By kiran bala sahoo Mfc dept 2010-11.

A financial statement is a collection of data organized as per logical & consistent accounting procedure. The end product of business transactions are financial statement . A financial statements are the basis of decision making by management. Its purpose is to convey an understanding of some financial aspects of business firm. Financial statement generally refers to the two statements. Balance sheet and profit & loss A/c.

Financial

statement analysis is the process of identification of the financial strength and weakness of firm by properly establishing relationship between the items of balance sheet and profit & loss A/c.

Metcalf & Titcard Financial statement analysis is the process of evaluating relationship between component part of a financial statements to obtain better understanding of firms financial position & performance. Myers- Financial statement analysis is largely is study of relationship among the various financial factors in a business as disclosed by a single setup, statements and study of trend of these factors as shown in a series of statements. Purpose of financial statement: Weathering the profitability. Indicating the trend of achievement. Accessing the growth potential. Comparative position in relation to other firm. Access overall financial strength. Access solvency of firm.

 On

the basis of material used External analysis This analysis done by outsiders who do not have access to the internal a/c of business firm. Internal analysis- This analysis done by persons who have access to internal A/c of business firm.

On the basis of modus operandi. Horizontal analysis- It refer to comparison of financial data of a company horizontally over a number of columns for several years. Vertical Analysis- Vertical analysis refer to the study of relationship of various item in the financial statement of one accounting period be selecting a base figure from the same year statement. Parties Interested- Investors, management, trade creditors, lenders, suppliers, stock exchange, tax authority, researcher, employees, Govt., and their agencies.

 COMPARATIVE COMMON TREND RATIO

STATEMENT.

SIZE STATEMENT.

ANALYSIS.

ANALYSIS FLOW ANALYSIS.

FUNDS CASH

FLOW ANALYSIS.

Comparative financial statements are the statement of financial position at different periods. Comparison are made between financial statement of a business at different periods Current years statement are compared with previous years statements. Practically, two financial statement i.e. balance sheet & Income statement are prepared in comparative form for analysis purposes. It enables identification of weakness & strength & applying corrective measures.

 Absolute

figures (rupee amount) are recorded of both the year. Changes in absolute fig. i.e. increase or decrease in absolute fig. are calculated. Absolute data in terms percentage are calculated Increase or decrease in terms of percentage are calculated. Interpretation is done.

 It

is the study of the trend of the same item of the group, and of the computed item in two or more b/s of the same business on different periods.

The comparative balance sheet shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another. It has two columns for the data of original balance sheets. A third column is used to show change in figures. The fourth column may be added for giving percentages of change. While interpreting comparative balance sheet the interpreter is expected to study the following aspects: - Current financial position and liquidity position - Long term financial position - Profitability of the concern For studying current financial position or liquidity position of a concern one should examine the working capital in both the years. Working capital is the excess of current assets over current liabilities. For studying the long term financial position of the concern, one should examine the changes un fixed assets, long term liabilities and capital The next aspect to be studied in a comparative balance sheet is the profitability of the concern. The study of change in profit will help the interpreter to observe whether the profitability has improved or not. After studying various assets and liabilities, an opinion should be formed about the financial position of the concern.

LIABILITIES
Equity share capital. Reserve & surplus Debentures Long term loan on mortgage Bills payables Sundry creditors Other current liabilities

2006 Rs.
5,00,000 3,30,000 2,00,000 1,00,000 50,000 100,000 5,000

2007 Rs.
7,00,000 2,22,000 3,00,000 1,50,000 45,000 1,20,000 10,000

ASSETS
Land and Building Plant & Machinery Furniture Other fixed asset Cash in hand Bills receivables Sundry debtors Stock Prepaid expenses TOTAL

2006 Rs.
2,70,000 4,00,000 20,000 25,000 20,000 1,00,000 2,00,000 2,50,000 nil 12,85,000

2007 Rs.
1,70,000 6,00,000 25,000 30,000 40,000 80,000 2,50,000 3,50,000 2000 15,47000

TOTAL

1,28,5000

15,47,000

Year ending 31st Dec. Assets I. Current Assets Cash in hand Bill Receivables Sundry Debtors Stock Prepaid expenses Total current assets II. Fixed Assets Land Building Plant and Machinery Furniture Other Fixed Assets Total Fixed Assets Total Assets Liabilities & Capital I. Current Liabilities Bill Payables Sundry creditors Other current liabilities Total Current Liabilities II. Debentures Long term loan on mortgage Total long term liabilities 20,000 100,000 200,000 250,000 570,000 270,000 400,000 20,000 25,000 715,000 1285000 2006 40,000 80,000 250,000 350,000 2,000 722,000 170,000 600,000 25,000 30,000 825,000 1547000 2007

Increase / Decrease Amount Rs. +20,000 -20,000 +50,000 +100,000 +2,000 +152,000 -100,000 +200,000 +5,000 +5,000 +110,000 +262,000

Increase / Decrease Percentage +100 -20 +25 +40 +100 26.67 -37.03 +50.00 +25.00 +20.00 +13.49 20.39

50,000 100,000 5,000 155,000 200,000 100,000 300,000

45,000 120,000 10,000 175,000 300,000 150,000 450,000

-5,000 +20,000 +5,000 +20,000 +100,000 +50,000 +150,000

-10 +20 +100 +12.9 +50 +50 +50

Total Liabilities
III. Equity share capital Reserve & surplus Total owned equities Total capital & Liabilities

455000
500,000 330,000 8,30,000 1285000

625000
7,00,000 2,22,000 9,22,000 1547000

+170,000
+200,000 -108,000 +82,000 +262,000

+37.36
+40.00 -32.73 +50 +20.39

The comparative balance sheet of the company reveals that during 2007 there has an increase in fixed asset of 1,10,000 i.e.,13.4%. Long term liabilities to outsider have relatively increased by 1,50,000 &equity share capital has increased by 2,00,000.This fact indicates that the policy of the company is to purchase fixed assets from the long term of the finance. The current has increased by 1,52,000 i.e.,26.67% & cash has increased by Rs20,000.The current liabilities have increased only by Rs20,000 i.e., 12.9%.The further confirms that the company has used long term finance even for the current asset resulting in the improvement in the liquidity position of the company. Reserve & surpluses have decreased from 3,30,000 to 2,22,000 i.e., 32,73%, which shows that the company has utilized reserves & surpluses for the payment of cash or in the way of bonus. The overall financial position of the company is satisfactory.

The income statement provides the results of the operations of a business. This statement traditionally is known as trading and profit and loss A/c. Important components of income statement are net sales, cost of goods sold, selling expenses and office expenses etc. The figures of the above components are matched with their corresponding figures of previous years individually and changes are noted. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in money value and percentage can be determined to analyse the profitability of the business. Like comparative balance sheet, income statement also has four columns. The first two columns re shown figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amount and percentages respectively.

 Analysis

& Interpretation of income statement will involve the following : The change in sales should be compared with the change in cost of goods sold. To study the operating profits. The change in net profit is calculated that will give an idea about the overall profitability of the concern.

DETAILS

2006 2007 (Amounts)Rs (Amount)Rs. . 7,85,000 450,000 9,00,000 5,00,000

Net sales Cost of goods sold Operating Expenses: General & Administrative expenses Selling expenses Non operating expenses: Interest paid Income tax

70,000 80,000 25,000 70,000

72000 90000 30000 80000

DETAILS

2006 (Amount) Rs.

2007(Amount) Rs.

INCREASE/ DECREASE (RS.)

INCREASE/ DECREASE (percentage)

Net sales Less: cost of goods sold Gross profit Operating expenses: General & Administrative Selling expenses Total op. expenses operating profit Less :other deduction Interest received Net profit before tax: Less: income tax NET profit after tax:

7,85,000 4,50,000 335,000

9,00,000 500,000 400,000

+1,15,000 +50,000 +65,000

+14.65 +11.11 +19.40

70,000 80,000 150,000 185,000

25000 160,000 70,000 90,000

72,000 90,000 162,000 238,000

30,000 208,000 80,000 128,000

+2000 +10,000 +12,000 +53,000

+5000 +48,000 +100,000 +38,000

+2.8 +12.5 +8.0 +28.65

+20 +30.0 +14.28 +42.22

Net sales increased = 14.65% The cost of goods sold increased by 11% As a result G/P increased by 19.4% Operating expenses increased by 8% Therefore increase in G/P is sufficient to cover the operating expenses. Net profit after tax increased = Rs.38,000 i.e. 42.22% CONCLUSION: There is sufficient progress in the performance of the company & the profitability of the company is good.

 The

common size statements (balance sheet and income statement) are shown in analytical percentages. The figures of these statements are shown as percentages of total assets, total liabilities and total sales respectively. The total assets are taken as 100 and different assets are expressed as a percentage of the total. Similarly various liabilities are taken as a part of total liabilities.

Common size balance sheet A statement where balance sheet items are expressed in the ratio of each asset to total assets and the ratio of each liability is expressed in the ratio of total liabilities is called common size balance sheet. Thus the common size statement may be prepared in the following way. The total assets or liabilities are taken as 100 The individual assets are expressed as a percentage of total assets i.e., 100 and different liabilities are calculated in relation to total liabilities.

Liabilities

Anup pvt ltd Rs 1,20,000 1,40,000 24,000 1,10,000 7,000 12,000 15,000 10,000 4,38,000

Bansal pvt ltd Rs 1,50,000 4,10,000 28,000 1,20,000 1,000 3,000 6,000 90,000 8,08,000

Preference share capital Equity share capital Reserves & surpluses Long term loans Bills payable Sr. Creditor Outstanding expenses Proposed dividend Total liabilities Assets Land & building Plant & machinery Temporary investment Investment Sr. Debtor Prepaid expenses Cash & bank balance Total assets

80,000 3,34,000 5,000 6,000 4,000 1,000 8,000 4,38,000

1,23,000 6,00,000 40,000 20,000 13,000 2,000 10,000 8,08,000

Anoop Pvt. Ltd. Amount Rs. Fixed Assets Land and Building Plant and machinery Total Fixed Assets Current Asset Temporary investment Investment Sundry Debtors Prepaid Expenses Cash and Bank Total current assets Total Assets Share Capital and Reserves Preference share capital Equity share capital Reserve and surpluses Total Capital and Reserves 80,000 334,000 414,000 5,000 6,000 4,000 1,000 8,000 24,000 438,000 120,000 140,000 24,000 284,000 % 18.26 76.26 94.52 1.14 1.37 0.91 0.23 1.83 5.48 100.00 27.39 31.96 5.48 64.83

Bansal Pvt. Ltd. Amount Rs. 123,000 600,000 723,000 40,000 20,000 13,000 2,000 10,000 85,000 808,000 150,000 410,000 28,000 588,000 % 15.22 74.62 89.48 4.95 2.48 1.61 0.25 1.25 10.54 100.00 19.80 50.74 3.47 74.01

Loan term loans

Current Liabilities Bill Payables Sundry creditor Outstanding expenses Proposed Dividend

110,000
7,000 12,000 15,000 10,000 39,000

25.11
1.60 2.74 3.44 2.28 10.06 100.00

120,000
1,000 3,000 6,000 90,000 109,000 808,000

14.85
0.12 0.37 0.74 11.15 12.38 100.00

Total Liabilities

438,000

An analysis of pattern of financing of both the companies shows that Bansal ltd is more traditionally financed than Anoop ltd. Bansal ltd has depended more on its own fund out of total investment 74.01% of the funds are proprietory funds and outsiders funds account only for 25.9%.in anup ltd proprietors funds are 64.83%, while the share of outsiders funds is 34.17% which shows that this company has depended more on outsiders fund. Both the companies are suffering from shortage of working capital. The percentage of CL is more than the percentage of CA in both the comp. Both the comp. invested in Fixed assets have been from Working capital.

 In

anoop ltd Fixed asset accounts for 94.52% of total asset In bansal ltd fixed assets accounts for 89.48% of total asset CONCLUSION- thus,both the companies face working capital problem and immediate steps should be taken to issue more capital or raised long term loans to improve working capital position.

Common size income statement The item in the income statements can be shown as a percentage of sales to show how the relation of each item to sales. TREND PERCENTAGE ANALYSIS (TPA) The trend analysis is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year. The analyst is able to see the trend of figures, whether moving upward or downward. In brief, the process for calculating trends is as: -One year is taken as a base year which is generally is the first year or last year. -Trend percentages are calculated in relation to base year.

2006 Rs. SALES: Miscellaneous income 5,00,000 20,000

2007 Rs. 700,000 15,000

520,000

715,000

Expenses cost of goods sold Office expenses Interest Selling expenses

330,000 20,000 25,000 30,000

510,000 30,000 30,000 40,000

405,000 NET PROFIT 115,000

610,000 105,000

2006
Amount Rs.
Sales Less: cost of sales Gross profit Operating expenses : Office expenses Selling expenses Total operating expenses Operating profit Miscellaneous income Total income Less: non operating expenses Net profit 500000 330000 170000 20000 30000 50000 120000 20000 140000 25000 115000

2007
%
100.00 66.00 34.00 4.00 6.00 10.00 24.00 4.00 28.00 5.00 23.00

Amount Rs.
700000 510000 190000 30000 40000 70000 120000 15000 135000 30000 105000

%
100.00 72.86 24.14 4.29 5.71 10.00 17.14 2.14 19.28 4.28 15.00

The sales & Gross profit have increased in absolute fig. in 2007 as compared to 2006. But the percentage of gross profit to sales has gone down in 2007.
The increase in cost of sales as a percentage of sales has brought the profitability from 34% to 27.14%. Operating expenses have remained the same in both the years.

Net profit has decreased both in absolute figures and as a percentage in 2007 as compared to 2006.

2004

2005

2006

2007

Net sales Less: cost of goods sold Gross profit: Less: Expenses Net profit:

200,000 120,000 80,000 20,000 60,000

190,000 117,800 72000 19,400 52,800

249,000 139,200 100,800 22,000 78,800

260,000 145,600 114,400 24,000 90,400

2004

2005

2006

2007

Net sales LESS: Cost of goods sold Gross profit: Less: Expenses Net profit:

100 100 100 100 100

95.0 98.2 90.3 97.0 88.0

124.5 116.0 126.0 110.0 131.3

130.0 121.3 143.0 120.0 150.6

On the whole, 2005 was a bad year but the recovery was made during 2006.In this year there is increase in sales as well as profit. The figure of 2005 when compared with 2004 reveal that the sales have down by 5%.However, the cost of goods sold and the in net profit expenses have decreased by1.8% and 3% respectively.This has resulted in decrease in net profit by 12%. The position was recovered in 2006 and not only the decline but also there is positive growth in 2006 and 2007.Moreover, the increase in profit by 31.3%(2006) and 50.6%(2007) is much more than the increase in sales by 29% and 30% respectively.This shows major portion of cost of goods sold and expenses is of fixed nature.

Ratio- A simple arithmetical relationship of one number to another. Wixon, Kell and Bedford- Ratio is an expression of the quantitative relationship between two numbers. Kohler- A ratio is a relation of the amount A to another amount B , expressed as the ratio a-b; a:b or simple fraction integer decimal fraction or percentage. Ratio are the pointer of financial strength , soundness, position or weakness of an enterprise. Ratio-Analysis- It is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratio for helping in making certain decision.

Selection of relevant data from the financial statement depending upon the objective of the analysis. Calculation of the appropriate ratio of the data. Comparison of calculated ratio. Interpretation of ratios. Interpretation of ratio involves following Single absolute ratios. Group of ratios. Historical comparison. Projected ratio. Inter-firm comparison.

a)

b)

c)

Traditional classification. Functional classification. Significant ratio. Traditional classification Balance sheet ratios- Current ratio, Liquid ratio, Absolute liquid ratio, Debt equity ratio, proprietary ratio, Capital gearing ratio, Asset proprietary ratio, capital inventory to working capital ratio. Ratio of current asset to fixed asset. P & L A/c ratio- Gross profit ratio, operating ratio, Operating profit ratio, Net profit ratio, Expenses ratio, Interest coverage ratio. Composite/Mixed/Intra Statement ratio- Stock turn over ratio, Debtor turnover ratio, Fixed Asset Turnover ratio, Return on equity. Return on share holder fund, Return on capital employed, capital turnover ratio, working capital turnover ratio. Return on total resources, Total asset turnover ratio.

Functional
a) b) c) d)

Classification.

Liquidity ratio. Leverage ratio. Activity Ratio. Profitability Ratio.

Significance
a)

Ratio.

b)

Primary Ratio Secondary Ratio.