income Statement
For the Year ended 31st March

Particulars Taka Taka

Absolute Percentage
Changes Changes
Net sales 1370 1442 72 5.26
Less: Cost of goods sold 833 926 88 10.50
Gross Profit 532 516 (16) (3.01)
Less,' Operating Expenses
Office and Administrative Expenses 94 92 (2) (2.13)
Selling and Distribution Expenses 188 182 (6) (3.19)
Total Operating Expenses 282 274 (8) (2.84)
Operating Profit 250 242 (8) (3.20)
Add: Other Income- Dividend 44 50 6 13.64
294 292 (2) (0.68)
Less: Other Deductions-Interest Paid 44 44 nil Nil
Net Profit Before Tax 250 248 (2) (0.80)
Less: Income Tax 124 124 Nil Nil
Net Profit After tax 126 124 (2) (1.59)
Interpretation:

7
From the above comparative Income statement the following points are worth noting:
i. The sales volume and cost of goods sold have increased by 5.26% and 10,50%
respectively during the year ending 31 st March, 2002 as compared to the last year ending
31st March, 2001.
ii. Gross profit, operating profit, net profit, administrative expenses and selling expenses
have all decreased by 3.01%, 3.02%, 0.80%, 2.13% and 3.19% respectively during the
year 2001-02 as compared to the last year 2000-01.

From the above analysis it is evident that percentage increase in cost was more as compare to the
percentage increase in sales. Gross profit, operating profit and net profit have decreased in spite
of decreased in administrative and selling expenses. It is all because of appreciable increase in
cost of goods sold. It seems that it has not been possible to shift the burden of increase in cost to
the consumers by increasing price because of acute competition. Increase in cost of goods sold
may be because of increase in prices of materials used or goods purchased and increase in labor
rates or other manufacturing expenses. Management cannot reduce cost if it is due to overall
increase in market prices of input, but management can do a lot if increase in cost is as a result
of inefficiency of input.
To conclude, efforts should be made to et best utilization of inputs i.e., material, labor and
manufacturing expenses so that gross profit, operating profit and net profit may increase with
increase in sales.
Illustration-03
The comparative condensed balance sheet of ABC Manufacturing organization is presented
below:
ABC Manufacturing Organization
Comparative Condensed Balance Sheet
December, 31

Assets 2016 (Tk.) 2015 (Tk.)

Current assets:
Cash 1,00,010 2,00,020
Account receivable 7,50,000 4,00,000
Inventory 15,00,000 6,00,000
Prepaid expenses 50,000 50,000
Total current assets 24,00,010 12,50,020
Plant and equipment 25,85,000 27,00,000
Total assets 49,85,010 39,50,020

Liabilities and Stockholders’ Equity

Liabilities:
Current liabilities 12,50,010 5,00,020
Bonds payable 10,00,000 10,00,000
Total liabilities 22,50,010 15,00,020
Stockholders’ equity:
Preferred stock 7,50,000 7,50,000
Common stock 5,00,000 5,00,000
8
 Retained earnings 14,85,000 12,00,000
Total Stockholders’ equity 27,35,000 24,50,000
Total Liabilities and Stockholder's Equity 49,85,010 39,50,020

Instructions:
Make a Comparative analysis of the balance sheet data for ABC Manufacturing
organization using 2015 as base.

Illustration-04:

Balance Sheet of ABC Ltd. for the year 2002 and 2003
Liabilities 2002 2003 Assets 2002 2003
Rs. Rs. Rs. Rs.

Current
Liabilities 37,000 50,000 Cash in Hand 3,000 5,000
Debenture 50,000 60,000 Cash at Bank 10,000 20,000
Long-Term Debts 2,00,000 2,50,000 Bills Receivable 7,000 10,000
Capital: Sundry Debtors 10,000 15,000
Preference Share Stock 20,000 25,000
Capital 1,00,000 1,50,000 Fixed Assets 4,90,000 6,25,000
Equity Capital 1,25,000 1,60,000
General Reserve. 28,000 30,000

5,40,000 7,00,000 5,40,000 7,00,000

Solution

ABC Ltd.
Comparative Balance Sheet as on 315' Dec. 2002 & 2003
Particulars 2002 2003 Increase or Percentage of Increase
Rs. Rs. Decrease in 2003 Rs. or Decrease in 2003 (%)
Assets :
Cash in Hand 3,000 5,000 +2000 + 66.66
Cash at Bank 10,000 20,000 +10000 + 100
Bills Receivable 7,000 10,000 + 3000 + 42.85
Sundry Debtors 10,000 15,000 +5000 + 50
Total Liquid Assets 30,000 50,000 + 20000 + 66.66
Add,' Stock 20,000 25,000 + 5000 + 25
Total Current Assets 50,000 75,000 + 25000 + 50

Fixed Assets 4,90,000 6,25,000 + 1,35,000 + 27.55

Total Assets 5,40,000 7,00,000 + 1,60,000 + 29.62
Liabilities and Capital :
Current Liabilities 37,000 50,000 + 13,000 + 35.13
Total Current Liabilities 37,000 50,000 + 13,000 + 35.13
Long-Term Liabilities:
Debenture 50,000 60,000 + 10,000 + 20

9
 Long-Term Debts 2,00,000 2,50,000 + 50,000 + 25
Total Long-term Liabilities 2,50,000 3,10,000 + 60,000 + 24
Total Liabilities 2,87,000 3,60,000 + 73,000 + 25.43
Capital and Reserve :
Preference Share Capital 1,00,000 1,50,000 + 50,000 + 50
Equity Share Capital 1,25,000 1,60,000 + 35,000 + 28
General Reserves 28,000 30,000 + 2,000 + 7.14
Total Capital & Reserve 2,53,000 3,40,000 + 87,000 + 34.38
Total Liabilities & Capital 5,40,000 7,00,000 + 1,60,000 + 29.62

Interpretation
The total current assets of the company have increased by 50% in 2003 as compared to
2002. The current liabilities have increased only to the extent of 33.15 %. This indicates that the
company will have no problem to meet the day-to-day expenses. It also observed that the current
financial position of the concern has considerably increased.
The fixed assets have increased by 29.62% compared to 2002. At the same time, long-term
liabilities, share capital and reserve have considerably increased by 34.38%. It shows that the
company has taken up expansion plans in a big way.

2. Common Size Statements

In order to avoid the limitations of Comparative Statement, this type of analysis is designed.
Under this method, financial statements are analysed to measure the relationship of various
figures with some common base. Accordingly, while preparing the Common Size Profit and
Loss Account, total sa!es is taken as common base and other items are expressed as a percentage
of sales. Like this, in order to prepare the Common Size Balance Sheet, the total assets or total
liabilities are taken as common base and all other items are expressed as a percentage of total
assets and liabilities.

Illustration-
The balance sheet of Shaheen Ltd are given for the year 2007 and 2008
convert them into common size balance size balance sheet and interpret the
changes.

2007 2008
Liabilities Assets 2007 Tk. 2008 Tk..
Tk. Tk.

Equity share 1,46,800 1,91,000 Buildings 1,80,000 2,00,000

Capital reserve 50,000 70,000 Plant and machinery 40,000 55,000
Revenue reserve & 20,000 30,000 Furniture 10,000 20,000
surplus
Freehold property 20,000 12,000

Trade creditors 30,000 40,000 Goodwill 25,000 30,000

Bills payable 80,000 60,000 Cash balance 25,000 20,000

10
Bank overdraft 90,000 80,000 Sunday debtors 30,000 35,000
Provisions 30,000 20,000 Inventories 70,000 57,000
4,46,800 4,91,000 4,46,800 4,91,000

Solution:

Common size Balance Sheet

2007 2008

Assets
Amt. (Tk.) Percentage Amt. (Tk.) Percentage

A. Current Assets
Sundry Debtor 30,000 6.71 35,000 7.13
Cash balance 25,000 5.59 20,000 4.07
Inventories 70,000 15.71 57,000 11.60
Investment (Temporary) 36,500 8.17 42,000 8.55
Bill Receivable 10,300 2.30 20,000 4.08

Total (A) 1,71,800 38.44 1,74,000 35.43

B. Fixed Assets
Building 1,80,000 40.29 2,00,000 40.75
Plant and Machinery 40,000 8.95 55,000 11.20
Furniture 10,000 2.24 20,000 4.07
Freehold Property 20,000 4.48 12,000 2.44
Goodwill 25,000 5.60 30,000 6.11

Total (B) 2,75,000 61.5 3,17,000 64.57

Total Assets (A+B) 4,46,800 100.00 4,91,000 100.00

Liabilities
C. Current Liabilities
Trade Creditors 30,000 6.17 40,000 8.15
Bill Payable 80,000 17.91 60,000 12.22
Bank Overdraft 90,000 20.14 80,000 16.29
Provision 30,000 6.71 20,000 4.07

11
 Total (C) 2,30,000 51.47 200,000 40.73

D. Long-term Liabilities
Equity Share 1,46,800 32.86 1,91,000 38.90
Capital Reserve 50,000 11.19 70,000 14.26
Revenue Reserve and 20,000 4.48 30,000 6.11
Surplus
Total (D) 2,16,800 48.53 2,91,000 59.27
Total Liabilities (C+D) 4,46,800 100.00 4,91,000 100.00

Interpretation:

1. The study of common size balance show that 61.56 per cent total asset in 2007 were
fixed This percentage increased 64.57 per cent 2008 if concern requires considerable
investment in fixed assets these percentage might be acceptable if the company needs be
acceptable if the company need liquid assets the interested parties might have cause to be
concerned about the decreasing trend liquidity.
2. There was a wide shift from the use of creditor provided fund to the use of owner equity
fund in 2007 external equity (current liability) and owner equity (long term liability)
accounted from 51.47 percent and 48.73 per cent for external equities and 59.27 per cent
for owner equity These changes indicate that the concern has started to use internal
sources more frequently than external sources more frequently than external sources in
the generation of fund for this business.
3. The concern has not only succeeded in getting its current liability down from 51.47 per
cent in 2007 to 40.73 per cent in 2008 of their respective of the total equity In but it has
also increased the percentage of its revenue and surplus from 4.48 per cent in 2007 to
6.11per cent in 2008 of other respective total equities.

Illustration No. 2

From the following particulars of AVS Ltd., for the year 2002 and 2003, you are required to
prepare a common size Income Statement:

Statement of Profit and Loss Account

Particulars 2002 2003
Rs. Rs.
Net Sales 4,000 5,000
Less : Cost of Goods Sold 3,000 3,750
Gross Profit 1,000 1,000
Less : Operating Expenses :
Office & Administrative Expenses 200 250
Selling & Distribution Expenses 225 300
Total Operating Expenses 425 550

12
 Net Profit 575 700

Illustration: 3
From the following Balance Sheet, prepare a Common Size Statement:
Balance Sheet
Liabilities 2002 2003 Assets 2002 2003
Rs. Rs. Rs. Rs.
Share Capital 2,64,000 2,80,000 Cash in Hand 10,000 lO,750
Current Liabilities 65,000 70,000 Cash at Bank 3,500 5,000
Long-term Debt 1,00,000 87,500 Bills Receivable 22,500 22,750
Bills Payable 12,500 - Sundry Debtors 90,000 85,000
Sundry Creditors 10,000 16,000 Inventories 70,000 83,000
Bank Overdraft 50,000 71,500 Fixed Assets 3,00,000 3,07,500
Prepaid Expenses 5,500 lO,500
5,01,500 5,25,000 5,01,500 5,25,000

Illustration: 4

From the following Profit· and Loss account and Balance sheet, you are required to
prepare(a) Comparative Income Statements (b) Comparative Balance sheet (c) Common size
Income Statement and (d) Common size Balance sheet.

Profit and Loss Account

Particulars 2002 2003 Particulars 2002 2003
Rs. Rs. Rs. Rs.
To opening Stock }
of Materials 25,000 30,000 By Net Sales 2,00,000 2,25,000
To Purchases 1,00,000 1,25,000 By Closing Stock 25,000 30,000
To Direct Wages 15,000 17,000 By Non-operating}
To Freight and Carriage 2,000 3,000 Income 10,000 15,000
To Other Factory }
Expenses 1,000 2,000

To Office & Admi.}

Expenses 5,000 6,000
To Selling and }
Distribution Expn. 7,000 8,000
To Non-operating}
Expenses 5,000 7,000
To Net Profit c/d 75,000 72,000
2,35,000 2,70,000 2,35,000 2,70,000

Balance Sheet as on 31s1 Dec .......

Liabilities 2002 2003 Assets 2002 2003
Rs. Rs. Rs. Rs.
Bills Payable 5,000 7,000 Cash in hand 3,000 5,000
Sundry Creditors 10,000 15,000 Cash at Bank 10,000 20,000
Provision for Tax 7,000 10,000 Bills Receivable 7,000 10,000
Proposed Dividend 5,000 8,000 Sundry Debtors 10,000 15,000
Bank Overdraft 10,000 10,000 Stock in Trade 20,000 25,000
Debenture 50,000 60,000 Land & Buildings 2,00,000 2,50,000
Preference Share Goodwill 1,00,000 1,25,000
Capital 1,00,000 1,50,000 Furniture & Fixtures 40,000 50,000

13
 Equity Share Capital 1,25,000 1,60,000 Plant & Machinery 1,50,000 2,00,000
Long-Term Loans 2,00,000 2,50,000
General Reserve 28,000 30,000
5,40,000 7,00,000 5,40,000 7,00,000

3. Trend Analysis
Trend Analysis is one of the important technique which is used for analysis and
interpretations of financial statements. While applying this method, it is necessary to select a
period for a number of years in order to ascertain the percentage relationship of various items in
the financial statements comparing with the items in base year. When a trend is to be determined
by applying this method, earliest year or first year is taken as the base year. The related items in
the base year are taken as 100 and based on this trend percentage of corresponding figures of
financial statements in the other years are concluded. This analysis is useful in framing suitable
policies and forecasting in future also.

Illustration 4 : You given the following common size percentage of AB Company Ltd for
1997 and 1998.

1997 1998

Inventory 5.20 5.83

Debtors 10.39 ?
Cash ? 7.35
Machinery 49.35 45.35
Building 27.27 29.59
Creditors 20.78 ?
Overdraft ? 10.81
Total Current Liabilities 31.17 ?
Capital 51.95 49.67
Long-term loan 16.88 17.91
Total Liabilities 3,85,000 4,63,000

From the above information, compute the missing common size percentage. Also
calculate the value of all assets and liabilities.Solution :

Common Size Balance Sheet (as on 31 December

1997 and 1998)

1997 1998

Assets
Amt. (Rs.) Percentage Amt. (Rs.) Percentage

14
 Assets :
A. Current Assets
Inventory 20,000 5.20 27,000 5.83
Debtors 40,000 10.39 55,000 11.88
Cash 30,000 7.79 34,000 7.35
Total (A) 90,000 23.38 1,16,000 25.06

B. Fixed Assets
Machinery 1,90,000 49.35 2,10,000 45.35
Building 10,05,000 27.27 1,37,000 29.59

Total (B) 2,95,000 76.62 3,47,000 74.94

Total Assets (A+B) 3,85,000 100.00 4,63,000 100.00

Illustration:

Calculate trend percentage from the following figures of X L td, taking 1979 as
the base and interpret.

Year Sales Stock Profit before tax

1979 1,881 709 321

1980 2,340 781 435
1981 2,655 816 458
1982 3,021 944 527
1983 3,768 1,154 672

Solution :
Trend percentage

Profit before Profit

Years Sales (Tk. Stock (Tk. before
Tax (Tk. in Sales Stock
before in Lakhs) in Lakhs) Tax
Lakhs)

1979 1,881 709 321 100 100 100

1980 2,340 781 435 124 110 136
1981 2,655 816 458 141 115 143
15
 1982 3,021 944 527 161 133 164
1983 3,768 1,154 672 200 162 209

Interpretation:

The study of the above given statement of Trend percentage reveals that –
1. The sales of the farm as continuously increased over a period of a five year
commencing from 1979. However there has been a substantial increase in the amount
of sales in the 1983 when it increased by 39%.
2. The trend of Stock is also upward although the increase in this item has been constant
yet in 1983 the increased has been exceptionally.
3. The Profit of the firm has increased at much higher rat in comparison to increase in
Sale and Stock during the period under study.

The overall analysis of the financial items indicated that the firm is doing well, and
therefore, its financial position it bound to be good.

Illustration: 5
Calculate the trend percentage from the following figures of Ram & Co. Ltd. The year 1999 is taken as the
base year.

Year Sales Cost of Goods Sold Rs. Gross Profit Rs.

1999 2000 1400 600
2000 2500 1800 700
2001 3000 2200 800
2002 3500 2600 900
2003 4000 3000 1000

4. Fund Flow Analysis

Fund Flow Analysis is one of the important methods for analysis and interpretations of
financial statements. This is the statement which acts as a supplementary statement to the profit
and loss account and balance sheet. Fund Flow Analysis helps to determine the changes in
financial position on working capital basis and on cash basis. It also reveals the information
about the sources of funds and has been utilized or employed during particular period.
5. Ratio Analysis
Ratio Analysis is one of the important techniques which is used to measure the
establishment of relationship between the two interrelated accounting figures in financial
statements. This analysis helps to Management for decision making. Ratio Analysis is an
effective tool which is used to ascertain the liquidity and operational efficiency of the concern.

16