FINANCIAL STATEMENT ANALYSIS

FINANCIAL STATEMENT ANALYSISProcess of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.

It is basically a study of the relationship among various financial facts and figures as given in a set of financial statements. Vertical Format of Balance SheetParticularsAmount (Rs.)Sources of Funds

Owners FundLoan FundTotal

Application of Funds

Fixed AssetsLong term or trade investmentWorking Capital (a) Current assetsLess (b) Current liabilitiesTotalQ) The following Balance Sheet of a concern for the years 2007Capital and Liabilities2007Rs.Assets2007Rs.Equity Share capitalReserves and surplusDebenturesLong term loans and MortgageBills payableSundry creditorsOther current liabilities6,00,000

3,30,000

2,00,0001,50,000

50,0001,00,0005,000Land and BuildingsPlant and MachineryFurniture and FixturesOther fixed assetsCash in hand and at bankBills receivablesSundry debtorsStock3,70,0004,00,0020,00025,00020,000

1,50,0002,00,0002,50,000 Total14,35,000Total14,35,000Balance SheetAs on 31st MarchVertical Format of Balance Sheet as on 31st March 2007ParticularsAmount (Rs.)Sources of FundsOwners FundEquity Share capitalReserves and surplusLoan FundDebenturesLong term loans and MortgageTotal

Application of FundsFixed AssetsLand and BuildingsPlant and MachineryFurniture and FixturesOther fixed assetsWorking Capital (a) Current assetsCash in hand and at bankBills receivablesSundry debtorsStock Total Current assets(a)Less (b) Current liabilitiesBills payableSundry creditorsOther current liabilitiesTotal Current liabilities(b)Net working capital (a-b)Total6,00,0003,30,000

3,70,0004,00,000 20,000 25,000

20,000 1,50,0002,00,0002,50,0006,20,000

50,0001,00,000 5,000 1,55,000

9,30,000

2,00,0001,50,00012,80,000

8,15,000

4,65,00012,80,000Vertical Income StatementParticularsAmount (Rs.)Gross SalesLess: ReturnsNet salesLess: Cost of goods soldOpening stockPurchasesDirect expensesLess: Closing StockCost of goods soldGross Profit ( Net sales-cost of goods sold)Less: Operating expensesAdministrative expensesSelling and distribution expensesFinance chargesOperating profit before interestLess: InterestNet profit after interestAdd: Net non operating income (non operating income- non operating expenses)Net profit before taxLess: Income taxNet profit after taxLess: Proposed dividendRetained EarningQ) The following Income Statement of a concern for the years 2007Particulars2007Rs.Net sales7,85,000Cost of goods sold4,50,000Operating expenses:General and Administrative expenses70,000Selling expenses80,000Non-operating expenses:Interest paid25,000Income tax70,000Income Statement for the year ended 2007Particulars2007Rs.Net sales7,85,000Less: Cost of goods sold4,50,000Gross Profit3,35,000Less: Operating expenses:General and Administrative expenses70,000Selling expenses80,0001,50,000Operating profit before Interest1,85,000Less: Non-operating expenses:Interest paid25,000Net Profit before tax1,60,000Less: Income tax70,000Net profit after tax90,000FINANCIAL STATEMENT ANALYSISOBJECTIVESLiquiditySolvencyProfitabilityEfficiencyHealth & PerformanceTECHNIQUES OF FSAComparative Statement AnalysisCommon Size statement AnalysisTrend AnalysisRatio Analysis

Comparative Statement AnalysisIn Comparative Financial Statements, two or more Balance Sheet and/or the Income Statement of a firm are presented simultaneously in columnar form.

The financial data for two or more years are placed and presented in adjacent columns and thereby the financial data is provided a times perspective in order to facilitate periodic comparison. Comparative Financial StatementParticularsInter Firm ComparisonsFirm 1Firm 2Absolute Difference (Rs.)Percentage Difference %121-2 =33/1 x 100ParticularsInter Period ComparisonsYear 1Year 2Absolute Difference (Rs.)Percentage Difference %121-2 =33/1 x 100Q) The following Balance Sheet of a concern for the years 2007 and 2008. Prepare a comparative balance sheet and study the financial position.Capital and Liabilities2007Rs.2008Rs.Assets2007Rs.2008Rs.Equity Share capitalReserves and surplusDebenturesLong term loans and MortgageBills payableSundry creditorsOther current liabilities6,00,000

3,30,000

2,00,0001,50,000

50,0001,00,0005,0008,00,000

2,22,000

3,00,0002,00,000

45,0001,20,00010,000Land and BuildingsPlant and MachineryFurniture and FixturesOther fixed assetsCash in hand and at bankBills receivablesSundry debtorsStockPrepaid expenses3,70,0004,00,0020,00025,00020,000

1,50,0002,00,0002,50,000-2,70,0006,00,00025,00030,00080,000

90,0002,50,0003,50,0002,000 Total14,35,00016,97,000Total14,35,00016,97,000Balance SheetAs on 31st MarchQ) The following Income Statement of a concern for the years 2007 and 2008. Prepare a comparative Income Statement and study the profitability position.Particulars2007Rs.2008Rs.Net sales7,85,0009,00,000Cost of goods sold4,50,0005,00,000Operating expenses:General and Administrative expenses70,00072,000Selling expenses80,00090,000Non-operating expenses:Interest paid25,00030,000Income tax70,00080,000Common Size StatementThe Common Size Statement represents the relationship of different items of a financial statement with some Common item by expressing each item as a percentage of the Common item.

In Common Size Balance Sheet, each item of the Balance Sheet is stated as a percentage of the total of the Balance Sheet.

In Common Size Income Statement, each item is stated as percentage of the Net Sales. Q) The following Balance Sheet of a concern for the years 2007 and 2008. Prepare a Common size balance sheet and study the financial position.Capital and Liabilities2007Rs.2008Rs.Assets2007Rs.2008Rs.Equity Share capitalReserves and surplusDebenturesLong term loans and MortgageBills payableSundry creditorsOther current liabilities6,00,000

3,30,000

2,00,0001,50,000

50,0001,00,0005,0008,00,000

2,22,000

3,00,0002,00,000

45,0001,20,00010,000Land and BuildingsPlant and MachineryFurniture and FixturesOther fixed assetsCash in hand and at bankBills receivablesSundry debtorsStockPrepaid expenses3,70,0004,00,00020,00025,00020,000

1,50,0002,00,0002,50,000-2,70,0006,00,00025,00030,00080,000

90,0002,50,0003,50,0002,000 Total14,35,00016,97,000Total14,35,00016,97,000Balance SheetAs on 31st MarchQ) The following Income Statement of a concern for the years 2007 and 2008. Prepare a common size Income Statement and study the profitability position.Particulars2007Rs.2008Rs.Net sales7,85,0009,00,000Cost of goods sold4,50,0005,00,000Operating expenses:General and Administrative expenses70,00072,000Selling expenses80,00090,000Non-operating expenses:Interest paid25,00030,000Income tax70,00080,000Trend Analysis Trend analysis treats the first year as the base year and compares the figures of all the other years against it.The position as on 31st December 2010, 2011 and 2012 of AB Co. Is given below. You need to work out the trend percentage and give the interpretation on the same.Summarized Income StatementParticulars201020112012sales300000036000004000000Less: cost of goods sold200000024000002800000Gross profit100000012000001200000expenses700000800000800000Net profit300000400000400000Trend Analysis of Income StatementParticulars2010201120122010 (%)2011(%)2012(%)sales300000036000004000000100120.00133.33Less: cost of goods sold200000024000002800000100120.00140.00Gross profit100000012000001200000100120.00120.00expenses700000800000800000100114.29114.29Net profit300000400000400000100133.33133.33