ANALYSIS OF FINANCIAL STATEMENTS

ANALYSIS OF FINANCIAL STATEMENTS

It is the process of simplification of financial informations through analysis, interpretations and generalization.

Objectives of Financial Analysis

·        To assess the current profitability and operational efficiency of the firm

·        To ascertain the relative importance of different components of the financial position of the firm.

·        To identify the reasons for change in the profitability/financial position of the firm.

·        To judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term liquidity position of the firm.

Tools of Financial Analysis

Comparative Statements

Comparative statement captures changes in all items of financial statements in absolute and percentage terms over a period of time for a firm or between two firms. Steps involved in its preparation are ;

§  List out absolute figures in rupees relating to two points of time.

§  Find out change in absolute figures by subtracting the first year from the second year and indicate the change as increase (+) or decrease (–) and put it in column 4.

§  Preferably, also calculate the percentage change as follows and put it in Column 5.

Percentage =

Particulars	First Year	Second Year	Absolute Increase (+) or Decrease (–)	Percentage Increase (+) or Decrease (–)
1	2 (Rs)	3 (Rs.)	4 (Rs)	5 (%)
Revenue from operations Add: Other incomes Total Revenue I+II Less: Expenses Profit before tax Less: Tax Profit after tax

Common Size Statement

Common size statement expresses all items of a financial statement as a percentage of some common base such as revenue from operations for statement of profit and loss and total assets for balance sheet. It also known as component percentage statement. Steps involved in its preparation are ;

§  List out absolute figures in rupees at two points of time, say year 1, and year 2.

§  Choose a common base (as 100).

§  For all items of Col. 2 and 4 work out the percentage of that total.

Particulars	Absolute Amounts		Percentage of Net Sales
	Year - 1	Year – 2	Year - 1	Year – 2
Net Sales (Less) Cost of goods sold
Gross Profit (Less) Operating Expenses
Operating Income (Less) Non-operating Expenses
Profit

Ratio Analysis

Ratio analysis is a tool of financial analysis which involves the methods of calculating and interpreting financial ratios in order to assess the strengths and weaknesses in the performance of a business enterprise.

Trend Analysis

            Trend analysis is used to observe the percentage changes over time in the selected data. Generally, the first year is taken as the base year.

Trend Percentage =

Cash Flow Analysis

            It refers to the analysis of actual movement of cash into and out of an organization.