financial accounting - management accounting - financial management - analysis and interpretation of financial statements

1. Dr. Mohamed Kutty Kakkakunnan
Associate Professor
P G Dept. of Commerce
N A M College Kallikkandy
Kannur – Kerala – India

2. COMPARATIVE FINANCIAL STATEMENTS
 Comparison Compare
 How to compare?
Matching, the similarities and dissimilarities
 What do you need for comparing?
Two or more things, facts, persons etc
 What is the objective of comparison?
To ascertain the difference
 Why do we compare?
– To ascertain which is good / bad?
– To ascertain the favorable / unfavorable changes
– To ascertain the efficiency and effectiveness
 COMPARATIVE STATEMENTS ARE USED FOR COMPARISON

3.  Statements which summarise and present related
accounting data for a number of years incorporating
therein the changes (absolute or relative or both) in
individual item
 Figures of two or more period are placed side by side to
facilitate comparison
 Tool used for analysing financial statements
 Aims to study the changes in individual items when
compared to the previous year
 On the basis of the changes, valid conclusions on
financial condition and/or profitability, strengths and
weaknesses etc., of the firm
 The changes can be shown either in absolute or relative
terms or both

4. Comparative financial statement show:-
1. Accounting variables in their current and
previous values (values for comparison)
2. Changes (increase / decrease) in the values
of individual items
3. Changes (increase / decrease) in percentages
of the individual items.

5. Advantages of comparative statements
1. Facilitates for inter-firm and/or inter-period
comparisons
2. Highlights upon the tends in different accounting
variables relating to performance, efficiency and
financial position
3. Helps to identify weaknesses in operating efficiency,
financial conditions etc and to take appropriate
remedial actions

6. Disadvantages (limitations / demerits) of
comparative statements
1. Frequent changes in accounting principles,
conventions, methods policies etc., make inter-
period comparison difficulty
2. Differences in age, size, lack of uniformity in
accounting policies and practices between different
firms make inter-firm comparison difficult

7. COMPARATIVE INCOME STATEMENT
Particulars
Values Change (+ / - )
CY PY Absolute Percentage
Net sales 120 100 +20 +20.00
Less Cost of Goods Sold 40 30 +10 +33.33
Gross Profit 80 70 +10 +14.30
Operating expenses 40 25 +15 +60.00
Operating Profit (EBIT) 40 45 -5 -11.10
Less Interest 10 10 0 0
Earning Before Tax 30 35 -5 -14.30
Less Tax 12 15 +3 +20.00
Earnings After Tax 18 20 -2 -10.00
Less Preference Share Dividend 8 8 0 0
Earnings available to Equity Share Holders 10 12 -2 -16.67

8. COMMON-SIZE FINANCIAL STATEMENTS
Financial statements in which items reported are
converted into percentage to some common base
In income statement total sales will be taken as
the base for conversion and all items in the
income statement are converted and expressed
as percentage of sales
In balance sheet, total of assets or liabilities will
be taken as the common base and all items in the
balance sheet are expressed as a percentage of
total assets or liabilities

9. COMMON SIZE INCOME STATEMENT
Particulars
2015 2016
Rupees % Rupees %
Net sales 7,00,000 100.00 8,00,000 100.00
Less cost of goods sold 5,95,000 85.00 6,15,000 76.87
Gross profit 1,05,000 15.00 1,85,000 23.13
Operating expenses 35,700 5.10 36,500 4.56
Operating income 69,300 9.90 1,48,500 18.56
Add other Incomes 1,200 0.17 8,050 1.00
Total income (EBIT) 68,750 9.82 1,54,610 19.56
Less interest 8,750 1.25 8,750 1.09
Profit Before Tax 60,000 8.50 145860 18.23
Less Tax 30,000 4.25 45,000 5.62
Profit after tax 30,000 4.25 1,00,860 12.616

10. COMMON-SIZE BALANCE SHEET
ASSETS
X LTD Y LTD
Rupees % Rupees %
Current Assets :-
Cash in hand 8,000 1.83 10,000 1.25
Prepaid expenses 1,000 0.23 2,000 0.25
Debtors 4,000 0.91 8,000 0.99
Stock 10,000 2.28 25,000 3.08
Temporary investment 1,000 0.23 40,000 4.95
Total Current Assets 24,000 5.48 85,000 10.52
Fixed Assets :-
Land and building 3,30,000 76.26 6,00,000 74.62
Plant and machinery 80,000 18.26 1,23,000 15.22
Total Fixed Assets 4,14,000 94.52 7,23,000 89.48
TOTAL ASSETS 4,38,000 100.00 8,08,000 100.00

11. COMMON-SIZE BALANCE SHEET
Liabilities
X LTD Y LTD
Rupees % Rupees %
Current Liabilities:-
Sundry creditors 14,000 3.20 4000 0.49
Outstanding expenses 15,000 3.44 6,000 0.74
Proposed dividend 10,000 2.28 90,000 11.15
Total current liabilities 39,000 8.92 1,00,000 12.38
Long-term Liabilities :-
Loans 15,000 3.44 30,000 3.71
Debentures 1,00,000 22.81 1,00,000 12.38
Total long term liabilities 1,15,000 26.25 1,30,000 16.09
Capital and Reserves :-
Share capital 2,70,000 61.64 5,60,000 69.31
Reserves 14,000 3.20 18,000 2.23
Total capital and reserves 2,84,000 64.84 5,78,000 71.53
Total Liabilities 4,38,000 100.00 8,08,000 100.00

12. TREND ANALYSIS
Another tool used for analysis and interpretation
Trend means “tendency”
Trend analysis means “review and appraisal of
tendency in accounting variables”
Helps in analyzing long term trend of various
business factors – help in budgeting and
forecasting
Helps in ascertaining favorable or unfavorable
trend in business
Trend analysis can be performed through :-
(a). Trend ratios and (b). Graphs

13. Trend Ratios or Trend Percentages
 Ratio expresses mathematical relationship between two
figures. Expression of one figure in term of another one
 Trend ratios / percentages refer to the expression of
arithmetical relationship which each item of several years
bears to the same item of ‘base year’.
 For calculating trend ratios / percentages one year is taken
as the “base” and then ratios or percentages are calculated
taking the figure of the base year as “base”.
 Where
P₁ = Values of Current Year
P₀ = Values of Base Year