FINANCIAL STATEMENT ANALYSIS

The financial statements are affording many facts though they are absolute and concrete in terms; but not in a position to interpret and analyse the stature of the enterprise. To analyse and interpret, the financial statement analysis is being applied across the financial statements viz Trading, Profit & Loss Account and Balance sheet. Under the financial statement analysis, the information available are grouped together in order to cull out the meaningful relationship which is already available among them; for interpretation and analysis.According to Kennedy and Muller
“ The analysis and interpretation of financial statements are an attempt to determine the
significance and meaning of financial statement data so that the forecast may be made
of the prospects for future earnings, ability to pay interest and debt maturities and
profitability and sound dividend policy”

The entire financial statement analysis can be classified into various categories
Comparative financial statements
Common size financial statements
Trend percentages
 Fund flow statements
Cash flow statements
Ratio analysis
Objectives of comparative financial statements
Changes taken place in the financial performance are taken into consideration for
further analysis
To reveal qualitative information about the firm in terms of solvency, liquidity
profitability and so on are extracted from the analysis of financial statements
With reference to yester financial data of the enterprise, the firm is facilitated to
undergo for the preparation of forecasting and planning.
The major part of financial statement analysis is mainly focused on the comparative
analysis.
The comparative analysis classified into four different analyses viz
Comparative Balance sheet
Comparative Profit and Loss account
Common Size statement
Trend percentage
First we will discuss the comparative Balance sheet.
The first and foremost important step is to have the following information and should
take preparatory steps
i. While preparing the comparative statement of balance sheet, the particulars for
the financial factors are required
ii. The second most important for the preparation of the comparative balance sheet is
yester financial data extracted from the balance sheet or balance sheets
iii. The next most important requirement to have an effective comparison with the
yester financial data is current year information extracted from the balance sheet
or balance sheet of the firms.
iv. After having been procured the financial data pertaining to various time periods
are ready for comparison; to determine or identify the level of increase or decrease
taken place in the financial position of the firms
v. To determine the level of increase or decrease in financial position, the percentage
analysis to carried out in between them.
From the above table, the following are basic inferences
The fixed assets volume got increased 20% from the year 2004 to 2005, amounted
Rs. 12, 00, 000
Rs 9, 00, 000 worth of current assets decrease from the year 2004 to 2005 recorded
30%
The total volume of assets recorded 3% increase from the year 2004 to 2005
It obviously understood that 20% increase taken place on the reserves and surpluses
It clearly evidenced that the current liabilities of the firm increased 10% from the
year 2004 to 2005
The firm has not recorded any changes in the investments, equity share capital
and long-term loans
The next one in the comparative financial statement analysis is that Income statement
analysis
Comparative (Income) financial statement analysis: This analysis is being carried out in
between the income statements of the various accounting durations of the firm, with
other firms in the industry and with the industrial average.
This will facilitate the firm to know about the stature of itself regarding the financial
performance. It facilitates to understand about the changes pertaining to various financial
data which closely relevantly connected with the financial performance
l Change in the gross sales
l Change in the net sales
Particulars 31st Mar,2004 31st Mar,2005
Equit share capital 50,00,000 50,00,000
Fixed Assets 60,00,000 72,00,000
Reserves and surpluses 10,00,000 12,00,000
Investments 10,00,000 10,00,000
Long-term loans 30,00,000 30,00,000
Current assets 30,00,000 21,00,000
Current liabilities 10,00,000 11,00,000
Particulars 2004 Rs 2005 Rs Absolute
Change Rs%
Increase
%
Decrease
Fixed Assets 60,00,000 72,00,000 12,00,000 20 -
Investments 10,00,000 10,00,000 N.C - -
Current assets 30,00,000 21,00,000 (9,00,000) 30
Total Assets 1,00,00,000 1,03,00,000 3,00,000 3 -
Equity share capital 50,00,000 50,00,000 N.C - -
Reserves & surpluses 10,00,000 12,00,000 2,00,000 20 -
Long-term loans 30,00,000 30,00,000 N.C - -
Current liabilities 10,00,000 11,00,000 1,00,000 10 -
1,00,00,000 1,03,00,000 3,00,000 3 -
Change in gross profit and net profit Change in operating profit Change in operating expenses Change in the volume of non operating income Change in the non operating expenses The ultimate purpose of the comparative (Income) financial statement analysis is as follows i. To study the income earning and expenditure spending pattern of the firm for two or more years ii. To identify the changing pattern of the income and expenditure of the firms. The preparatory steps for the preparation of the comparative financial statement (Income) analysis The first and foremost important step is to have the following information and should take preparatory steps i. While preparing the comparative statement of Profit and Loss Account, the particulars for the financial factors are required ii. The second most important for the preparation of the comparative Profit & Loss account is yester financial data extracted from the Profit & Loss A/c or Profit & Loss Accounts iii. The next most important requirement to have an effective comparison with the yester financial data is current year information extracted from the balance sheet of the firm or of the other firms iv. After having been procured the financial data pertaining to various time periods are ready for comparison ; to determine or identify the level of increase or decrease taken place in the operating financial performance of the firms v. To determine the level of increase or decrease in financial performance, the percentage analysis to be carried out in between them.For this problem, the inferences could be enlisted according to the comparative statement analysis on Profit & Loss Accounts of two different year viz 2001 and 2002. The next important tool of financial statement analysis is a common size statement analysis which known as predominant tool in intra firm analysis in studying the share of each component. The components are translated into percentage for analysis and interpretations. For profit and loss account, Net sales is considered as a base for the computation of a share of each financial factor available. For Balance sheet, total volume of assets and liabilities are taken into consideration for the computation of a share of each financial factor available under the heading of assets and liabilities.

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