ANALYSIS OF FINANCIAL

STATEMENTS
 DEFINITION
• FINANCIAL STATEMENT :-

“AN ORGANISED COLLECTION OF DATA

ACCORDING TO LOGICAL AND
CONSISTENT ACCOUNTING PROCEDURES”
 TYPES
FINANCIAL STATEMENT

INCOME BALANCE STATEMENT STATEMENT

STATEMENT SHEET OF RETAINED OF
(P&L A/C) EARNINGS CHANGES
(P&L IN
APPROPRIATION) FINANCIAL
POSITION
A FLOW FINANCIAL
REPORT POSITION CHANGING WORKING
AS ON DATE CAPITAL (FUND FLOW)

CHANGE IN CASH
POSITION (CASH FLOW)

CHANGES IN
FINANCIAL POSITION)
 FACTORS
* FINANCIAL STATEMENTS ARE
INDICATORS OF TWO SIGNIFICANT
FACTORS :-
– PROFITABILITY.

– FINANCIAL SOUNDNESS.
 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”.
 ANALYSIS
AND
INTERPRETATION
• ANALYSIS :-
– METHODICAL CLASSIFICATION :- PUT IN A SIMPLIFIED FORM.
• INTERPRETATION :-
– EXPLAIN MEANING & SIGNIFICANCE OF THE ANALYSED DATA.

• INTERPRETATION REQUIRES ANALYSIS.

ANALYSIS WITHOUT INTERPRETATION
IS MEANINGLESS.
 TYPES
ANALYSIS

MATERIAL MODUS OPRANDI

USED

HORIZONTAL * VERTICAL *
No OF YEARS VARIOUS
(DYNAMIC) ITEMS
IN THE
EXTERNAL INTERNAL FIN STATS
BY BY (STATIC)
OUTSIDERS EXECUTIVES/EMPLOYEES
BALANCE SHEETS BOOKS OF ACCOUNTS

* CAN BE DONE SIMULTANEOUSLY

 STEPS IN ANALYSIS

• METHODICAL CLASSIFICATION
(LIQUID ASSETS, CURRENT
ASSETS, CURRENT LIABILITIES,
PROVISIONS & NET WORKING
CAPITALS).
 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.
 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 ; PERCENTAGE

INCREASE.
TECHNIQUES OF FINANCIAL
ANALYSIS

• COMMON SIZE FINANCIAL

STATEMENTS :-

“FIGURES ARE CONVERTED TO

PERCENTAGES TO SOME COMMON
BASE ”.
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”.
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”.
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”.
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”.
• 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.

• 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.
• 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).
• 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.
• 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.
• 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.
 RATIO ANALYSIS

• DEFINITION :-

“ ONE OF THE TECHNIQUES OF

FINANCIAL ANALYSIS WHERE ARE
USED AS A YARDSTICK FOR
EVALUATING THE FIANANCIAL
CONDITION AND PERFORMANCE
OF A FIRM”
 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
 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).
 RATIO ANALYSIS
• CLASSIFICATION OF ACCTG
RATIOS (Cont’d) :-
– FUNCTIONAL (TO STUDY THE PFOFITABILITY
AND SOLVENCY).
– PROFITABILITY RATIO
(ROLE-RETURN ON CAPITAL EMPLOYED).
OP PROFIT X 100
CAPITAL EMPLOYED
– COVERAGE RATIO.
– TURNOVER RATIO.
– FINANCIAL RATIOS.

LIABILITY RATIO STABILITY RATIO

 RATIO ANALYSIS
• PROFITABILITY :-

“IS AN INDICATION OF THE

EFFICIENCY WITH WHICH THE OP OF
THE BUSINESS IS CARRIED ON”