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items of balance sheet and profit & loss account. The term financial analysis also known as Analysis and Interpretation of financial statements.
To assess the earning capacity or profitability of the firm To make inter firm comparison To help in decision making and control To provide proper information for granting credit To guide or determine the dividend action To assess the progress of the firm over a period of time
MANAGEMENT CREDITORS INVESTORS THE GOVERNMENT THE STOCK EXCHANGE THE BANKERS
First and foremost need the information is to the owners of the business, without the information in a financial statement it would be very difficult to make any important business decision. It explains the facts relating to Creditability, Efficiency, Performance and Financial control. As the Management is able to decide the course of action taken in future.
From
the analysis of Financial Statements, the creditors can ascertain the liquidity of business.They also get information regarding long-term financial soundness& Profitability.
The Investors includes Both longterm and Short term investors. They can analyse the financial position and earning capacity of business. With the help of financial analysis ,they can determine the rate of dividend in the previous year and can forecast future rate.
The
Financial Statements are used to assess tax liability of business enterprises. These Statements enables the government to find out whether business is following various rules or regulations or not.
The Stock Exchanges deal in purchases and sale of securities of different companies. The Financial Statements enable the stock brokers to judge the financial position of different concerns. The fixation of prices for securities, etc., is also based on these statements.
The Banker is interested to see that the loan amount is secure or not. The banker analyses the balance sheet to determine financial strength of the concern. It is through the financial statements that banker can keep a watch on the business plans and performances.
Comparative
statement
THE COMPARATIVE FINANCIAL STATEMENTS ARE STATEMENTS OF THE FINANCIAL POSITION AT DIFFERENT PERIODS; OF TIME. THE ELEMENTS OF FINANCIAL POSITION ARE SHOWN IN A COMPARATIVE FORM SO AS TO GIVE AN IDEA OF FINANCIAL POSITION AT TWO OR MORE PERIODS. ANY STATEMENT PREPARED IN A COMPARATIVE FORM WILL BE COVERED IN COMAPARATIVE STATEMENTS
FROM PRACTICAL POINT OF VIEW , GENERALLY TWO FINANCIAL STATEMENTS ( BALANCE SHEET AND INCOME STATEMENT)ARE PREPARED COMPARATIVE FORM FOR FINANCIAL ANALYSIS PURPOSES.
NOT ONLY THE COMPARISON OF THE TWO FIGURES OF TWO PERIODS BUT ALSO BE RELATIONSHIP BETWEEN BALANCE- SHEET AND INCOME STATEMENT ENABLES AS IN DEPTH STUDY OF THE FINANCIAL POSITION AND OPERATIVE RESULTS.
2.
3. 4.
ABSOLUTE FIGURES (RUPEE AMOUNTS ) CHANGES IN ABSOLUTE FIGURES I.E. INCREASE OR DECREASE IN ABSOLUTE FIGURES ABSOLUTE DATA IN TERMS OF PERCENTAGES INCREASE OR DECREASE IN TERMS OF PERCENTAGES
Comparative Incomestatement
A COMPARATIVE BALANCE SHEET SHOWS THE BALANCES OF ACCOUNTS (PERSONAL AND REAL) ON DIFFERENT DATES & ALSO THE EXTENT 0F THEIR INCREASE OR DECREASE BETWEEN THESE DATES THROWING LIGHT ON TREND & DIRECTION OF CHANGE IN THE POSITION OVER THE PERIOD. THIS ENABLES THE USER TO PREDICT THE FUTURE POSITION OF THE BUSINESS
WHEN DATA OF TRADING & PROFIT &LOSS ACCOUNT AND BALANCE SHEET FOR A DEFINITE NUMBER OF CONSECUTIVE YEARS ARE PUT IN ADJACENT COLOUMNS THEY ARE CALLED COMPARATIVE FINANCIAL STATEMENTS. IN PREPARING THESE STATEMENTS , THE ITEMS ARE PLACED IN ROWS AND YEARS OR FIRMS ARE EXHIBITED IN THE COLOUMNS
FORMAT
PARTICULARS
PREVIOU S YEAR
--------------------------------------------
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SHAREHOLDERS FUND(D-E)
REPRESENTED BY : 1. EQUITY SHARE CAPITAL 2. PREFERENCE SHARE CAPITAL NET RESERVE & SURPLUS(AFTER MISC.EXPENDITURE)
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FORMULA FOR :
PERCENTAGE OF CHANGE (INCREASE OR DECREASE)=
* 100
EXAMPLE: SUPPOSE IN PREVIOUS BUILDING IS RS.5,OO,OOO & IN CURRENT YEAR IT IS RS.600,000.THE INCREASE IS RS.100,000 %AGE OF INCREASE = 100,000 *100 500,000 =20%
PARTICULARS
LIABILITIES: SHARE CAPITAL RESERVE LONG TERM LOANS TOTAL ASSETS : FIXED ASSETS SUNDRY DEBTORS BANK BALANCE TOTAL
2009 RS
40,000 12,000 50,000 1,02,000 80,000 10,000 12,000 1,02,000
2010 RS
70,000 10,000 50,000 1,30,000 1,02,000 20,000 8,000 1,30,000
PARTICULARS
2009 RS 80,000
2010 RS 1,02,000
A.TOTAL FIXED ASSETS B.CURRENT ASSETS SUNDRY DEBTORS BANK BALANCE TOTAL CURRENT ASSETS C. TOTAL ASSETS ( A+B) D. LONG TERM LOANS E.SHAREHOLDERS FUND (C-D)
TOTAL (D + E )
REPRESENTED BY : SHARE CAPITAL RESERVE SHAREHOLDER FUND
1,02,000
1,30,000
28,000
27.5
75 (-)16.7 53.85
THE INCOME STATEMENT SHOWS THE NET PROFIT OR NET LOSS DUE TO BUSINESS OPERATIONS. A COMPARATIVE INCOME STATEMENT SHOWS INCREASE OR DECREASE IN ABSOLUTE FIGURES OF THE INCOMES & EXPENSES. IT SHOWS THE OPERATING RESULTS FOR A NUMBER OF ACCOUNTING PERIODS SO THAT THE CHANGES IN ABSOLUTE DATA IN TERMS OF MONEY AND PERCENTAGE FROM ONE PERIOD TO OTHER MAY BE STUDIED AND ANALYZED.
WHILE STUDYING THE CHANGES SHOWN IN INCOME STATEMENT ,THE FOLLOWING FACTORS SHOULD BE CONSIDERED :-
1.
CAUSES OF CHANGE IN SALES :INCREASE / DECREASE IN QUANTITY OF GOODS SOLD CHANGE IN SELLING PRICE OF GOODS CHANGE IN QUANTITY SOLD AS WELL AS CHANGE IN COST OF GOODS SOLD
2. CAUSES CHANGE IN CHANGE IN CHANGE IN OF CHANGE IN COST OF GOODS SOLD :DIRECT EXPENSES DIRECT PURCHASES INVENTORY
3. CAUSES OF CHANGE IN GROSS PROFIT INCREASE / DECREASE IN SALES INCREASE / DECREASE IN DIRECT EXPENES INCREASE / DECREASE IN OPENING & CLOSING STOCK INCREASE / DECREASE IN PURCHASES
PARTICULARS
CURRENT YEAR RS
INCREASE/ DECREASE RS
%AGE
NET SALES (I.E.AFTER RETURNS) LESS : COST OF GOODS SOLD GROSS PROFIT (A)
LESS : OPERATING EXPENSES OFFICE & ADMINISTRATION SELLING & DISTRIBUTION TOTAL OPERATING EXPENSES(B)
OPERATING PROFIT (A-B ) ADD: NON OPERATING PROFITS TOTAL PROFITS LESS: NON OPERATING EXPENSES NET PROFIT BEFORE TAX LESS: TAX
OPENING STOCK ADD: PURCHASES LESS: RETURNS DIRECT EXPENSES LESS: CLOSING STOCK
2.OPERATING EXPENSES INCLUDES RENT OF OFFICE , STATIONARY ,SALARIES TO STAFF , ADVERTISEMENT , SALESMAN , SALARIES & COMMISSION , DELIVERY VAN EXPENSES , BAD DEBTS ETC. 3. NON OPERATING INCOME INCLUDES INSURANCE CLAIM RECEIVED , PROFIT FROM SALE OF ASSETS , GOVERNMENT SUBSIDY , DIVIDEND ON SHARES , INTEREST ON SECURITIES 4.NON OPERATING EXPENSE INCLUDES LOSS ON SALE OF ASSETS , WRITING OFF GOODWILL , DISCOUNT ON SHARES & DEBENTURES WRITTEN OFF
PARTICULARS
SALES COST OF GOODS SOLD INDIRECT EXPENSES PROVISION FOR TAX
2009 RS
4,00,000 2,00,000 75,000 50,000
2010 RS
5,00,000 3,00,000 1,00,000 65,000
PARTICULARS
SALES LESS: COST OF GOODS SOLD GROSS PROFIT LESS:INDIRECT EXPENSES NET PROFIT BEFORE TAX LESS:PROVISION FOR TAX NET PROFIT AFTER TAX
2009 RS
2010 RS