About different tools used for financial statement analysis

3.  Process of evaluation of the financial statement
in order to understand & take decisions
regarding the operations of the firm.
 Helps to find the profitability & operational
efficiency of the firm to assess its financial
health & future.
 Includes both analysis and interpretation.
 It helps to estimate past & current position of
the firm and to predict the future.

4.  To assess the current profitability and
operational efficiency.
 To identify the reasons for the change in the
profitability and financial position of the firm.
 To judge the ability of the firm to repay its
debt.
 To assess the short term as well as the liquidity
position of the firm.

5.  Give an idea regarding the firm so that the
investors can decide whether to invest or not.
 Help the regulatory authorities to ensure that
the firm is following the required standards.
 Helps the government agencies to analyze the
taxation.
 Company can analyze its own performance.
 Full disclosure.

6.  Accuracy of financial information depends on
how accurately financial statements are
prepared.
 It is prepared using historical data so it will not
be effective in planning.
 Only provided quantitative information.
 If the analysis is done without adequate
knowledge it may lead to wrong judgment and
conclusion.

7.  Comparative statement
 Common size statement
 Trend analysis
 Ratio analysis
 Cash flow analysis
 Fund flow analysis

8.  Statement showing the profitability & financial
position of a firm for different periods in a
comparative form.
 Comparative figures indicate the trend and
direction of financial position.
 Comparative statements can be prepared in 2
forms:
 Comparative income statement
 Comparative balance sheet

9.  Statement which indicates the relationship of
different items with a common item.
 Expressed in percentage.
 Also known as vertical analysis.
 Common size statements can be prepared in 2
forms:
 Common size income statement
 Common size balance sheet

10.  It is a technique to study the financial position
over a series of years.
 Trend percentage is the percentage relationship
of each item of different years to the same item
in the base year.
 It helps to understand whether the ratio is
falling, rising or remaining constant.

11.  Ratio is a number which indicates the
relationship of 2 or more numbers.
 It can be expressed as a fraction, proportion or
percentage.
 If the number is calculated from financial
statements then it can be called as accounting
ratios.

12.  To know the areas of business which need
more attention.
 To provide a deeper analysis on profitability,
liquidity, solvency & efficiency levels in the
business.
 To make projections & estimates for the future.
 To provide information for making cross
sectional analysis.

13.  Helps to understand whether the business has
taken the right decisions.
 Simplify complex figures.
 Helpful in comparative analysis.
 Helps to identify the problem areas.
 Enables SWOT analysis.

14.  Qualitative factors are ignored.
 There is no single universally accepted
standard ratio.
 Ratios alone are not adequate to find the
financial position of the firm.
 Many firms show a better position than they
really exists so the ratios will not be correct.

15.  Liquidity ratio
 Leverage ratio
 Profitability ratio
 Activity ratio
 Market test ratio

16.  It is the ability of the firm to pay its current
liabilities in time.
 Different liquidity ratios are:
 Current ratio
 Quick ratio
 Absolute liquidity ratio

17. Current ratio= current asset
current liability
Quick ratio= quick asset
current liability
Absolute liquidity ratio= cash+bank+marketable securities
current liability

18.  It looks at how much capital comes in the form
of debt or assesses the ability of a firm to meets
its obligations.
 Different leverage ratios are:
 Debt equity ratio
 Proprietary ratio
 Solvency ratio
 Fixed asset to network ratio
 Capital gearing ratio

19. Solvency = outsiders fund
ratio total assets
Proprietary = shareholders fund
ratio total assets
Fixed asset
to network = fixed asset
ratio shareholder fund
Capital = fixed interest bearing fund
gearing ratio equity share capital+reserves & surplus+ other surplus
Debt equity = outsiders fund
ratio shareholders fund

20.  It measures various aspects of profitability of a
business firm.
 Different types of profitability ratios are:
 Gross profit ratio
 Net profit ratio
 Operating ratio
 Operating profit ratio
 Return on shareholder fund
 Return on equity share capital
 Return on capital employed

21. Net profit = net profit x 100
ratio Net sales
Operating = 100 - operating ratio
profit ratio
cost of goods sold+
Operating = operating expenses x 100
ratio Net sales
Gross profit = gross profit x 100
ratio Net sales

22. Return on net profit after
Equity = interest & tax x 100
Share capital equity share
capital
Return on net profit after
Shareholders = interest & tax x 100
Fund shareholders
fund
Return on net profit before
capital = interest & tax X 100
employed net capital
employed

23.  It measures a firm’s ability to convert different
accounts within its balance sheets into cash or
sales.
 Different activity ratios are:
 Fixed asset turnover ratio
 Inventory turnover ratio
 Working capital turnover ratio
 Debtors turnover ratio
 Creditors turnover ratio

24. Debtors net credit sales
turnover = average accounts
ratio receivable
Working capital = net sales
turnover ratio net working capital
Fixed asset = net sales
turnover ratio fixed asset
Inventory = cost of goods sold
turnover ratio average stock
Creditors turnover ratio = net credit purchases
average accounts payable

25.  It helps the investor to estimate the
attractiveness of a potential or existing
investment & get an idea of its valuation.
 Different market test ratios are:
 Earning per share (EPS)
 Price to earning ratio
 Dividend yield ratio

26. dividend per
Dividend yield = share x 100
ratio market price
per share
market price per
Price earning = share
ratio EPS
net profit available
Earnings = to equity shareholders
per share number of equity
shareholders

27.  It is a statement that shows the ups and downs
of the financial position or the changes in
working capital of the entity between the two
financial years.
 It provides long term analysis of financial
planning.
 It discloses sources & applications of funds.

28.  It is a statement showing the inflows &
outflows of cash and its equivalents over a
period.
 It explains the reasons for the difference
between the opening & closing cash balances
over a period.
 It provides short term analysis of financial
planning.

29.  Financial statement analysis is a judgment
process.
 It is useful in decision making involving
comparison with other firms & also with firm’s
own performance over a time period.
 Helps to understand the different components
of the financial position of the firm.