2. Analysis of Financial Statements
• Financial statements are traditionally prepared for the owners of the
organization. A typical financial statement of a company may contain large
mass of raw data.
• Financial statement analysis refers to detailed study of these statements
arrive at useful interpretations.
• For the users, the details in the financial statements signify only raw data.
This raw data needs to be reorganized, processed and converted into
relevant and useful information.
• Thus, Financial Statement Analysis is largely
• a study of relationship among the various financial factors in a business
• as disclosed by a single set of statements
• and study of the trends of these factors as shown in a series of statements
3. Types of Analysis
Horizontal Analysis--The analysis of financial statements includes
Horizontal Analysis and Vertical Analysis involves comparison of two
years for the same concerns. It involves preparation of Comparative
Statement.
Vertical analysis on the other hand involves finding out the relationship
between two items in respect of the same concern and in same year. It
involves preparation of Common size Statement
4. For Example [Single Statement]
P & LA/c
For the Year end 31st Mar.2015
• Relationship between Own fund
to Borrowed Fund
• 454000 : 1,70,000
• 2.67 :1
• % of Current Asset to Total
Assets
• Total Assets= FA+ Invest.+CA
• 2,94,000+1,60,000+3,50,000
• 804000 = 100%
• 350000= ? 43.53%
1. SOURCES OF FUND Rs.
Owners Fund /Shareholder’s Fund
(a) Capital 3,00,000
(b) Reserve & Surplus
Securities Premium 10,000
General Reserve 1,20,000
P &L A/c 34,000
Less: Preliminary Exps 10,000
4,54,000
2. Long Term Borrowings
11% Debentures 1,70,000
Total Capital Employed 6,24,000
Fixed Assets 2,94,000
Investment 1,60,000
Current Assets 3,50,000
Current Liabilities 1,80,000 1,70,000
Total Capital Employed 6,24,000
6. Interpretation
• F. Wood -- “Interpreting means, putting the meaning of a statement
into simple terms for the benefits of a person.
• Interpretation means conclusion derived from the given data.
7. Objectives of Financial Statement Analysis
• Measuring the profitability
• Indicating the trend of Achievements
• Assessing the growth potential of the business
• Comparative position in relation to other firms
• Assess overall financial strength
• Assess solvency of the firm
8. Parties Interested
• Investors
• Management
• Trade Unions
• Lenders
• Suppliers and Trade Creditors
• Employees
• Government
• Other
10. Comparative Statements
Comparative Financial statements are statements of the
financial position of a business so designed as to facilitate
comparison of different accounting variables for drawing
useful inferences.
It calculates absolute changes as well as percentage changes
side by side.
A percentage can only be computed when a positive amount is
reported in the base year, the amount of change cannot be
stated as a percentage if the item in the base year was reported
as a negative or a zero amount.
11. A Proforma of Comparative Balance Sheet
----------- co. Ltd
Comparative Balance Sheet [as on….]
Previous Current Amount of Percentage of
Year [P.Y.] Year[C.Y.] Inc./Dec. Inc./Dec. in
Assets in C.Y. over P.Y. C.Y. over P.Y.
Fixed Assets
Investment
Working Capital
Liabilities and Capital
Long term borrowings/
Fixed Liabilities
Capital
Reserve & Surplus
Retained earnings
12. Comparative Balance Sheet of “A” Co. Ltd
As on 1st January 2014 & 31st Dec.2014
[Rs.in Lakhs]
1.1.2014 31.12.2014 Amt. Inc/Dec. Amt.Inc/Dec
Capital & Liabilities
Equity Share Capital 500 500 0 0
Reserves 400 600 200 50.00
Net worth 900 1100 200 22.22
Long Term Debt 100 100 0 0
Total 1000 1200 200 20.00
Assets
Net Fixed Assets 900 1000 100 11.11
Investment-Marketable Securities 100 0 [100] [100]
Current Assets
Stock of goods 600 800 200 33.33
Debtors 100 400 300 300.00
Cash 50 50 0 0
750 1250 500 66.67
13. Comparative Balance Sheet of “A” Co. Ltd
As on 1st January 2014 & 31st Dec.2014
[Rs.in Lakhs]
1.1.2014 31.12.2014 Amt. Inc/Dec. Amt.Inc/Dec
Less : Current Liabilities
Creditors 200 250 50 25.00
Payables 450 650 200 44.44
Provisions 100 150 50 50.00
750 1050 300 40.00
Working Capital 0 200 -- --
Total 1000 1200 200 20.00
14. A Proforma of Comparative Income Statement
--------co. Ltd.
Comparative Income Statement for the Year ended….
Previous Current Amount of Percentage of
Year [P.Y.] Year[C.Y.] Inc./Dec. Inc./Dec.
in C.Y. over P.Y. C.Y. over PY
Net Sales
Less Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Administrative
Selling & Distribution
Finance Expenses
Operating Profit
Add : Non Operating Income
Less: Non Operating Expenses
Net Profit before Tax
Less Tax
Net Profit After Tax
15. A Proforma of Comparative Income Statement
--------co. Ltd.
Comparative Income Statement for the Year ended….
Previous Current Amount of % of
Year [P.Y.] Year[C.Y.] Inc./Dec. Inc./Dec.
Net Sales 2,50,000 4,00,000 1,50,000 60
Less Cost of Goods Sold
Opening Stock 1,25,000 1,50,000 25,000 20
Purchases 2,00,000 4,00,000 2,00,000 100
Carriage Inward 10,000 30,000 20,000 200
3,35,000 5,80,000 2,45,000 73.13
Less :Cl. St. 1,50,000 2,90,000 1,40,000 93.33
1,85,000 2,90,000 1,05,000 56.75
Goss Profit 65,000 1,10,000 45,000 69.23
16. A Proforma of Comparative Income Statement
--------co. Ltd.
Comparative Income Statement for the Year ended….
Previous Current Amount of % of
Year [P.Y.] Year[C.Y.] Inc./Dec. Inc./Dec.
Less: Operating Expenses
Office Expenses 30,000 25,000 [5,000] [16.67]
Selling Expenses 15,000 30,000 15,000 100
Finance Expenses 5,000 10,000 5,000 100
50,000 65,000 15,000 30
Net Profit 15,000 45,000 30,000 200
17. Common Size Statement
• Common size statement is also called as ‘Common Measurement’ or ‘Component Percentage’
or ‘100 percent statement’.
• Each statement is reduced to the total of 100 and each individual component of the statement
is represented as a percentage of the total of 100 which invariably serves as the base.
• In case of Balance Sheet, total of balance sheet [Total Capital Employed] will be taken as base
i.e.100
• In case of P & L a/c Net sales will be taken as base i.e. 100
• Each item will be represented as percentage of Total capital Employed or Net Sales
• Steps
• Prepare Vertical Statement
• Select base [ in case of B/s- B/s total, in case of P &L a/c –Net Sales]
• Calculate % of each item to base
Item in P & L A/c Item in B/s
Percentage = ---------------------- X100 --------------- X100
Sales Total Capital Employed
18. A Proforma of Common Size Income Statement
For the Year ended…
Absolute Amount % of Net Sales
Sales -- --
Less Cost of Goods Sold -- --
Gross Profit -- --
Less Operating Exps -- --
Administrative
Selling & Distribution
Finance
Operating Profit -- --
Add: Non Operating Income -- --
Less: Non Operating Expenses -- --
Net Profit Before Tax -- --
Less : Tax -- --
Net Profit After Tax -- --
19. A Proforma of Common Size Balance Sheet
As on …
Absolute Amount % of Capital Employed
Equities and Liabilities
Share Capital -- --
Reserve & Surplus -- --
Long Term Borrowings
Secured Loan -- --
Unsecured Loan -- --
Total Capital Employed
Fixed Assets -- --
Investment -- --
Working Capital
Current Assets -- --
Less : Current Liabilities & Provisions -- --
Total Capital Employed -- --
20. Devata Ltd
Common Size Income Statement
For the Year ended…Absolute Amount % of Net Sales
2013 2014 2015 2013 2014 2015
Net Sales
Cash 450 448 520
Credit 1350 1752 2080
1800 2200 2600 100 100 100
Less Cost of Goods Sold
Opening Stock 130 150 180 7.22 6.81 6.92
Purchases 1370 1702 2032 76.11 77.36 78.15
Dep. @ 10% 15 20 25 0.83 0.90 0.96
1515 1872 2237 84.16 85.09 86.03
Less : Cl.St. [150] [180] [210] [8.33] [8.18] [8.07]
1365 1692 2027 75.83 76.90 77.96
Gross Profit 435 508 573 24.16 23.09 22.03
Less Operating Exps
Administrative 180 231 286
Selling Exps 90 121 156
270 352 442 15.00 16.00 17.00
21. Absolute Amount % of Net Sales
2013 2014 2015 2013 2014 2015
Operating Profit 165 156 131 9.16 7.09 5.04
Less: Int. on Debentures 18 18 18 1.00 0.82 0.69
Add: Non Operating Income -- --
Less: Non Operating Expenses -- --
Net Profit Before Tax 147 138 113 8.16 6.27 4.32
Less : Provision for Tax 73.5 69 56.5 4.08 3.14 2.17
Net Profit After Tax 73.5 69 56.5 4.08 3.14 2.17
Comment
In 2013 G/P was 24.16% of sales which decreased to 23.09% in 2014 and further decreased
to 22.03% in 2015. The net profit after tax was 4.09% in 2013 which decreased to 3.13%
in 2014 and further decreased to 2.17% in 2015. Decrease in Profit is due to increase in
cost of goods sold and operating expenses. Profitability position of the company for 2014
& 2015 was unsatisfactory as compared to 2013
22. Common Size Balance Sheet
As on …
Absolute Amount
SOURCES OF FUND 2014 2015
Equities and Liabilities
Share Capital 400000 500000
Reserve & Surplus
Gen.Reserve 20000 40000
P & L A/C 50000 60000
70000 100000
Less: Misc. Expes 2000 68000 3000 97000
Long Term Borrowings
12% Debentures 100000 150000
Total Capital Employed 568000 747000
• % to capital Employed
2014 2015
70.42 66.93
3.52 5.35
8.80 8.03
12.32 11.38
0.35 11.97 0.40 12.98
82.39 79.91
17.61 20.00
100.00 100.00
23. 2014 2015
APPLICATION OF FUNDS
Fixed Assets 540000 672000
Investment 130000 90000
Working Capital
Current Assets
Stock 90000 85000
Debtors 25000 45000
B/R -- 35000
Cash 10000 5000
Bank 8000
133000 170000
Less : Current Liabilities & Provisions
Creditors 135000 45000
Bank Overdraft 10000
Provision for tax 60000 80000
B/P 40000 50000
235000 [102000] 185000 [15000]
Total Capital Employed 568000 747000
2014 2015
95.07 89.96
22.89 12.04
15.85 11.37
4.40 6.02
-- 4.69
1.77 0.68
1.41 -----
23.42 22.76
23.76 6.02
-- 1.34
10.56 10.71
7.04 6.69
41.36 [17.92] 24.76 [2.00]
100.00 100.00
