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Analysis of Financial Statements

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12 views5 pages

Analysis of Financial Statements

Uploaded by

aloksinghtanwar7720
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Analysis of Financial Statements

Financial Statements
Financial statements provide information about the financial activities and position of a firm. Important
financial statements are:
1. Balance sheet
2. Profit & Loss statement
3. Cash flow statement

Analysis of Financial Statements


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.

Objectives of Financial Analysis


1) To Assess the Earning Capacity or Profitability
2) To Assess the Managerial Efficiency
3) To Assess the Short-term and Long-term Solvency of the Enterprise
4) To facilitate Inter-firm Comparison
5) To Forecast and Prepare Budgets
6) To Understand Complicated Matte

Uses of Financial Analysis


1) Security Analysis
2) Credit Analysis
3) Debt Analysis
4) Dividend Decision
5) General Business Analysis

Parties Interested in Financial Analysis


1) Management
2) Employees and Trade Unions
3) Shareholder or Owners or Investors
4) Potential Investors
5) Suppliers or Creditors
6) Bankers and Lenders
7) Researchers
8) Tax Authorities
9) Customers

Limitations of Financial Statement Analysis


1) Historical Analysis
2) Price Level Changes are not considered
3) Qualitative Aspect Ignored
4) Financial Statements Limitations
5) Not free from bias
6) Different Accounting Practices

DSM_AFS_1
Tools or Techniques of Financial Statement Analysis
1) Comparative Statements
2) Common Size Financial Statements
3) Trend Analysis
4) Ratio Analysis
5) Cash Flow Statement

Comparative Statements
Comparative Statements or Comparative Financial Statements means a comparative study of
components or elements or items of Balance Sheet and Statement of Profit or Loss for two or more
years.
At first, the value of each component or element or item of two or more financial years is placed
alongside each other. After this, a difference between the two amounts is determined and lastly
percentage change in the amount from the base year is ascertained. Such comparative statements can be
Intra-Firm or Inter-Firm Comparisons.

Comparative Balance Sheet

COMPARATIVE BALANCE SHEET


AS AT….
Note Previous Current Absolute Percentage
Particulars
No. Year (Rs.) Year (Rs.) Change (Rs.) Change (%)
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
Share capital
Reserves and surplus
2. Share application money
pending allotment
3. Non-Current Liabilities
4. Current Liabilities
Short-term Borrowings
Trade Payables
Other Current Liabilities
Short-term Provisions
TOTAL
II. ASSETS
1. Non-current assets
Fixed assets
Non-current investment
Other non-current assets
2. Current assets
Inventories
Trade receivables
Cash and cash equivalents
Short-term loans and
advances
Other current assets
TOTAL
DSM_AFS_2
Comparative Statement of Profit and Loss

COMPARATIVE STATEMENT OF PROFIT AND LOSS for the years ended…


Note Previous Current Absolute Percentage
Particulars
No. Year (Rs.) Year (Rs.) Change (Rs.) Change (%)
Revenue from Operations
Other Income
Total Revenue (A)
Expenses
Cost of Materials Consumed
Purchases of Stock-in-Trade
Changes in Inventories
Employee Expenses
Finance Costs
Depreciation Expenses
Amortisation Expenses
Other Expenses
Total Expenses (B)
Profit Before Tax (A-B)
Less: Tax
Profit for the year

Common-Size Statement
It is a vertical analysis of Financial Statements in which amounts of individual items of Balance Sheet or
Statement of Profit or Loss are written. These amounts are further converted into percentages to a
common base. Total Amount in case of Balance Sheet and Revenue from Operation in case of Statement
of Profit and Loss will be taken as base.
These percentages can be compared with the corresponding percentages in other period sand meaningful
conclusions can be drawn. Such statements may be prepared for intra-firm and inter-firm comparison.

Common-Size Balance Sheet

COMMON-SIZE BALANCE SHEET as at ….


Percentage of Balance Sheet
Amount
Note Total
Particulars
No. Previous Current Previous Current
Year (Rs.) Year (Rs.) Year (%) Year (%)
I. EQUITY AND LIABILITIES
1. Shareholders’ funds
Share capital
Reserves and surplus
2. Share application money
pending allotment
3. Non-Current Liabilities
DSM_AFS_3
4. Current Liabilities
Short-term Borrowings
Trade Payables
Other Current Liabilities
Short-term Provisions
TOTAL 100 100
III. ASSETS
1. Non-current assets
Fixed assets
Non-current investment
Other non-current assets
2. Current assets
Inventories
Trade receivables
Cash and cash equivalents
Short-term loans and
advances
Other current assets
TOTAL 100 100

Common-Size Statement of Profit and Loss

COMMON-SIZE STATEMENT OF PROFIT AND LOSS for the years ended…


Percentage of Revenue from
Amount
Note operation
Particulars
No. Previous Current Previous Current
Year (Rs.) Year (Rs.) Year (%) Year (%)
Revenue from Operations 100 100
Other Income
Total Revenue (A)
Expenses
Cost of Materials Consumed
Purchases of Stock-in-Trade
Changes in Inventories
Employee Expenses
Finance Costs
Depreciation Expenses
Amortisation Expenses
Other Expenses
Total Expenses (B)
Profit Before Tax (A-B)
Less: Tax
Profit for the year

Trend Analysis

DSM_AFS_4
Trend analysis can be done to observe the percentage changes over time in the selected data. The trend
percentage is the percentage relationship, in which each item of different years bear to the same item in
the base year. Trend analysis is important because, with its long run view, it may point to basic changes
in the nature of the business.
Procedure for Calculating Trends:
1) One year is taken as a base year. Generally, the first or the last is taken as base year.
2) The figures of base year are taken as 100.
3) Trend percentages are calculated in relation to base year. If a figure in other year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if figure is
more than base year figure. Each year’s figure is divided by the base year’s figure.

Current Year Amount


Trend percentages = X 100
Base Year Amount

DSM_AFS_5

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