Understanding Financial Statement

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Financial figures in absolute amounts do not provide the complete picture. Financial statements give a detailed understanding of the various financial entries and overall profits and expenses. This presentation explains the various methods to understand Financial Statements.

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Understanding Financial Statement

  1. 1. Welingkar’s Distance Learning Division Financial Accounting CHAPTER-12. Understanding Financial Statement We Learn – A Continuous Learning Forum
  2. 2. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Net earnings from operations disclose profitability of a company. But the figure can include one time item like sale of assets, in which case earnings from operations are less to that extent.
  3. 3. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Net earnings from operations disclose profitability of a company which can be a respectable figure say Ten crores. But the figure when compared to previous year, say Fifteen crores, shows a significant dip.
  4. 4. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Trends over years & Financial Ratios
  5. 5. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. We study three types of Ratios Profit Ratios Balance Sheet Ratios Debt Paying Ability Ratio
  6. 6. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Profit Ratios Gross Profit Gross Return on Sales = Total sales a stronger company in the Industry will have a high ratio
  7. 7. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios Profit Ratios Net Profit Net Return on Sales = Total sales a high ratio indicates greater capacity to declare dividends
  8. 8. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios - Profit Ratios Balance Sheet Ratios Net Worth Book Value per share = No of outstanding shares Higher the ratio , stronger the company
  9. 9. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios - Profit Ratios ; Balance Sheet Ratios Debt Paying Ability Ratio – measures solvency of company Current Assets Current Ratio = Current Liabilities Indicates ability to discharge short term liabilities
  10. 10. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios - Profit Ratios ; Balance Sheet Ratios Debt Paying Ability Ratio – measures solvency of company Total Debt Debt Equity Ratio = Net Worth Higher the ratio greater the risk
  11. 11. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios - Profit Ratios ; Balance Sheet Ratios Debt Paying Ability Ratio – measures solvency of company Profit before Interest & Tax Interest Cover Ratio = Interest Higher ratio indicates greater capacity to pay interest
  12. 12. Chapter Twelve- Understanding Financial Statements Financial figures in absolute amounts do not provide complete picture. Hence focus should be on Financial Ratios - Profit Ratios ; Balance Sheet Ratios Debt Paying Ability Ratio – measures solvency of company Annual Sales Revenue Asset Turnover Ratio = Total Assets Higher ratio indicates better utilization of assets
  13. 13. Chapter Twelve – Understanding Financial Statements Ultimately, understanding financial statements is a fine art and calls for deep understanding of accounting techniques!

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