Accounts And Finance For Managers

Accounts And Finance For Managers

This course contains the basics of Accounts And Finance For Managers

Course introduction
Interview Questions
Pragnya Meter Exam

Accounts And Finance For Managers

FINANCIAL STATEMENT ANALYSIS
Introduction

The financial statements are affording many facts though they are absolute and concrete in terms; but not in a position to interpret and analyse the stature of the enterprise. To analyse and interpret, the financial statement analysis is being applied across the financial statements viz Trading, Profit & Loss Account and Balance sheet. Under the financial statement analysis, the information available are grouped together in order to cull out the meaningful relationship which is already available among them; for interpretation and analysis.

DEFINITION & CLASSIFICATION OF FINANCIAL STATEMENT ANALYSIS

According to Kennedy and Muller

“ The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statement data so that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability and sound dividend policy”
The entire financial statement analysis can be classified into various categories

  • Comparative financial statements
  • Common size financial statements
  • Trend percentages
  • Fund flow statements
  • Cash flow statements
  • Ratio analysis


COMPARATIVE FINANCIAL STATEMENTS

Objectives of comparative financial statements

  • Changes taken place in the financial performance are taken into consideration for further analysis
  • To reveal qualitative information about the firm in terms of solvency, liquidity profitability and so on are extracted from the analysis of financial statements
  • With reference to yester financial data of the enterprise, the firm is facilitated to undergo for the preparation of forecasting and planning.

The major part of financial statement analysis is mainly focused on the comparative analysis.

The comparative analysis classified into four different analyses viz

  • Comparative Balance sheet
  • Comparative Profit and Loss account
  • Common Size statement
  • Trend percentage

First we will discuss the comparative Balance sheet. The first and foremost important step is to have the following information and should take preparatory steps

  1. While preparing the comparative statement of balance sheet, the particulars for the financial factors are required
  2. The second most important for the preparation of the comparative balance sheet is yester financial data extracted from the balance sheet or balance sheets
  3. The next most important requirement to have an effective comparison with the yester financial data is current year information extracted from the balance sheet or balance sheet of the firms.
  4. After having been procured the financial data pertaining to various time periods are ready for comparison; to determine or identify the level of increase or decrease taken place in the financial position of the firms
  5. To determine the level of increase or decrease in financial position, the percentage analysis to carried out in between them.

Illustration 

From the following information, Prepare comparative Balance sheet of X Ltd.


The first step we have to segregate the available information into two different categories viz Assets and Liabilities


N. C = No change in the position during the two years

From the above table, the following are basic inferences

  • The fixed assets volume got increased 20% from the year 2004 to 2005, amounted Rs. 12, 00, 000
  • Rs 9, 00, 000 worth of current assets decrease from the year 2004 to 2005 recorded 30%
  • The total volume of assets recorded 3% increase from the year 2004 to 2005
  • It obviously understood that 20% increase taken place on the reserves and surpluses
  • It clearly evidenced that the current liabilities of the firm increased 10% from the year 2004 to 2005
  • The firm has not recorded any changes in the investments, equity share capital and long-term loans

The next one in the comparative financial statement analysis is that Income statement analysis

Comparative (Income) financial statement analysis: This analysis is being carried out in between the income statements of the various accounting durations of the firm, with other firms in the industry and with the industrial average.

This will facilitate the firm to know about the stature of itself regarding the financial performance. It facilitates to understand about the changes pertaining to various financial data which closely relevantly connected with the financial performance

  • Change in the gross sales
  • Change in the net sales
  • Change in gross profit and net profit
  • Change in operating profit
  • Change in operating expenses
  • Change in the volume of non operating income
  • Change in the non operating expenses

The ultimate purpose of the comparative (Income) financial statement analysis is as follows

  1. To study the income earning and expenditure spending pattern of the firm for two or more years
  2. To identify the changing pattern of the income and expenditure of the firms. The preparatory steps for the preparation of the comparative financial statement (Income) analysis

 The first and foremost important step is to have the following information and should take preparatory steps

  1. While preparing the comparative statement of Profit and Loss Account, the particulars for the financial factors are required
  2. The second most important for the preparation of the comparative Profit & Loss account is yester financial data extracted from the Profit & Loss A/c or Profit & Loss Accounts
  3. The next most important requirement to have an effective comparison with the yester financial data is current year information extracted from the balance sheet of the firm or of the other firms
  4. After having been procured the financial data pertaining to various time periods are ready for comparison; to determine or identify the level of increase or decrease taken place in the operating financial performance of the firms
  5. To determine the level of increase or decrease in financial performance, the percentage analysis to be carried out in between them.

Illustration 

Prepare the comparative income statement from the following:


From the above table, the following inferences can be had: Financial Statement Analysis

  • The firm has registered 25% increase in sales from the year 2004 to 2005
  • Cost of goods sold raised 30% from the year 2004 to 2005
  • There is no change in the level of operating expenses
  • The firm has got 22. 22% increase in the level of net profits from the year 2004 to 2005

Illustration 

From the following information, prepare a comparative income statement:


For this problem, the inferences could be enlisted according to the comparative statement analysis on Profit & Loss Accounts of two different year viz 2001 and 2002.

The next important tool of financial statement analysis is a common size statement analysis which known as predominant tool in intra firm analysis in studying the share of each component.
The components are translated into percentage for analysis and interpretations. For profit and loss account, Net sales is considered as a base for the computation of a share of each financial factor available.

For Balance sheet, total volume of assets and liabilities are taken into consideration for the computation of a share of each financial factor available under the heading of assets and liabilities.

Illustration 

Prepare the common size statement analysis for the firm ABC ltd


The above illustration highlights the share of every component in the balance sheet out of the total volume of assets and liabilities.

This will certainly facilitate the firm to easily understand not only the share of every component but also facilitates to have a meaningful and relevant comparison with various time horizons.
From the following table, prepare the common size statement analysis:

TREND PERCENTAGE ANALYSIS

The next important tools of analysis is trend percentage which plays significant role in analyzing the financial stature of the enterprise through base years’ performance ratio computation. This not only reveals the trend movement of the financial performance of the enterprise but also highlights the strengths and weaknesses of the enterprise

The following ratio is being used to compute the trend percentage

=
Current year *100
Base year


 

This trend ratio is being computed for every component for many number of years which not only facilitates comparison but also guides the firm to understand the trend path of the firm.

LET US SUM UP

Under the financial statement analysis, the information available are grouped together in order to cull out the meaningful relationship which is already available among them; for interpretation and analysis. To reveal qualitative information about the firm in terms of solvency, liquidity profitability and so on are extracted from the analysis of financial statements. Comparative (Income) financial statement analysis is being carried out in between the income statements of the various accounting durations of the firm, with other firms in the industry and with the industrial average. After having been procured the financial data pertaining to various time periods are ready for comparison; to determine or identify the level of increase or decrease taken place in the operating financial performance of the firms.

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