Chapter twelve discusses the importance of understanding financial statements, emphasizing that absolute financial figures alone do not provide a complete picture of a company's performance. It highlights the necessity of analyzing trends over time and using financial ratios, such as profit ratios and debt-paying ability ratios, to gauge profitability and solvency. Ultimately, a comprehensive understanding of financial statements requires a deep grasp of accounting techniques.

1. Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-12. Understanding Financial
Statement
We Learn – A Continuous Learning Forum

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Chapter Twelve – Understanding Financial Statements
Ultimately,
understanding financial
statements is a fine art and calls
for deep understanding of accounting techniques!