FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

27

Notes

FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION You have already learnt about the preparation of financial statements i.e. Balance Sheet and Trading and Profit and Loss Account in the module titled ‘Financial Statements of Profit and Not for Profit Organisations’. After preparation of the financial statements, one may be interested in analysing the financial statements with the help of different tools such as comparative statement, common size statement, ratio analysis, trend analysis, fund flow analysis, cash flow analysis, etc. In this process a meaningful relationship is established between two or more accounting figures for comparision. In this lesson you will learn about analysing the financial statements by using comparative statement, common size statement and trend analysis.

OBJECTIVES After studying this lesson, you will be able to : 

explain the meaning, need and purpose of financial statement analysis;



identify the parties interested in analysis of financial statements;



explain the various techniques and tools of analysis of financial statements.

27.1 FINANCIAL STATEMENTS ANALYSIS (MEANING, PURPOSE AND PARTIES INTERESTED) We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required.

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements : (i) Profit and loss Account or Income Statement Notes

(ii) Balance Sheet or Position Statement These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weaknesses of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes : 

Measuring the profitability The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend.



Indicating the trend of Achievements Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged.



Assessing the growth potential of the business The trend and other analysis of the business provides sufficient information indicating the growth potential of the business.



Comparative position in relation to other firms The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilising capital, etc. 

Assess overall financial strength

Notes

The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not if yes, how much? And also to assess how much funds have been received from external sources. 

Assess solvency of the firm The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not.

PARTIES INTERESTED Analysis of financial statements has become very significant due to widespread interest of various parties in the financial results of a business unit. The various parties interested in the analysis of financial statements are : (i)

Investors : Shareholders or proprietors of the business are interested in the well being of the business. They like to know the earning capacity of the business and its prospects of future growth.

(ii)

Management : The management is interested in the financial position and performance of the enterprise as a whole and of its various divisions. It helps them in preparing budgets and assessing the performance of various departmental heads.

(iii) Trade unions : They are interested in financial statements for negotiating the wages or salaries or bonus agreement with the management. (iv) Lenders : Lenders to the business like debenture holders, suppliers of loans and lease are interested to know short term as well as long term solvency position of the entity. (v)

Suppliers and trade creditors : The suppliers and other creditors are interested to know about the solvency of the business i.e. the ability of the company to meet the debts as and when they fall due.

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

(vi) Tax authorities : Tax authorities are interested in financial statements for determining the tax liability. (vii) Researchers : They are interested in financial statements in undertaking research work in business affairs and practices. Notes

(viii) Employees : They are interested to know the growth of profit. As a result of which they can demand better remuneration and congenial working environment. (ix) Government and their agencies : Government and their agencies need financial information to regulate the activities of the enterprises/ industries and determine taxation policy. They suggest measures to formulate policies and and regulations. (x)

Stock exchange : The stock exchange members take interest in financial statements for the purpose of analysis because they provide useful financial information about companies.

Thus, we find that different parties have interest in financial statements for different reasons.

INTEXT QUESTIONS 27.1 I. Fill in the blanks with suitable word/words : (i) Financial statements are ...................... and ...................... (ii) The term financial analysis include both ...................... and ...................... (iii) In order to ascertain the financial status of the business every enterprise prepares a ...................... statement. (iv) Financial statements are mainly prepared for ...................... purposes. II. Two columns are given below. Column I lists the parties interested in analysis and column II states the subject of their interest. Match the two columns. Column I

Column II

(i) Management

(a) about solvency of the business

(ii) Employees

(b) Profitability

(iii) Shareholders

(c) Performance of the enterprise as a whole

(iv) Suppliers and creditors (d) Better remunerations

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

27.2 TECHNIQUES AND TOOLS OF FINANCIAL STATEMENT ANALYSIS Financial statements give complete information about assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. They are not readily understandable to interested parties like creditors, shareholders, investors etc. Thus, various techniques are employed for analysing and interpreting the financial statements. Techniques of analysis of financial statements are mainly classified into three categories :

Notes

(i) Cross-sectional analysis It is also known as inter firm comparison. This analysis helps in analysing financial characteristics of an enterprise with financial characteristics of another similar enterprise in that accounting period. For example, if company A has earned 15% profit on capital invested. This does not say whether it is adequate or not. If we analyse further and find that a similar company has earned 16% during the same period, then only we can make a conclusion that company B is better. Thus, it turns into a meaningful analysis. (ii) Time series analysis It is also called as intra-firm comparison. According to this method, the relationship between different items of financial statement is established, comparisons are made and results obtained. The basis of comparison may be : – Comparison of the financial statements of different years of the same business unit. – Comparison of financial statement of a particular year of different business units. (iii) Cross-sectional cum time series analysis This analysis is intended to compare the financial characteristics of two or more enterprises for a defined accounting period. It is possible to extend such a comparison over the year. This approach is most effective in analysing of financial statements. The analysis and interpretation of financial statements is used to determine the financial positon. A number of tools or methods or devices are used to study the relationship between financial statements. However, the following are the important tools which are commonly used for analysing and interpreting financial statements :

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Notes



Comparative financial statements



Common size statements



Trend analysis



Ratio analysis



Funds flow analysis



Cash flow analysis



Comparative financial statements

In brief, comparative study of financial statements is the comparison of the financial statements of the business with the previous year’s financial statements. It enables identification of weakpoints and applying corrective measures. Practically, two financial statements (balance sheet and income statement) are prepared in comparative form for analysis purposes. 1. Comparative Balance Sheet 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. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show change (increase/decrease) in figures. The fourth column may be added for giving percentages of increase or decrease. While interpreting comparative Balance sheet the interpreter is expected to study the following aspects : (i) Current financial position and Liquidity position (ii) Long-term financial position (iii) Profitability of the concern (i)

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.

(ii) For studying the long-term financial position of the concern, one should examine the changes in fixed assets, long-term liabilities and capital. (iii) The next aspect to be studied in a comparative balance sheet is the profitability of the concern. The study of increase or decrease 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.

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Illustration 1 The following is the Balance Sheets of MS Gupta for the years 2006 and 2007. Prepare the comparative Balance Sheet and study the financial position of the concern. Notes Balance Sheet as on 31st December Liabilities

2006 Rs

2007 Rs

Assets

2006 Rs

2007 Rs

Equity share capital

500,000 700,000

Land and Building

270,000

1,70,000

Reserves and surplus

330,000 222,000

Plant and Machinery 400,000

600,000

Debentures

200,000 300,000

Furniture

20,000

25,000

Long term loan on

100,000 150,000

Other fixed assets

25,000

30,000

Cash in hand

20,000

40,000

Bill Receivables

100,000

80,000

Sundry debtors

200,000

250,000

Stock

250,000

350,000



2000

1285000

1547000

mortgage Bill Payables Sundry creditors Other current liabilities

50,000

45,000

100,000 120,000 5000

10,000

Prepaid Expenses 1285000 1547000

Solution : Comparative Balance Sheet of MS Gupta for the year ending December 2006 and 2007 Year ending 31st Dec

Assets I.

Increase/ Decrease

Increase Decrease (Percentage)

2006

2007

(Amount) (Rs)

20,000

40,000

+20,000

+100

Bill Receivables

100,000

80,000

–20,000

–20

Sundry Debtors

200,000

250,000

+50,000

+25

Current Assets Cash in hand

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Stock

250,000

350,000

+100000

+40



2000

+2000

+100

570,000

722,000

+152,000

26.67

Land and Building

270,000

170,000

–100000

–37.03

Plant and Machinery

400,000

600,000

+200,000

+50.00

Furniture

20,000

25,000

+5000

+25.00

Other fixed assets

25000

30,000

+5000

+20.00

Total Fixed Assets

715000

825000

+110000

+13.49

1285000

1547000

+262000

20.39

50,000

45,000

–5,000

–10

100,000

120,000

+20,000

+20

Other current liabilities

5,000

10,000

+5,000

+100

Total current liabilities

155,000

175,000

+20,000

+12.9

Debentures

200,000

300,000

+100,000

+50

Long term loan on mortgage

100,000

150,000

+50000

+50

Total long term liabilities

300,000

450,000

+150,000

+50

Total liabilities

455000

625000

+170,000

+37.36

Equity share capital

500,000

7,00,000

+200,000

+40.00

Reserve & surplus

330,000

2,22,000

–108,000

–32.73

Total owned equities

8,30,000

9,22,000

+82,000

+50

Total capital & liabilities

1285000

1547000

+262,000

+20.39

Prepaid expenses Total current assets

Notes

II.

Fixed Assets

Total Assets Liabilities & Capital : I.

Current liabilities Bill Payables Sundry creditors

II.

III.

Interpretation (i) The comparative balance sheet of the company reveals that during 2007 there has been an increase in fixed assets of 110,000 i.e. 13.49%. Long

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

term liabilities to outsiders have relatively increased by Rs 150,000 and equity share capital has increased by Rs 200000. This fact indicates that the policy of the company is to purchase fixed assets from the longterm sources of finance. (ii) The current assets have increased by Rs 152000 i.e. 26.67% and cash has increased by Rs 20,000. The current liabilities have increased only by Rs 20000 i.e. 12.9%. This further confirms that the company has used long-term finances even for the current assets resulting into an improvement in the liquidity position of the company. (iii)

Reserves and surplus have decreased from Rs 330,000 to Rs 222,000 i.e. 32.73% which shows that the company has utilized reserves and surplus for the payment of dividends to shareholders either in cash or by way of bonus.

(iv)

The overall financial position of the company is satisfactory.

Notes

Comparative Income statement 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, 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 are 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. The analysis and interpretation of income statement will involve the following : –

The increase or decrease in sales should be compared with the increase or decrease in cost of goods sold.



To study the operating profits



The increase or decrease in net profit is calculated that will give an idea about the overall profitability of the concern.

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Illustration 2 The income statements of a concern are given for the year ending 31st December 2006 and 2007. Rearrange the figures in a comparative form and study the profitability of the concern Notes Details

2006 Amount (Rs)

2007 Amount (Rs)

Net Sales

785,000

900,000

Cost of goods sold

450,000

500,000

General and administrative expenses

70,000

72,000

Selling expenses

80,000

90,000

Interest paid

25,000

30,000

Income tax

70,000

80,000

Operating expenses :

Non-operating expenses :

Solution : Comparative income statement for the year ended 31st Dec 2006 and 2007 2006 Amount (Rs)

2007 Amount (Rs)

Increase (+) Decrease (–) (Rs)

Net sales

785,000

900,000

+115000

+14.65

Less cost of goods sold

450,000

500,000

+50000

+11.11

Gross profit

335,000

400,000

+65000

+19.40

General & Administrative

70,000

72,000

+2000

+2.8

Selling expenses

80,000

90,000

+10000

+12.5

Total operating expenses

150,000

162,000

+12000

+8.0

Operating profit

185,000

238,000

+53000

+28.65

25,000

30,000

+5000

+20

160,000

208,000

+48000

+30.0

Less income tax

70,000

80,000

+10000

+14.28

Net profit after tax

90,000

128,000

+38000

+42.22

Detaiils

Increase (+) Decrease (–) (Percentage)

Operating expenses :

Less : other deductions Interest received Net profit before tax

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

Interpretation The comparative income statement given above shows that there has been an increase in net sales of 14.65%. The cost of goods sold has increased by 11%. This has resulted in increase of gross profit by 19.4%. Operating expenses have increased by 8%. The increase in gross profit is sufficient to cover the operating expenses. There is also an increase in net profit after tax of Rs 38000 i.e. 42.22%.

Notes

It is concluded from the above analysis that there is sufficient progress in the performance of the company and the overall profitability of the company is good.

INTEXT QUESTIONS 27.2 Fill in the blanks with appropriate word/words : (i)

Time series analysis is a technique of ...................

(ii) Comparative statement is a ................... for financial statement analysis. (iii) ................... is the comparison of the financial statement of business with the previous years financial statement. (iv) Comparative ................... shows the different assets and liabilities of the firm on different dates to make comparison of balance from one date to another. (v) ................... income statement gives an idea of the progress of a business over a period of time. 27.3 COMMON SIZE STATEMENTS AND TREND ANALYSIS 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. Take the example of Balance Sheet. 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.

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Thus the common size statement may be prepared in the following way.

Notes



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.

For example, if total assets are Rs10 lakhs and value of inventory is Rs 100,000, then inventory will be 10% of total assets

FG 10000 × 100IJ H 100000 K

Illustration 3 The balance sheet of Mr Anoop Private (Pvt) Limited (Ltd) and Bansal Private Limited are given below : Balance Sheet as on 31st December, 2007 Liabilities

Anoop Pvt Ltd Rs

Bansal Pvt Ltd Rs

Preference share capital

120,000

150,000

Equity share capital

140,000

410,000

24,000

28,000

110,000

120,000

7000

1000

Sundry creditors

12000

3000

Outstanding Expenses

15000

6000

Proposed Dividend

10000

90000

438,000

808,000

80,000

123,000

334,000

600,000

Temporary Investments

5000

40,000

Investment

6000

20,000

Sundry Debtors

4000

13,000

Prepaid expenses

1000

2000

Cash and Bank balance

8000

10,000

438,000

808,000

Reserves and surpluses Long-term loans Bill Payables

Land and Building Plant and Machinery

Compare the financial position of two companies with the help of common size balance sheet. 12

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Solution : Common size Balance Sheet as on 31st December 2007 Anoop Pvt Ltd Amount Rs

%

Bansal Pvt Ltd Amount Rs

%

Notes

Fixed assets Land and Building

80,000

18.26

123,000

15.22

Plant and machinery

334,000

76.26

600,000

74.62

Total Fixed Assets

414,000

94.52

723,000

89.48

Temporary investment

5000

1.14

40,000

4.95

Investment

6000

1.37

20,000

2.48

Sundry Debtors

4000

0.91

13,000

1.61

Prepaid Expenses

1000

0.23

2,000

0.25

Cash and Bank

8000

1.83

10,000

1.25

24000

5.48

85,000

10.54

438,000

100.00

808,000

100.00

Preference share capital

120,000

27.39

150,000

19.80

Equity share capital

140,000

31.96

410,000

50.74

24,000

5.48

28,000

3.47

Total Capital and Reserves

284,000

64.83

588,000

74.01

Long term loans

110,000

25.11

120,000

14.85

7,000

1.60

1,000

0.12

Sundry creditor

12,000

2.74

3,000

0.37

Outstanding expenses

15,000

3.44

6,000

0.74

Proposed Dividend

10,000

2.28

90,000

11.15

39,000

10.06

109,000

12.38

438,000

100.00

808,000

100.00

Current asset

Total current assets Total Assets Share Capital and Reserves

Reserve and surpluses

Current liabilities Bill Payables

Total liabilities

Interpretation (i) An analysis of pattern of financing of both the companies shows that Bansal Ltd is more traditionally financed as compared to Anoop Ltd. The former company has depended more on its own funds as is shown

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

by balance sheet. Out of total investment, 74.01% of the funds are proprietory funds and outsiders funds account only for 25.9%. In Anoop Ltd proprietors’ fund are 64.83% while the share of outsiders funds is 34.17% which shows that this company has depended more upon outsiders funds. Notes (ii) Both the companies are suffering from shortage of working capital. The percentage of current liabilities is more than the percentage of current assets in both the companies. (iii) A close look at the balance sheet shows that investments in fixed assets have been from working capital in both the companies. In Anoop Ltd. fixed assets account for 94.52% of total assets while in Bansal Ltd fixed assets account for 89.48%. (iv) Thus, both the companies face working capital problem and immediate steps should be taken to issue more capital or raise long term loans to improve working capital position. Common size income statement The items in income statement can be shown as percentages of sales to show the relations of each item to sales. Illustration 4 Following are the income statements of a company for the year ending 31st December 2006 and 2007 2006 Rs

2007 Rs

500,000

700,000

20,000

15,000

520,000

715,000

330,000

510,000

Office expenses

20,000

30,000

Interest

25000

30,000

Selling expenses

30,000

40,000

405,000

610,000

115,000

105,000

520,000

715,000

Sales Miscellaneous income

Expenses Cost of sales

Net profit

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

Solution : Common size Income Statement for the year ending 31st December 2006 and 2007. 2006

2007

Notes Amount Rs

%

Amount Rs

%

Sales

500,000

100.00

700,000

100.00

Less : Cost of sales

330,000

66.00

510,000

72.86

Gross profit

170,000

34.00

190,000

27.14

Office expenses

20,000

4.00

30,000

4.29

Selling expenses

30,000

6.00

40,000

5.71

Total operating expenses

50,000

10.00

70,000

10.00

120,000

24.00

120,000

17.14

20,000

4.00

15,000

2.14

140,000

28.00

135,000

19.28

25,000

5.00

30,000

4.28

115,000

23.00

105,000

15.00

Operating expenses

Operating profit Miscellaneous income Total income Less : Non operating expenses Net profit

Interpretation –

The sale and gross profit have increased in absolute figures 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 have decreased both in absolute figures and as a percentage in 2007 as compared to 2006.

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 taken as 100. Generally the first year is taken as a base year. The analyst is able to see the trend of figures, whether moving upward or downward.

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Financial Statements Analysis - An Introduction

Analysis of Financial Statements

In brief, the procedure for calculating trends is as :

Notes



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

Illustration 5 From the following data relating to Ms Rekha Gupta for the year 2004 to 2007, calculate trend percentages (taking 2004 as base year) 2004

2005

2006

2007

Net sales

200,000

190,000

249,000

260,000

Less : Cost of goods sold

120,000

117,800

139,200

145,600

Gross profit

80,000

72,000

100,800

114,400

Less : Expenses

20,000

19,400

22,000

24,000

Net profit

60,000

52,800

78,800

90,400

Solution : Trend percentages 2004

2005

2006

2007

Net Sales

100

95.0

124.5

130.0

Less : Cost of goods sold

100

98.2

116.0

121.3

Gross profit

100

90.3

126.0

143.0

Less : Expenses

100

97.0

110.0

120.0

Net profit

100

88.0

131.3

150.6

Interpretation 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 come down by 5%. However, the cost of goods sold and the expenses have decreased only by 1.8% 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 both 2006 and 2007. Moreover, the increase in profit by 31.3% (2006) and 50.6% (2007) is much more than the increased in sales by 20% and 30% respectively. This shows major portion of cost of goods sold and expenses is of fixed nature.

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Financial Statements Analysis - An Introduction

MODULE - 6A Analysis of Financial Statements

INTEXT QUESTIONS 27.3 Fill in the blanks with appropritate word/words (i)

.......................... statement shows analytical percentage. (comparative, common size)

Notes

(ii) .......................... balance sheet items are expressed in the ratio of each asset to total assets and ratio of each liability to total liability. (comparative, common size) (iii) .......................... analysis is a technique of studying several financial statements over a series of years. (Trend, time series) (iv) Trend percentage is calculated on the basis of .......................... year. (current, base)

WHAT YOU HAVE LEARNT 

Analysis of financial statements means establishing meaningful, relationship between various items of the two financial statements i.e. income statement and position statement.



The main parties interested in analysis of financial statement are (i) Investor (iii) Trade unions



(ii) Management (iv) Lenders

(v) Trade creditors

(vi) Employees

(vii) The authorities

(viii) Government

(ix) Stock exchange

(x) Researchers

The major techniques of financial statement analysis are (i) Cross-sectional analysis (ii) Time series analysis (iii) Cross-sectional and time series analysis.



The major tools for financial statement analysis are : (i) comparative statement (iii) Trend analysis (v) Funds flow analysis

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(ii) Common size statement (iv) Ratio analysis (vi) cash flow analysis

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MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements



Comparative study of financial statements is the comparison of the financial statements of the business with the previous years financial statements.



Comparative Balance Sheet shows the different assets and liabilites of the firm on different dates to make comparison of balances from the date to another.



Common size 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 liablities.

Notes

TERMINAL QUESTIONS 1. State any four tools which are commonly used for analysing and interpreting financial statements. 2. What are the main techniques of financial statement analysis? 3. Briefly explain the parties interested in analysis of financial statements. 4. Write a brief notes on comparative statement, common size statement and trend analysis. 5. The following are the Balance Sheets of Ms Shivani Ltd for the year ending 31st December 2006 and 2007. Liabilities

Equity share

2006

2007

Rs

Rs

200000

330000

capital Preference share

Assets

Fixed Assets less

2006

2007

Rs

Rs

340000

450000

40000

50000

100000

125000

depreciation 200000

250000

Stock

Reserve

20000

30000

Debtors

Profit and loss A/c

15000

20000

Bills receivable

20000

60000

Bank overdraft

50000

50000

Prepaid expenses

10000

12000

Creditors

40000

50000

Cash in hand

40000

53000

Provision for

20000

25000

Cash at Bank

10000

30000

15000

25000

560000

780000

560000

780000

capital

taxation Proposed dividend

Prepare a comparative balance sheet of the company and study its financial position. 18

ACCOUNTANCY

MODULE - 6A

Financial Statements Analysis - An Introduction

Analysis of Financial Statements

6. The following are the Balance Sheets of Ms Anjani Anand for the year 2006 and 2007. Discuss the financial position of the company in two years with the help of common size Balance Sheet. Liabilities

2006 Rs

2007 Rs

Assets

Share capital

625000

675000

Goodwill

Reserve surplus

352000

352000

Surplus

175535

59070

6% debentures

225000

200000

3750

3000

Accrued interest on debenture Sundry creditors

2006 Rs 80000

50000

Plant

526000

513000

Patent

30000

26000

Investment

205000

125000

Cash at bank

170650

287000

3200

4600

Debtors

138760

153000

235800

287670

6875

5000

Prepaid expenses 112000

143000



25000

Stock

8000

48000

Debenture discount

Dividend payable Taxation provision

2007 Rs

1401285 1405070

Notes

1401285 1405070

ANSWERS TO INTEXT QUESTIONS Intext Questions 27.1 I.

(i) income statement or profit and Loss A/c, posiiton statement or balance sheet. (ii) analysis and interpretation (iii) financial statement (iv) decision making

II.

(i) (c)

(ii)

(d)

(iii) (b)

(iv)

(a)

Intext Questions 27.2 (i)

financial statement analysis

(iii) comparative statement

(ii) tool (iv) balance sheet

(v) comparative Intext Questions 27.3 (i) Comparative (iii) Trend

ACCOUNTANCY

(ii) Comparative (iv) base 19

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FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION

Financial Statements Analysis - An Introduction MODULE - 6A Analysis of Financial Statements 27 Notes FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCT...

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