Financial Statement

Analysis

Prepared By:
2ND YEAR
GROUP IV
SECTION C
ROLL NO. 144-154

CONTENTS
TOPIC

NAME

ROLL NO.

SLIDE NO.

DEFINITION,
NATURE AND
CHARACTERISTICS

POOJA AGARWAL

150

2-5

PARTIES
INTERESTED,
MERITS &
DEMERITS

ANGELINA GUPTA

145

6-9

ELEMENTS AND
SCOPE

EKATA AGRAWAL

148

10-13

TYPES

SHREYA CHANDAK

149

14-20

MEANING AND
CONCEP OF
COMPARATIVE
STATEMENT
ANALYSIS

AKANCHA BANSAL

151

21-29

MEANING AND
CONCEPT OF
COMMON-SIZE
STATEMENT

RAKA SARKAR

154

26-30

TREND ANALYSIS

RITIKA

146

31-37

POOJA AGARWAL
ROLL NO. 150

PARTIES/USERS OF FINANCIAL
STATEMENT ANALYSIS AND
ADVANTAGES AND DISADVANTAGES
OF FINANCIAL STATEMENT ANALYSIS

ANGELINA GUPTA
ROLL. NO. 145

ELEMENTS OF FINANCIAL STATEMENT

ANALYSIS
The 10 elements of Financial Statement
Analysis are given below:
Assets
Liabilities
Equity
Investment by owners
Distribution to owners
Revenues
Expenses
Gains
Losses
Comprehensive income
EKATA AGRAWAL
ROLL. NO. 148

 Distributions to ownersare decreases in equity resulting from

transferstoowners.

Investments by ownersand distributions to ownersare

transactions describing any owner contribution to and
withdrawal from the company.
Equityis a residual amount, the owners interest in assets
after subtracting liabilities.

DISTRIBUTIO
N TO
OWNERS

INVESTMEN
T BY
OWNERS

EQUITY

LIABILITIEs

Liabilitiesrepresent obligations to other entities.

Assetsrepresent probable future economic benefits controlled

by the enterprise

Assets

 Comprehensiveincome often does not equal net income.

Lossesrepresent decreases in equity arising from peripheral, or

incidental, transactions of an entity.

Gainsare increases in equity from peripheral, or incidental,

transactions of an entity.

Expensesare gross outflows incurred in generating revenues.

Revenuesare gross inflows resulting from providing goods or

services to customers.

COMPREHEN
SIVE INCOME

LOSSES

GAINS

EXPENSE
S

REVEN
UES

SCOPE OF FINANCIAL STATEMENT ANALYSIS

To evaluate the business in

terms of profit in present and
future.
To evaluate the efficiency of
various parts or department of
the business.
To evaluate the short term and
long term solvency of business
for distributing profit to the trade
creditor and debenture holders.
To evaluate the chances of
growth of business in the future

TYPES OF
FINANCIAL
ANALYSIS
SHREYA
CHANDAK

 Comparative Financial
Statements
Statement of Changes in
Working Capital
Common Size Statements
Trend Analysis
Ratio Analysis

Comparative Financial Statements:

It is an important method of analysis which is used to
make comparison between two financial statements.
Being a technique of horizontal analysis and applicable to
both financial statements, income statement and balance
sheet, it provides meaningful information when compared
to the similar data of prior periods. The comparative
statement of income statements enables to review the
operational performance and to draw conclusions,
whereas the balance sheets, presenting a change in the
financial position during the period, show the effects of
operations on the assets and liabilities. Thus, the absolute
change from one period to another may be determined.

Statement of Changes in
Working Capital:
The objective of this analysis is to
extract the information relating to
working capital. The amount of net
working capital is determined by
deducting the total of current liabilities
from the total of current assets. The
statement of changes in working
capital provides the information in
relation to working capital between
two financial periods.

Common Size Statements:

The figures of financial statements are
converted to percentages. It is
performed by taking the total balance
sheet as 100. The balance sheet items
are expressed as the ratio of each
asset to total assets and the ratio of
each liability to total liabilities. Thus, it
shows the relation of each component
to the whole - Hence, the name
common size.

Trend Analysis:
It is an important tool of horizontal
analysis. Under this analysis, ratios of
different items of the financial
statements for various periods are
calculated and the comparison is
made accordingly. The analysis over
the prior years indicates the trend or
direction. Trend analysis is a useful
tool to know whether the financial
health of a business entity is
improving in the course of time or it is

Ratio Analysis:
The most popular way to analyze the financial
statements is computing ratios. It is an important
and widely used tool of analysis of financial
statements. While developing a meaningful
relationship between the individual items or
group of items of balance sheets and income
statements, it highlights the key performance
indicators, such as, liquidity, solvency and
profitability of a business entity. The tool of ratio
analysis performs in a way that it makes the
process of comprehension of financial statements
simpler, at the same time, it reveals a lot about
the changes in the financial condition of a
business entity.

COMPARATIVE STATEMENT
ANALYSIS
MEANING :A statement which compares
financial data from different periods of
time. The comparative statement lines
up a section of the income statement,
balance sheet or cash flow statement
with its corresponding section from a
previous period. It can also be used to
compare financial data from different
companies over time, thus revealing the
trend in the financials

ADVANTAGES
The advantages of comparative financial statements are
as follows:
These statements are very useful to the financial
analysts because they indicate the direction of the
movement of the financial profitability, position and
performance over the years
This statements can also be used to compare the
position of the firm every month or every quarter Such
comparisons facilitate identification of trouble spots in
a companys working and taking corrective measures.
Comparative statements present a review of the past
activities and their cumulative effect on the financial
position of the concern

DISADVANTAGES
The disadvantages of comparative financial
statements are as follows:
Comparisons loose their purpose and significance
and tend to mislead if the application of accounting
principles over a period of time is not consistent.
Constant changes in price levels render accounting
statements useless for comparisons.
Comparison between two successive accounting
periods, a normal period following an abnormal
period or vice- versa, will also prove to be a
pointless analysis

METHODS
Horizontal analysis -Horizontal analysis is
the comparison of financial information
over a series of reporting periods,
Vertical analysis - Vertical analysis is
the proportional analysis of a financial
statement, where each line item on a
financial statement is listed as a
percentage of another item

TWO TYPES OF COMPARATIVE

STATEMENT

COMPARATIVE INCOME STATEMENT .

COMPARATIVE BALANCE SHEET.

AKANCHA
BANSAL
ROLL. NO.
151

Meaning and Concept of

Common size Statements
Common size financial statements are those in which figures
reported
converted into percentages to some common base such
as Net Sales for Income Statements and total assets for balance sheet.
Each percentage shows the relation of the individual items to its
respective total.
Common size statements may be used for balance sheet as well as
income statements.
It indicates the static relationship since the relative changes are
studied at particular date

RAKA SARKAR
ROLL NO. 154

These statements comprise of the

following:

(a)Absolute amounts of individual items of balance

sheet/profit and loss account for two successive
periods ; and
(b)Percentage to some common base. Usually net
sales is taken as a base to profit and loss account
items and total of liabilities is taken for balance
sheet.

Common size Income Statement

A common size income statement is the income
statements in which sales figure is assumed to
be equal to 100 and all other figures are
expressed as percentage of sales.
Significance
I. To analyze changes individual items of income
statement
II. To determine the trend in different items of
income and expenses
III. To judge the relative financial performance .

Methods to prepare Common Size Income Statement

(1) Enter the items of income statement

in first column.
(2)Enter the absolute amounts of
previous year in second column and
current years in third column.

(3)Enter the percentage relation to net

sales of different years in other two
different columns.

Common Size Balance sheet

It shows the percentage relation of each
assets/liability to total assets/total liability including
capital.
Steps to prepare the Common Size Balance
(1)Enter the items of the balance sheet in the
Sheet
first column.

(2)Enter the absolute amounts of the previous

year and current year in second and third
column.

(3)Enter the percentage relations of the different

relations in different columns which are taken as
100.

TREND
ANALYSIS
PRESENTED BY:
RITIKA
ROLL NO. 146

Meaning

Meaning of 'Trend Analysis' An

aspect of technical analysis that
tries to predict the future
movement of a stock based or sale
based on past data. Trend analysis
is based on the idea that what has
happened in the past gives traders
an idea of what will happen in the
future.
Formula
=Current Years figure * 100 / Base

Procedure For
Calculation Trends
One year is taken as a base year. Generally,
the first or the last year is taken as base year.
The % figures of base year are taken as 100.
Trend percentage 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. Each
years figure is divided by base years figure.

For Example
year

sales

stock

EBT

2008

1881

709

321

2009

2340

781

435

2010

2655

816

458

2011

3021

944

527

2012

3768

1154

672

(in
Lakhs.)

Trend percentages
(Base year 2008=100)(In lakhs)

Year
2008
2009
2010
2011
2012

Sales
Amt.
%
1881 100
2340 124
2655 141
3021 161
3762 200

Stock
Amt. %
709 100
781 110
816 115
944 133
1154 162

EBT
Amt.
%
321 100
435 136
458 143
527 164
672 209

Graphical View of
Trend Analysis
250
200
150

Sales
Stock
EBT

100
50
0
2008

2009

2010

2011

2012

Interpretation
The sales have continuously increased in all
years up to 2012. The percentage in 2012 is
200 as compared to 100 in 2008. The increase
in sales is quite satisfactory.
The figures of stock have also increased from
2008 to 2012. The increase in stocks is more in
2011 and 2012 a compared to earlier years.
Profit before tax substantially increased. In five
years period it has more than doubled. The
comparative increase in profits is much higher
in 2011 and 2012 as compared to 2010.

Ratio analysis
KOMAL CHAUDHARY
ROLL NO. 154

Definition
Quantitative analysis of information contained in a companys
financial statements. Ratio analysis is based on line items in
financial statements like the balance sheet, income statement and
cash flow statement; the ratios of one item or a combination of
items - to another item or combination are then calculated.
Ratio analysis is used to evaluate various aspects of a companys
operating and financial performance such as its efficiency,
liquidity, profitability and solvency. The trend of these ratios over
time is studied to check whether they are improving or
deteriorating.
Ratios are also compared across different companies in the same
sector to see how they stack up, and to get an idea of comparative
valuations. Ratio analysis is a cornerstone of fundamental
analysis.

Ratio analysis
While there are numerous financial ratios,
most investors are familiar with a few key
ratios, particularly the ones that are
relatively easy to calculate. Some of these
ratios include the current ratio, return on
equity, the debt-equity ratio, the dividend
payout ratio and the price/earnings (P/E)
ratio. There are 4 ratios that are illustrated.

Current ratio and quick

ratio
Current ratio:
It is the most widely used of all analytical devices based
on the balance sheet. It establishes a relationship
between total current assets and current liabilities.
Current ratio = current assets
current liabilities
Quick ratio:
The quick ratio measures a companys ability to meet its
short-term obligations with its most liquid assets. For this
reason, the ratio excludes inventories from current
assets, and is calculated as follows:
Quick ratio = (current assets- inventories)
current liabilities

Debt equity ratio and

solvency ratio
Solvency ratio:
It expresses the relationship between total assets and
total liabilities of a business. This ratio is a small variant
of equity ratio and can be calculated as:
Solvency ratio = Total assets
Total liabilities
Debt equity ratio:
It is calculated to measure the relative claims of
outsiders and the owners against the firms assets. This
ratio indicates the relationship between the outsiders
funds and the shareholders funds.
Debt equity ratio = Total liabilities
total shareholders equity

PROBLEM- RATIO
ANALYSIS

TANUSHA RAJ
ROLL NO. 152

Problem 1.From the data calculate :

(i) Gross Profit Ratio
(ii) Net Profit Ratio
(iii)
Return on Total Assets
(iv) Inventory Turnover (v) Working Capital Turnover (vi) Net
worth to Debt
Sales
25,20,000
Other Current Assets
7,60,000
Cost of sale
19,20,000
Fixed Assets
14, 40,000
Net profit
3,60,000
Net worth
15,00,000
Inventory
8,00,000
Debt.
9,00,000
Current Liabilities
6,00,000

Solution:
1. Gross Profit Ratio = (GP/ Sales) *
100 = 6
Sales Cost of Sales Gross Profit
25,20,000 19,20,000 = 6,00,000
2.Net Profit Ratio = (NP / Sales)* 100
=3
3.Inventory Turnover Ratio = Turnover
/ Total Assets) * 100=
1920000/800000= 2.4 times

4. Return on Total Assets = NP/ Total Assets

= (360000/3000000)*100 = 12%
FA+ CA +inventory [14,40,000 + 7,60,000 +
8,00,000] = 30,00,000
5. Net worth to Debt = Net worth/ Debt=
(1500000/900000)* 100 = 1.66 times
6.Working Capital Turnover =
Turnover/Working capital
Working Capital = Current Assets Current
Liabilities
= 8,00,000 + 7,60,000 6,00,000
15,60,000 6,00,000= 9,60,000
Working Capital Turnover Ratio = 19,20,000 =

Problem 2. Calculate the operating Ratio from

the following figures.
Items
($ in Lakhs)
Sales
17874
Sales Returns
4
Other Incomes
53
Cost of Sales
15440
Administration and Selling Exp.
1843
Depreciation
63
Interest Expenses (Non- operating
456

Solution:

Operating Ratio = (Cost of Goods Sold +

Operating Expenses * 100) / Sales

= ((15,440 + 1,843)/ 17,870)*100

= 97%

Illustration
The net Income reported in the Income
Statement for the year was Rs. 110,000 and
depreciation of fixed assets for the year was
Rs. 44000. The balances of the current
assets and current liabilities at the
beginning and end of the year are as
follows. Calculate cash from operating
activities.
RINI GUPTA
ROLL NO. 147

End of the year

amount (rs)

Beginning of the
year amount(rs)

Cash

1,30,000

1,40,000

debtors

2,00,000

inventories

2,90,000

3,00,000

Prepaid expenses

15,000

16,000

Accounts payable

1,02,000

1,16,000

Current items

sss

1,80,000

solution
Details

Amt (rs)

Net Income

1,10,000

Adjustment for non cash and Non-operating items

Add depreciation

44,000

Operating Profit before

1,54,000

working capital changes

Current Assets :
Add : (a) Decrease in inventories
10,000
(b) Decrease in prepaid expenses

1,65,000

1000
Deduct : (a) Increase in Debtors (20,000)
Current liabilities
(b) Decrease in Account payables

34,000

Illustration

The Income statements of a concern are given for the

year ending 31st Dec, 2006 and 2007. Re-arrange the
figures in a comparative form and study the profitability
position of the concern.

PRIYANAKA BAGLA
ROLL NO. 144

Guidelines for Interpretation of

Income Statements
1. The amount of GP should be studied

The increase or decrease in sales should be compared with the

increase or decrease in CGS.

2. The study of operational profits

Operational profits =
GP Office &Admn expenses Selling &Distbn
Expenses

3. The study of Net Profits

The increase or decrease in NP will give an idea about the overall

profitability of the concern.
NP = OP Non-operating exp + Non-operating Income

4. An opinion should be formed about profitability

of the concern whether is good or not.

THANK YOU!!!!!!