Financial statement analysis-Notes
NOTES
CHAPTER 12: Financial Statements Analysis
Analysis of financial statements is a systematic process of analyzing the financial information in the financial statements to understand and take economic decisions.
Tools or techniques of financial statements analysis:
- Comparative statements - mean a comparative study of individual items or components of financial statements i.e. Balance sheet and statements of profit and loss of two or more years of the enterprise itself.
- Common- Size statements - means statements in which individual items of financial statements in which individual items of financial statements of two or more year are placed side by side and there after converted into percentage taking a common base.
- Ratio Analysis - is an arithmetic expression of relationship between two related or interdependent components of financial statements of an accounting period.
- Cash flow statements - statements showing flow of cash and cash equivalents during the accounting period classified as operating activity, investing activity and financing activities.
Uses of financial Statements:
- Securities Analysis: it is a process by which the investor comes to know whether the firm is fulfilling his expectations with regard to payment of dividend, capital appreciation and security of money.
- Credit Analysis
- Debt Analysis
- Dividend Analysis
- General Business Analysis
Tools of Financial Statement Analysis
Purpose of comparative financial Statements:-
- Data presentation becomes simple and comparable
- Indicates trend
- Indicates strengths and weaknesses
- Comparison with other firms and industry performance
- Forecasting and planning
Importance of comparative financial statements:
- Shareholders
- Decisions and plans
- Lenders
- Investment decisions
Example 1:
From the following balance sheets of A Ltd. as on 31st March prepare comparative balance sheet.
| Particulars | Note No. | 31st March 2019 | 31st March 2018 |
|---|---|---|---|
| I. Equity And Liabilities | |||
|
• Shareholders’ funds • Share capital (Equity) • Non- Current Liabilities Long term borrowings: 8% Debentures • Current Liabilities Trade payables |
18,00,000 6,00,000 6,00,000 |
12,00,000 6,00,000 3,00,000 |
|
|
Total |
|
30,00,000 |
21,00,000 |
|
II. Assets a) Non–Current Assets Fixed Assets: Tangible Assets b) Current Assets Trade Receivables Cash and cash Equivalents |
|
18,00,000 10,00,000 2,00,000 |
15,00,000 5,00,000 1,00,000 |
|
Total |
|
30,00,000 |
21,00,000 |
Solution:
| Particulars | Note No. | 31st March 2018 (A) | 31st March 2019 (B) | Absolute change (increase/decrease) (C = B − A) | Percentage change (increase/decrease)% (D= C/A × 100) |
|---|---|---|---|---|---|
|
1. Equity & Liabilities 2. Equity And Liabilities Shareholders’ funds Share capital (Equity) b) Non- Current Liabilities Long term borrowings: 8 % Debentures c) Current Liabilities Trade payables |
|
18,00,000 6,00,000 6,00,000 |
12,00,000 6,00,000 3,00,000 |
6,00,000 --------- 3,00,000 |
50.00 --------- 100.00 |
|
Total |
|
21,00,000 |
30,00,000 |
9,00,000 |
42.86 |
|
II. Assets a) Non–Current Assets Fixed Assets: Tangible Assets b) Current Assets Trade Receivables Cash and cash Equivalents |
|
18,00,000 10,00,000 2,00,000 |
15,00,000 5,00,000 1,00,000 |
3,00,000 5,00,000 1,00,000 |
20.00 100.00 100.00 |
|
Total |
|
21,00,000 |
30,00,000 |
9,00,000 |
42.86 |
Example 2:
From the following balance sheet of S Ltd. as at March 2017. Prepare a common size balance sheet:-
| Particulars | Note No. | 31st March 2017 | 31st March 2016 |
|---|---|---|---|
|
I. Equity And Liabilities 1. Shareholders’ Funds a) Share Capital b) Reserves and Surplus 2. Non–current Liabilities Long term Borrowings 3. Current Liabilities Trade Payables |
|
10,00,000 2,00,000 8,00,000 4,00,000 |
5,00,000 3,00,000 5,00,000 2,00,000 |
|
Total |
|
24,00,000 |
15,00,000 |
|
II. Assets 1. Non–Current Assets Fixed Assets–Tangible Assets 2. Current Assets Cash and Cash Equivalents |
|
15,00,000 9,00,000 |
10,00,000 5,00,000 |
|
Total |
|
24,00,000 |
15,00,000 |
Solution:
| Particulars | Note No. | Absolute amounts | |||
|---|---|---|---|---|---|
| 31st March 2016 | 31st March 2017 | 31st March 2016(%) | 31st March 2017(%) | ||
|
I. Equity And Liabilities 1. Shareholders’ Funds c) Share Capital d) Reserves and Surplus 2. Non–current Liabilities Long term Borrowings 3. Current Liabilities Trade Payables |
|
5,00,000 3,00,000 5,00,000 2,00,000 |
10,00,000 2,00,000 8,00,000 4,00,000 |
33.33 20.00 33.34 13.33 |
41.67 8.33 33.33 16.67 |
|
Total |
|
15,00,000 |
24,00,000 |
100.00 |
100.00 |
|
II. Assets 1. Non–Current Assets Fixed Assets–Tangible Assets 2. Current Assets Cash and Cash Equivalents |
|
10,00,000 5,00,000 |
15,00,000 9,00,000 |
66.67 33.33 |
62.50 37.50 |
|
Total |
|
15,00,000 |
24,00,000 |
100.00 |
100.00 |
Example 3:
Prepare comparative statement of profit and loss for the year ended 31st March 2015.
| Particulars | Note No. | 2014-15 | 2013-14 |
|---|---|---|---|
|
Revenue from operations Other income Expenses |
|
20,00,000 10,00,000 21,00,000 |
15,00,000 4,00,000 15,0,000 |
Rate of income tax was 50%.
Solution:
| Particulars | Note no. | 31st March 2014 (A) | 31st March 2015 (B) | Absolute Change (increase/decrease)(C = B – A) | Percentage change (increase/decrease) % (D = C/A × 100) |
|---|---|---|---|---|---|
|
1. Revenue from operations 2. Other income |
15,00,000 4,00,000 |
20,00,000 10,00,000 |
5,00,000 6,00,000 |
33.33 150.00 |
|
|
3. Total Revenue (I + II) 4. Expenses |
|
19,00,000 15,00,000 |
30,00,000 21,00,000 |
11,00,000 6,00,000 |
57.89 40.00 |
|
5. Profit before Tax (III – IV) 6. Less: Tax (50%) |
|
4,00,000 2,00,000 |
9,00,000 4,50,000 |
5,00,000 2,50,000 |
125.00 125.00 |
|
7. Profit after Tax (V – VI) |
|
2,00,000 | 4,50,000 | 2,50,000 | 125.00 |