Financial Statements and Financial Analysis

8/13/2019 Financial Statements and Financial Analysis

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Management and Financial Accounting

Financial Statements and Analysis

Financial Statements: are prepared on the basis of recorded facts. The recorded facts

are those which can be expressed in monetary terms. These are the outcome ofsummarizing process of accounting.

Financial statement is a collection of data organized according to logical

and consistent accounting procedures.

Types of Financial Statements:

1. Position Statement OR Baance Sheet

!. "ncome Statement OR Profit and #oss $ccount %P $'c(). Statement of *hanges in Owner+s e,uity OR Retained -arnings

. Statements of changes in /inancia Position

Forms and Contents of Balance Sheet:

%a( 0orizonta or T /orm or $ccount /orm of Baance Sheet

%b( ertica or Report /orm of Baance Sheet

(a) Horizontal or T Form of Balance Sheet

!AB!!T!"S ASS"TS

#articulars Amt$ #articulars Amt$

Share Capital % "&uity'#reference

eseres and Surplus

2 *apita and 3enera Reser4es

2 Share Premium $ccount

2 Profit & #oss $'c %Retained -arnings(

2 Other Reser4es

Secured oans

2 /rom /"s and Ban5s2 Secured 6ebentures7 Bonds

*nsecured oans

2

2

2

2

Fi+ed Assets

2 #and7 Buiding

2 3oodwi2 /urniture7 Pant and 8achinery

2 Patent

2 *opy Rights

2 #i4e Stoc52 Trade 8ar5

!nestments

2 3o4t. & Trust Securities

2 Shares7 6ebentures & Bonds of

Other *orporates

2

2

*ash /ow

Statement

/und /ow

Statement


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2 /ixed 6eposits

2 Other #oans & $d4ances2 9nsecured Bonds etc.

Current ia,ilities

2 Sundry *reditors2 Bis Payabe7 Outstanding -xp.

2 Ban5 O4erdraft7 6i4idend and TaxPayabe7 Short Term $d4ances etc.

#roisions

2 /or Taxation2 6i4idend

2 /or *ontingencies etc.

2

2

Current Assets

2 *ash in 0and & *ash at Ban5

2 8ar5etabe Securities7 Short Term

"n4estment

2 Bis recei4abes7 sundry debtors2 "n4entories: Raw materia7 finished

goods7 spares & toos7 wor52in2progress.

2 Prepaid expenses7 accrued interest

oans - Adances

2 $d4ances & #oans

2 Preiminary -xpenses7 6eferred -xp.

2 6iscount on issue of shares'bonds

2

2

xx xx

Financial Statements

#art ! (B): .ertical Form of Balance Sheet

ame of the *ompany ;;;;;..Baance Sheet as at ;;;;;;..

Schedue /igures as at the /igure as at the o. end of current end of pre4ious

/inancia year %Rs.( /inancia


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%c( *ash & Ban5 Baances

%d( Other *urrent $ssets %e( #oans & $d4ances

#ess: *urrent #iabiities & Pro4isions

%a( #iabiities%b( Pro4isions

Net Current Assets

. %a( 8isceaneous -xpenditure to the

extent not written off or ad>usted

%b( Profit & #oss $ccount %debit(

T/TA:

M-FA % Financial Statements

"0#A1AT!/1 /F BAA1C" SH""T !T"MS:

!AB!!T!"S

1. SHA" CA#!TA: 8oney coected from the promoters of the business and from

genera pubic in the form of ?S0$R-@. Share capita can be of two type:

%i( "&uity Share Capital: Sharehoders of this capita ha4e 4oting right but they cannot

demand di4idend e4en if *ompany is in profits. 6i4idend decision is ta5en by the

8anagement of the *ompany.

%ii( #reference Shares: Sharehoders of these type of shares don+t ha4e any 4oting right.

But these sharehoders are paid some fixed rate of di4idend7 if *ompany is in profit.

They are 5nown as preference shares as they ha4e preference o4er e,uity shares in

foowing ways.

$t the time of i,uidation or winding2up of the company7 these are paid before

e,uity sharehoders but after the secured oans.

They ha4e preference o4er the di4idend distribution aso.

!. "S"."S - S*#*S: This is created by undistributed profits or retained

earnings. Reser4es are created from these retained earnings for 4arious purposes i.e.3enera reser4es7 Reser4e for redemption of bonds etc.7 Reser4e for contingencies etc.

=e can cassify the 4arious items of Reser4es & Surpuses as foowing:

Share Premium

Reser4es %$ 5inds of reser4es(

Retained -arnings %Pre4ious years profits(

Surpus Profit %*urrent


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). S"C*"2 /A1S: $ those oans against which security is pro4ided to raise the

oans are 5nown as secured oans. These can be cassified as foowing:

#oans ta5en from financia institutions i5e "6B"7 "*"*" and other state financia

institutions and Ban5s etc.

Secured debentures OR bonds A these are the oans coected from the generapubic instead of ta5en bu5 oan from ban5s & /"s. Security is pro4ided against

these bonds.

. *1S"C*"2 /A1S: These are the oans and ad4ances against which company

has not gi4en any security. They are 2

/ixed deposits %open ended(

9nsecured bonds or debentures

#oans from subsidiary company and

Other unsecured oans etc.

M-FA % F!1A1C!A STAT"M"1TS

. C*"1T !AB!!T!"S: which are to be paid or are expected to be paid within a

year or earier aso. These are 2

Sundry *reditors

Bis payabe

$d4ance payments

Ban5 o4erdraft

6i4idend payabe

Tax payabe

Outstanding ' accrued expenses

C. #/.!S!/1S: which are pro4ided to pay short term iabiities from the profits.

These are 2

Pro4ision for tax

Pro4ision for di4idends etc. %Proposed(

Pro4ision for insurance7 pension or for pro4ident fund scheme

ASS"TS S!2":

1. F!0"2 ASS"TS: are those which are used for ong period. 3eneray in4estment in

fixed assets are ir2re4ersibe in nature. =e can broady cassify these assets in two parts 2

(i) Tangi,le Fi+ed Assets

#and7 Buiding7 /urniture7 Pant & 8achinery7 ehices7 #i4e Stoc5s etc.

(ii) !ntangi,le Fi+ed Assets

3oodwi7 Patent7 *opyright7 Brand aue7 Trademar5


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!. !1."STM"1TS: are done to obtain some returns out of surpus funds. These

in4estments can be made under 4arious sub2heads:

2 "n4estments in go4t. securities %gifts(2 "n shares and debentures of other corporates and in2rea estates etc.

). C*"1T ASS"TS: are those assets or possessions which are used or utiizedwithin a year or can be con4erted in to cash within a year. These are foowing:

%"n the decreasing order of i,uidity(

2 *ash in hand2 *ash at Ban5

2 8ar5etabe Securities

2 Short2term in4estments

2 Bis Recei4abes2 Sundry 6ebtors

2 Prepaid -xpenses

2 $ccrued "ncomes

2 "n4entories of raw materia7 finished goods7 spares & toos7 wor52in2progress

. /A1S A12 A2.A1C"S: Short2term ad4ances and oans gi4en by the firm 'company to others.

. 2"F""2 "0#"12!T*"S: Those expenses which are not debited fuy to theProfit & #oss $'c of the year in which they ha4e been incurred. These expenses are

spread o4er a no. of years and the unwritten baance is shown in the baance sheet.

These are2

2 Preiminary -xpenses2 6iscount on issue of shares ' bonds etc.


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M-FA % F!1A1C!A STAT"M"1TS

Financial Statements

The 8anufacturing7 Trading and Profit & #oss $ccounts are generay prepared in

T2/orm. The genera forms of these accounts are gi4en as foows:

Manufacturing Account

For the year ending 3$$

2e,it Credit

To opening Stoc5

Raw 8aterias

Party 8anufactured 3oodsTo Purchase of Raw 8aterias

To *arriage "nwards

To 8anufacturing =agesTo /actory Rent

To 6epreciation:

/actory Buiding

8achineryTo Repair to Pant

To *oa

To Saary of =or5s 8anager

;..

;..

;..

;..

;..;..

;..

;..;..

;..

;..

By *ost of finished goods

transferred to trading account

By *osing Stoc5:

Raw 8aterias

Party 8anufactured 3oods

;..

;..

;..

xxx xxx

Trading and #rofit - oss Account


2e,it Credit

To Opening Stoc5 of finished goods

To *ost of finished goods

transferred from 8anufacturing$ccount

To 3ross Profit c'dD

To 3ross #oss b'dDTo Saaries

To Office Rent

To $d4ertisingTo *arriage Outward

To 6iscount $owed

To Pro4ision for Bad and 6oubtfu

6ebtsTo 6epreciation:

Office Buiding

/urniture

;..

;..

;..

;..;..

;..

;..;..

;..

;..

;..

By Saes

By *osing Stoc5 of

By /inished 3oodsBy 3ross #oss c'dD

By 3ross Profit b'dD

By 6iscount Recei4edBy et #oss transferred to *apita

$ccount

;..

;..

;..;..

;..

;..;..


7/23

To et Profit2transferred to

*apita $ccount

;..

xxx xxx

D Ony one figure wi be there.

#rofit - oss Appropriation A'c


2e,it Credit

To Transfer to 3enera Reser4e

To Transfer to Sin5ing /unds

To "nterim 6i4idendsTo Proposed 6i4idends

;..

;..

;..;..

By Baance b'd

%Baance of Profit from Pre4ious


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Ta+ Shield (By 2epreciation): Tax Shied is the benefit obtained by a firm or company

from the tax because of the existence of depreciation i.e. sa4ings of company or firm by

paying ess tax due to deducting depreciation from the 3ross Profit as an expense.

et =orth:

$so 5nown as A ?et Own /unds@ OR ?Owner+s /und@ etc.

Boo5 aue: aue of a share that shoud be according to

the financia position of the company.

-arning Per Share %-PS(: Profit earned by the

*ompany for each share

M-FA % F!1A1C!A STAT"M"1TS A1A4S!S

Meaning - Concept of Financial Analysis:

/inancia $naysis is aso 5nown as anaysis and interpretation of financiastatements.

A1A4S!S A means the simpification of financia data by methodicacassification of the data gi4en in the financia statement.

!1T"#"TAT!/1 A means expaining the meaning and significance of

simpified data %by anaysis(.

Both anaysis and interpretation are interin5ed and compimentary to each other.

The purpose of this anaysis is to diagnose the information contained in financia

statements so as to >udge the profitabiity and financia soundness of the firm.

Types of Financial Analysis

Share *apita F Reser4es & Surpus

EEEEet =orthEEEE

o. of -,uity Share

et Profit $fter Payment of

6i4idend to P. SharesEEEEEE

o. of -,uity Shares

On the basis of materia used

ertica

$naysis-xterna

$naysis

"nterna

$naysis

0orizonta

$naysis

On the basis of modus operandi


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1. "+ternal Analysis: 6one by outsiders who don+t ha4e access to the detaied

interna accounting records. These are sharehoders7 potentia in4estors7 creditors7

go4t. agencies7 credit agencies7 genera pubic etc. This anaysis depends onpubished financia statements.

!. !nternal Analysis: 6one by persons who ha4e access to the interna accountingrecords of a business firm. These may be executi4es and empoyees of the

company. ormay this is done for manageria purposes.

). Horizontal Analysis: "t is a comparison of financia data of a company for

se4era years7 presented horizontay o4er a no. of coumns for the data of 4arious

years. Beginning point is chosen as base or standard year and the figures of other

years are compared with the base or standard year.

"+ample Comparatie and trend analysis

. .ertical Analysis: "t is the study of reationship of the 4arious items in the

financia statements of one accounting period. "n this figures from one year+sfinancia statements are compared with a base seected from the same years

statement. "t is aso 5nown as ?Static Analysis@.

"+ample Common size statement analysis and ratio analysis

M-FA % F!1A1C!A STAT"M"1T A1A4S!S

Methods or Techni&ues of Financial Statement Analysis

Se4era methods and techni,ues are used for the financia anaysis but generay we usethe foowing techni,ues2

1. *omparati4e Statement $naysis!. Trend or Trend Percentage $naysis

). *ommon Size Statement $naysis

. Ratio $naysis. /unds /ow $naysis

C. *ash /ow $naysis

G. *ost2oume2Profit $naysis

1. Comparatie Statement Analysis: *omparati4e statements show financia position

of different periods of time. So they gi4e an idea of financia position at two or moreperiods. =hen figures of pre4ious periods are gi4en aong with the figures of current

period7 anayst wi be abe to study the trends of 4arious items i5e saes7 profits etc. and

aso the trend and direction of financia position and operating resuts. These statementscan be of two types2

%a( *omparati4e Baance Sheet7 %b( *omparati4e "ncome Statement


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%a( Comparatie Balance Sheet: This anaysis is done on two or more baance sheets of

the same company to find out the changes which hep in forming an opinion about theprogress of the company. /oowing points can be considered whie anayzing the

comparati4e baance sheet.

%i( Current Financial #osition: by anayzing wor5ing capita i.e. -xcess of *urrent

$ssets %*$( o4er *urrent #iabiities %*#(

"ncrease in =.*. wi mean impro4ement in current financia position of the company.

%ii( i&uidity #osition: by anayzing i,uid assets i.e. cash etc.

%iii( ongTerm Financial #osition: by anayzing changes in fixed assets ong2termiabiities7 capita etc.

%i4( #rofita,ility of the Concern: By anayzing changes in retained earning and surpus.


BAA1C" SH""T

As on 31stDecember

Liabilities 1HH)

Rs.

1HH

Rs.

Assets 1HH)

Rs.

1HH

Rs.-,uity Share *apita

Reser4es & Surpus6ebentures

#ong2term oans on

8ortgage

Bis PayabeSundry *reditors

Other *urrent

#iabiities

C7II7III

)7)I7III!7II7III

17I7III

I7III17II7III

7III

17)7II

I

J7II7III

!7!!7III)7II7III

!7II7III

7III17!I7III

1I7III

1C7HG7II

I

#and & Buidings

Pant & 8achinery/urniture & /ixtures

Other /ixed $ssets

*ash in hand & at ban5

Bis Recei4abesSundry 6ebtors

Stoc5

Prepaid -xpenses

)7GI7III

7II7III !I7III

!7III

!I7III

17I7III!7II7III

!7I7III

17)7II

I

!7GI7III

C7II7III !7III

)I7III

JI7III

HI7III!7I7III

)7I7III

!7III

1C7HG7III

Solution:

C/M#AAT!." BAA1C" SH""T /F A C/M#A14

For te !ear ending December 31" 1##3 and 1##$

=or5ing *apita %=.*.( K *$ A *#


11/23

Assets

Current Assets%*ash in hand & at Ban5

Bis Recei4abesSundry 6ebtors

Stoc5

Prepaid -xpenses

Tota *urrent $ssets

Fi&ed Assets%

#and & BuidingsPant & 8achinery

/urniture & /ixturesOther /ixed $ssetsTota /ixed $ssets

Tota $ssets


12/23

%1( The comparati4e baance sheet of the company re4eas that during 1HH there has

been an increase in fixed assets of 171I7III i.e. 1).HL whie ong2term iabiities to

outsiders ha4e reati4ey increased by Rs. 17I7III and e,uity share capita has increasedby Rs. ! a5hs. This fact depicts that the poicy of the company is to purchase fixed

assets from the ong2term sources of finance thereby not affecting the wor5ing capita.

%!( The current assets ha4e increased by Rs. 17!7III i.e. !.!L and cash has increased

by Rs. CI7III. On the other hand7 there has been an increase in in4entories amounting to

Rs. 1 a5h. The current iabiities ha4e increased ony by Rs. !I7III i.e. 1!.HL. Thisfurther confirms that the company has raised ong2term finances e4en for the current

assets resuting into an impro4ement in the i,uidity position of the company.

%)( Reser4es and surpuses ha4e decreased from Rs. )7)I7III to Rs. !7!!7III i.e.)!.G)L which shows that the company has utiized reser4es and surpuses for the

payment of di4idends to sharehoders either in cash or by the issue of bonus shares.

%( The o4era financia position of the company is satisfactory.

!. C/M#AAT!." !1C/M" STAT"M"1T

The "ncome Statement gi4es the resuts of the operations of a business. The comparati4e

income statement gi4es an idea of the progress of a business o4er a period of time. Thechanges in absoute data in money 4aues and percentages can be determined to anayze

the profitabiity of the business. #i5e comparati4e baance sheet7 income statement aso

has four coumns. /irst two coumns gi4e figures of 4arious items for two years. Third

and fourth coumns are used to show increase or decrease in figures in absoute amountsand percentages respecti4ey.


7uidelines for !nterpretation of !ncome Statement:

"ncrease and decrease in saes shoud be compared with or in cost of goods

sod. Profitabiity wi impro4e ony when increase in the cost of goods sod wibe ess than the increase in saes.

Operating profit wi impro4e when either sae wi impro4e or operating expenses

wi reduce or 4ice24ersa.

"ncrease or decrease in net profit wi show the progress of the concern. O4eraprofitabiity of the concern shoud aso be e4auated.

Saes A *ost of goods produced %8fg. or production cost(EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

K 7/SS #/F!TEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

essA Operating -xpenses %Office and administration expenses7

seing and distribution expenses etc.(


13/23

EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

/#"AT!17 #/F!TEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

essA on2operating -xpenses %"nterest on oans7 oss on sae of

assets7 writing off of deferred expenses payment of taxes etc.(

EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE1"T #/F!T999999999999999999999999999999999999999

"+ample: "ncome statements of a firm are gi4en for the year ending on )1st6ecember1HH) and 1HH. Re2arrange the figures in a comparati4e form and study the profitabiity

position of the concern.

;


14/23

Solution:

C/M#AAT!." !1C/M" STAT"M"1TFor te !ear ended 31stDecember 1##3 and 1##$

6ecrease %2(

)1st6ecember "ncrease %F(

6ecrease %2(

Rs. %MIII(

"ncrease %F(

6ecrease %2(

%Percentages(1HH)

Rs. %MIII(1HH

Rs. %MIII(

et Saes

Less: *ost of goods sod3ross Profit

Operating -xpenses:3enera & $dministrati4e -xpenses

Seing -xpensesTota Operating -xpenses

Operating Profit

Less: Other deductions

"nterest paid

et profit before tax

Less: "ncome tax

et Profit after tax

GJ

I

HII

II

F11

FI

F1.C

F11.I

)) II FC F1H.I

GI

JI

G!

HI

F!

F1I

F!.J

F1!.1I 1C! F1! FJ.I

1J

!

1CIGI

HI

!)J

)I

!IJJI

1!J

F)

F

FJF1I

F)J

F!J.C

F!I

F)I.IF1.)

F!.!!

!nterpretation

The comparati4e income statement gi4en abo4e re4eas that there has been an increase in

net saes of 1.CL whie the cost of goods sod has increased neary by 11L therebyresuting in an increase in the gross profit of 1H.L. $though the operating expenses

ha4e increased by JL the increase in gross profit is sufficient to compensate for the

increase in operating expenses and hence there has been an o4era increase in operationaprofits amounting to Rs. )7III i.e. !J.CL in spite of an increase in financia expenses

of Rs. 7III for interest and Rs. 1I7III for income2tax. There is an increase in net profits

after tax amounting to Rs. )J7III i.e. !.!!L. "t may be concuded that there is asufficient progress in the company and the o4era profitabiity of the company is good.

!llustration =. The "ncome Statements of Sanyasi #td. are gi4en for the years 1HH) and1HH. *on4ert them into *ommon2size "ncome Statement and interpret the changes.


15/23

!ncome Statements

For te !ears ending 1##3 and 1##$

3ross SaesLess: Saes returns

et Saes*ost of Saes

3ross Profit

'perating (&penses%Seing & 6istribution -xpenses

$dministrati4e -xpenses

Tota -xpenses

Operating "ncomeOther "ncomes

on2Operating -xpenses

et Profit during the year

;


16/23

!. Trend Analysis: "n this anaysis is done by computing trends of series of

information. This method determines the direction upwards or downwards.

The information for a no. of years is ta5en up and one year7 generay the first year7 is

ta5en as a base year. Base year+s figures are compared with other years to find a trend.

Base year is considered as 1IIL %trend percentage(.

"+ample: /igures of MN+ td from 1HHC are foowing:

4ear Sales Stoc 7$#$%/igures in Rs. #acs(1HHC 1JJ1 GIH )!1

1HHG !)I GJ1 )

1HHJ !C J1C J

1HHH )I!1 H !G!III )GCJ 11 CG!

Solution: T"12 #"C"1TA7"S (Base 4ear % ;


17/23

%i( Common Size Balance Sheet: "n this a the assets and a the iabiities are expressedin percentages of tota of assets and iabiities.

The tota figure of assets Rs. !7II7III is ta5en as 1II and a other assets are expressed asa percentage of tota assets. The reation of each asset to tota assets is expressed in the

statement. The reation of each iabiity to tota iabiities is simiary expressed.

The common2size baance sheet can be used to compare companies of differing size. The

comparison of figures in different periods is not usefu because tota figures may be

affected by a number of factors. "t is not possibe to estabish standard norms for 4arious

assets. The trends of figures from year to year may not be studied and e4en they may notgi4e proper resuts.

!llustration . The Baance Sheets of S & *o. and & *o. are gi4en as foows:

BAA1C" SH""TS

As on Dec. 31" 1##$

Liabilities S & Co. K & Co.

s$ s$

Preference Share *apita 17!I7III 17CI7III-,uity Share *apita 17I7III 7II7III

Reser4e & Surpuses 17III 1J7III

#ong2term #oans 1717III 17)I7IIIBis Payabe !7III 222

Sundry *reditors 1!7III 7III

Outstanding -xpenses 17III C7IIIProposed 6i4idend EE1I7III HI7III

7)J7III J7IJ7III

#and and Buiding JI7III 17!)7III

Pant and 8achinery )7)7III C7II7IIITemporary "n4estment 17III I7III

"n4entories 1I7III !7III

Boo526ebts 7III J7IIIPrepaid -xpenses 17III !7III

*ash and Ban5 Baances J7III 1I7III

7)J7III J7IJ7III

*ompare the financia position of two companies with the hep of common size baance

sheet.


18/23

Solution

C/MM/1S!@" BAA1C" SH""T

As on Dec. 31" 1##$

Assets

Fi&ed Assets

#and & Buiding

Pant & 8achinery

Tota /ixed $ssets

Current AssetsTemporary "n4estments

"n4entories

Boo5 6ebts

Prepaid -xpenses*ash & Ban5 Baance

Tota *urrent $ssets

Tota $ssets

Sare Capital ) *eser+es

Preference Share *apita-,uity Share *apita

Reser4es & Surpuses

Tota *apita & Reser4es#ong2term #oans

Current LiabilitiesBis PayabeSundry *reditors

Outstanding -xpenses

Proposed 6i4idend

Tota of #iabiity Side

S - Co$ E - Co$$mount

Rs.

JI7III

)7)7III

L

1J.!C

GC.!C

$mountRs.

17!)7III

C7II7III

L

1.!!

G.C!

717III H.! G7!)7III JH.J

17III

1I7III

7III

17IIIJ7III

I.!)

!.!J

I.H1

I.!)1.J)

I7III

!7III

J7III

!7III1I7III

.H

).IJ

I.HH

I.!1.!

!7III .J J7III 1I.!

7)J7III 1II.II J7IJ7III 1II.II

17!I7III17I7III

17III

!G.)H).!

).1H

17CI7III7II7III

1J7III

1H.JIH.I

!.!)

!7J7III C.J) 7GJ7III G1.)

1717III !C.! 17)I7III 1C.IH

!7III

1!7III

17III1I7III

I.C

!.G

).!.!J

222

7III

C7IIIHI7III

222

I.H

I.G11.1

)H7III J.H! 17II7III 1!.)J

7)J7III 1II.II J7IJ7III 1II.II

Comments:

%1( $n anaysis of pattern of financing of both the companies shows that & *o. is

more traditionay financed as compared to S & *o. The former company has dependedmore on its own funds as is shown by baance sheet. Out of tota in4estments7 G1.)L ofthe funds are proprietor+s funds and outsiders+ funds account ony for !J.GL. "n S& *o.

proprietors+ funds are C.J)L whie outsiders+ share is ).1GL which shows that this

company has depended more upon outsiders funds. "n the present day economic word7generay7 companies depend more on outsiders+ funds. "n this context both the

companies ha4e good financia panning but & *o. is more financed on traditiona

ines.


19/23

%!( Both the companies are suffering from inade,uacy of wor5ing capita. Thepercentage of current iabiities is more than the percentage of current assets in both the

companies. The first company is suffering more from wor5ing capita position than the

second company because current iabiities are more than current assets by ).L andthis percentage is 1.JCL in the case of second company.

%)( $ cose oo5 at the baance sheets shows that in4estments in fixed assets ha4e beenfinanced from wor5ing capita in both the companies. "n S & *o. fixed assets account for

H.!L of tota assets whie ong2term funds account for H1.IJL of tota funds. "n

& *o. fixed assets account for JH.JL whereas ong2term funds account for JG.C!L of

tota funds instead of using ong2term funds for wor5ing capita purposes the companiesha4e used wor5ing capita for purchasing fixed assets.

%( Both the companies face wor5ing capita probem and immediate steps shoud be

ta5en to issue more capita or raise ong2term oans to raise wor5ing capita position.

%ii( C/MM/1 S!@" !1C/M" STAT"M"1T:The items in income statement can be shown as percentages of saes to show the reation

of each item to saes. $ significant reationship can be estabished between items of

income statement and 4oume of saes. The increase in saes wi certainy increaseseing expenses and not administrati4e or financia expenses. "n case the 4oume of saes

increases to a considerabe extent7 administrati4e and financia expenses may go up. "n

case the saes are decining7 the seing expenses shoud be reduced at once. So7 a

reationship is estabished between saes and other items in income statement and thisreationship is hepfu in e4auating operationa acti4ities of the enterprise.

!llustration . /oowing are the "ncome Statements of a company for the years ending6ec. )17 1HH) and 1HH:

1HH) 1HH %Rs. in MIII( %Rs. in MIII(

Saes II GII

8isceaneous "ncome !I 1

!I G1(&penses%

*ost of Saes )! 1I

Office -xpenses !I !Seing -xpenses )I

"nterest ! )I

II C1I

et Profit 1!I 1I

!I G1


20/23

Solution:

C/MM/1S!@" !1C/M" STAT"M"1T

For te !ears ending Dec. 1##3 and 1##$1HH) 1HH

Saes

Less: *ost of Saes

3ross Profit

'perating (&penses%

Office -xpenses

Seing -xpensesTota Operating -xpenses

Operating Profit

8isceaneous "ncome

Tota "ncome

Less: on2Operating -xpenses:"nterest

et Profit

Rs. %MIII(II

)!

L1II.II

C.II

Rs. %MIII(GII

1I

L1II.II

G!.JC

1G ).II 1HI !G.1

!I)I

.IIC.II

!

).JC.!

I 1I.II GI 1I.II

1!

!I

1

!

1!I

!.II

.II

!H.II

.II

!.II

1!I

1

1)

)I

1I

1G.1

!.1

1H.!J

.!J

1.II

!nterpretation

%1( The saes and gross profit has increased in absoute figures in 1HH as compared to

1HH) but the percentage of gross profit to saes has gone down in 1HH.

%!( The increase in cost of saes as a percentage of saes has brought the profitabiity

from ) to !G.1L.

%)( Operating expenses ha4e remained the same in both the years but non2operating

expenses ha4e decreased as a percentage in 1HH. $ sight decrease in non2operating

expenses in the atter year coud not hep to impro4e profits.

%( et profits ha4e decreased both in absoute figures and as a percentage in 1HH as

compared to 1HH).

%( The o4era profitabiity has decreased in 1HH and the reason is arise in cost of

saes. The company shoud ta5e immediate steps to contro its cost of saes7 otherwise

the company wi be in troube.


21/23

!llustration G$ The foowing are the Baance Sheets of N #td. and < #td. for the yearending )1stof 6ecember7 1HH.

Liabilities

-,uity Share *apita

Preference Share *apita

Reser4es & Surpus

#oansBis Payabe

Sundry *reditors

Outstanding -xpenses6i4idend 6ecared

0 td$

s$

!7I7III

17!I7III

I7III

)7I7III!7III

1J7III

J7HI!7III

4 td$

s$

17GI7III

JI7III

GI7III

!7GH7III17III

J7III

7IIG7II

Assets

#and & Buiding

Pant & 8achinery

"n4estment

%Temporary(Boo526ebts

Prepaid -xpenses

*ash & Ban5

0 td$

s$

)7I7III

!7GI7III

G!7III

G7II

)7II

J7CHI

4 td$

s$

!7G7III

)7II7III

1!7III

!7III

222

!17III

J7!)7HI C7))7III J7!)7HI C7))7III

Present the data in such a way that proper anaysis is possibe. 6o your own. 3i4e your

interpretations aso.

#imitations of /inancia $naysis: Though financia anaysis is a powerfu too of

determining financia position %strengths & wea5nesses( of a firm7 but this anaysis is

based on the information a4aiabe in the financia statements.

Thus this anaysis suffers from inherent imitations of financia statements.

The financia anaysts ha4e to be carefu about the impact of price e4e changes7

window2dressing of financia statements7 changes in accounting poicies7 persona

>udgements etc.

Some of the important imitations of financia anaysis are7 howe4er7 summed up as

under:

1( "t is ony a study of interim reports.!( This anaysis is based upon ony monetary information and non2monetary factors are

ignored.)( "t does not consider changes in price e4e.( *hanges in accounting procedure may often ma5e financia anaysis miseading.

( $naysts ha4e to ma5e interpretations and draw his own concusions. 6ifferent

peope may interpret the same anaysis in different ways.

C( Sometimes accounting concepts and con4entions cause a serious imitation tofinancia anaysis.


22/23

AT!/ A1A4S!S: $ ratio is a simpe arithmetica expression of the reationship of

one no. to another.

$ financia ratio is a reationship between two accounting figures expressed

mathematicay.

$ ratio can be expressed in percentages by mutipying the ratio by 1II. $ ratio of III can be expressed as:

1III

%i( :17 or %ii( 7 or %iii( '17 or %i4( to 17 or %4( IIL"n a these cases the inference is that first figure %II( is fi4e times than that of

the second.

AT!/ % A1A4S!S

1AT*" /F AT!/ A1A4S!S: Ratio anaysis is a techni,ue of anaysis andinterpretation of financia statements.

"t is a process which heps in ma5ing certain decisions.

Ony cacuation of ratios does not ser4e purpose if it is not anayzed andinterpreted propery.

Seection of appropriate data and ree4ant ratios is aso 4ery important.

*se and Significance of atio Analysis: "t is important for different persons7 for

different purposes.

A) *tility for Managers

1. 0eps in decision ma5ing

!. 0eps in financia forecasting & panning). 0eps in communicating

. 0eps in communicating

. 0eps in co2ordinationC. 0eps in contro

B) *tility to Shareholders ' !nestors

C) *tility to Creditors

2) *tility to "mployees

") *tility to 7oernment

F) Ta+Audit e&uirements

imitations of atio Analysis:

#imited use of singe ratio

#ac5 of ade,uate standards

"nherent imitations of accounting

*hange of accounting procedures

=indow2dressing of financia statements

Persona >udgement


23/23

Price2#e4e changes

Classification of atios: *an be broady cassified under four categories:

(;) i&uidity atios () Actiity atios (=) eerage or ongTerm (>) #rofita,ilitySolency atios atios

a( *urrent Ratio a( 6ebtor+s Turno4er a( 6ebt2-,uity Ratio (i) !n relation to salesa( 3ross Profit Ratio'3P8

b( #i,uid or uic5 b( *reditor+s b( 6ebt to tota b( Operating Profit Ratio'

or $cid2test Ratio T'o Ratio *apita Ratio c( et2Profit Ratio'P8

c( $bsoute #i,uid c( "n4entory c( "nterest *o4erage Ratio (ii) !n relation to inestm Ratio T'o Ratio /!a( Return on etwor

b( Return on -,uity

d( =or5ing *apita d( -,uity Ratio c( Return on *api. -mp. T'o Ratio d( -PS

e( So4ency Ratio e( P'- Ratio

Documents

Financial Statements and Financial Analysis