The document discusses the importance of financial statements and emphasizes that absolute financial figures alone do not provide a complete picture of a company's performance. It highlights the need to focus on financial trends and various financial ratios, including profit ratios, balance sheet ratios, and debt-paying ability ratios, to assess a company's health. Key ratios discussed include gross profit margin, net profit margin, book value per share, current ratio, debt equity ratio, interest cover ratio, and asset turnover ratio.

1. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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.

2. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Hence focus should be on
Trends over years &
Financial Ratios

3. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Hence focus should be on Financial Ratios
We study three types of Ratios
Profit Ratios
Balance Sheet Ratios
Debt Paying Ability Ratio

4. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Hence focus should be on Financial Ratios
Profit Ratios
Gross Profit
Gross Return on Sales =
Total sales
a stronger company in the Industry will have a high ratio

5. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

6. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

7. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

8. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

9. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

10. Chapter Twelve--
Chapter Twelve Understanding Financial Statements
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

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