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ANALYSIS OFFINANCIAL
STATEMENTS
Unit III
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Syllabus
Analysis of FinancialStatements
Financial Ratio AnalysisCash Flow
(as per Accounting Standard 3)
Funds Flow Statement Analysis.
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Analysis of Financial
Statements
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Financial StatementAnalysis
American Institute of certied public accountssays ! nancial statements are prepared forthe purpose of presenting a periodical re"iew
or report on the progress by the managementand dealt with
#he status of in"estment in the business and
#he result achie"ed during the period under
re"iew.A nancial statement is an organi$edcollection of data.
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Financial Statement
Types of Financial Statements
%rot and &oss account or
Income statement'alance Sheet or Statement of
nancial position
A surplus statement or retainedearnings statement
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Financial Statement
Schedules to nancial statements
Schedule of ed assets
Schedule of debtorsSchedule of creditors
Schedule of in"estment
Statement of changes in woringcapital
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Financial Statement
!ot and Loss account o! Income statement
It matches the re"enue and costs incurred in theprocess of earning re"enues and shows the net protearned or loss su*ered during a particular period.
"alance Sheet
It is the statement which shows the assets andliabilities of the business. It re+ects the nancialcondition of a business concern as re"ealed by the
accounting records. It shows the assets owned by theconcern and the source of funds used in theac,uisition of those assets.
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Financial Statement
Su!plus o! #etained ea!nin$s statement
It re+ects to ecess of prot o"er losses. Suchretained earnings are taen to balance sheet fromthe retained earnings statement. It is a lin betweenthe balance sheet and the income statement.
Supplementa!y schedules
&ists of schedules are used to supplement the dataand details contained in the balance sheet and prot
and loss account. #he schedules re considered to bepart and parcel of the nancial statements for thebenet of analysis and interpretation.
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-ature of nancialstatements
Financial statements are prepared tochec the nature of in"estment in abusiness and result achie"ed during the
specic time period. Financial statementsshows /
'ased on recorded facts
Accounting con"entions%ostulates (assumptions0suggestions)
%ersonal 1udgment
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Financial Statement
Limitations
Information shown in nancial statements are notaccurate.
It is based on practical eperience andcon"entions
2o not disclose correct position of the business
2o not disclose the contribution of humanresource towards the eciency of the business
It is prepared by way of comparing two di*erentperiods
Record only monetary facts
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Analysis and Interpretation
Analysis and Interpretation are inter/related.Interpretation re,uires Analysis4 while Analysis isuseless without interpretation.
Analysis means methodical classication of the data
gi"en in the nancial statements. Interpretationmeans eplaining the meaning and signicance of the
data so simplied0classied.
Analysis may be described as a critical eamination of
nancial transactions e*ected during a denite periodof time and Interpretation is drawing of inference(suggestion or conclusion) and stating what thegures in the nancial statement really mean.
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Analysis and Interpretation
According to 5ennedy and 6uller4 ! the analysis andinterpretation of nancial statements are anattempt to determine the signicance and meaningof the nancial statement data so that forecast may
be made of the prospects for future earnings4 abilityto pay interest and debt maturities andchance0probability of a sound di"idend policy7.
Interpretation includes many processes lie
arrangement4 analysis4 establishing relationshipbetween a"ailable fact and nally maingconclusions.
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8b1ecti"es
#o interpret the protability and eciency of"arious business acti"ities with the help of protand loss account.
#o determine the managerial eciency of therm.
#o measure short/term and long/term sol"ency ofthe business.
#o ascertain earning capacity in future period.
#o compare operational eciency.
#o determine protability of the concern.
#o measure the nancial stability of the business.
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Financial StatementAnalysis
Financial Statement Analysis isclassied below/
8n the basis of information used
9ternal Analysis Internal Analysis
8n the basis of modus operandi ofanalysis
:ori$ontal Analysis ;ertical Analysis
8n the basis of ob1ecti"es of analysis
&ong/term Analysis Short/term
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Financial StatementAnalysis
8n the basis of information used
E%te!nal Analysis
It is made by those who do not ha"e access to
detailed record and depend on publishedstatements. Such type of analysis is made byin"estors4 credit agencies4 go"ernment agenciesand research scholars.
Inte!nal AnalysisIt is done on the basis of unpublished records bythe eecuti"es. It is "ery much useful andsignicant to employees and management.
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Financial StatementAnalysis
8n the basis of ob1ecti"es of analysis
Lon$)te!m Analysis
#his analysis is used for understanding the long/
term nancial stability4 sol"ency and li,uidity aswell as protability and earning capacity of aorgani$ation.
Sho!t)te!m Analysis
#his analysis is used to determine the short/termsol"ency of the business concern. Stability4li,uidity and earning capacity of the business isalso analy$ed.
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#echni,ues ofAnalysis and Interpretation.
Comparati"e statements
Common si$e statements
Fund +ow analysisCash +ow analysis
Ratio analysis
-et woring capital analysis #rend analysis
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Comparati"estatement analysis
Compa!ati*e statement analysis
It is a techni,ue used to analy$e the nancialstatement. #his statement summari$es and presentsrelated data for a number of years.
#hese statements are prepared in a way so as topro"ide time prospecti"e to the consideration of"arious elements of nancial position embodied in suchstatements.
#hese statements normally contains comparati"ebalance sheet and comparati"e income statement.
Comparati"e balance sheet is a statement which shows
changes in total capital and changes in woring capital
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Comparati"e Statements / specimen
a!ticula!s +,-, +,-- Inc!ease .ec!ease
Current Assets(a)
Fied Assets(b)
#otal Assets (a= b)
Current &iabilities(a)
&ong #erm &iabilities
(b)
#otal &iabilities (a= b)
Capital and Reser"es
Shareholders Funds( c )
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Common Si$e Statements
Common si$e statements indicate the relationshipof "arious items with some common items. It shouldbe denoted in percentage of common items.
#hese statements normally contains common si$e
balance sheet and common si$e income statement.
a!ticula!s
+,-, / +,-- /
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Funds Flow Statement
Funds +ow statement indicated the sources andapplication of funds. #he term funds refer tochanges in woring capital. Funds +owstatement clearly shows internal source andeternal source of woring capital and the wayfunds ha"e been used. Funds +ow is deri"edfrom analysis of changes which ha"e taenplace in assets and e,uities between twobalance sheets.
A statement of sources and application of fundsis a technical de"ice designed to analy$e the
changes in nancial position of a businessconcern between two eriods.
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Cash Flow Statement
Cash +ow statement shows thechanges in cash position. It re+ects thein+ows and out+ows of cash.
#his statement is prepared to nowclearly the "arious items of in+ow andout+ow of cash.
It is an essential tool for short/termnancial analysis and is "ery helpful inthe e"aluation of current li,uidity of
the business concern.
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Ratio Analysis
Ratio analysis refers to the numerical relationshipbetween two numbers.
An accounting ratio shows the relationshipbetween the two inter/related accounting guresas gross prot to sales4 current assets tocurrent liabilities4 loaned capital to owned capital.
Ratio analysis is the process of computing4determining and presenting the relationship ofitems. It also includes comparison andinterpretation of ratios and using them as basisfor the gure pro1ection.
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-etworing Capital Analysis
-ormally woring capital refers to the di*erencebetween current assets and current liabilities of thebusiness concern.
Current Assets are cash4 ban4 debtors4 bills
recei"able4 stoc4 prepaid epenses4 ad"ances andshort term in"estments.
Current &iabilities are sundry creditors4 bills payable4ban o"erdraft4 outstanding epenses4 pro"isions4
proposed di"idend etc.4-etworing capital statement or schedule changes inworing capital is prepared to disclose net changes inworing capital on two specic periods.
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#rend Analysis
#rend analysis is an important tool of hori$ontalnancial analysis. #his method plays a "ital roleto maing a comparati"e study of the nancialstatements of se"eral periods.
#rend analysis is carried out by calculating trendratio (>) and plotting the accounting data ongraph sheet or paper.
#rend analysis is signicant for forecasting andbudgeting. #rend analysis discloses the changesin nancial and operating data between specicperiods.
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&imitations ofFinancial Statement Analysis
:istorical nature of nancialstatements
Reliability of gures
'ased on past records
2i*erent interpretation
Change in accounting methods
Single year analysis is not much useful
%rice le"el changes
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#atio Analysis
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Ratio Analysis
Accounting ratios are relationships epressed inmathematical terms between gures which areconnected with each other in some manner.
Accounting ratios can be epressed as
A pure ratio
A rate
A percentage
Ratio analysis stands for the process of determining
and presenting the relationship of items and groupof items in the nancial statements. It is animportant method of nancial analysis.
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Ratio Analysis
Me!its
?seful in nancial position analysis
?seful in simplifying accounting gures
?seful in assessing the operationaleciency
?seful in forecasting purposes
?seful in locating the woring of thebusiness
?seful in comparison of performance
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Ratio Analysis
Limitations
%ractical nowledge and eperience
Inter/relationship
-on/a"ailability of standards or norms
Accuracy of nancial information
Consistency in preparation of nancial
statement #ime delay
Change in price le"el
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Ratio Analysis
Classication of #atios
Classication by Statements
'alance Sheet4 %rot and &oss A0c and Compositeratios
Classication by users
Ratios for 6anagement4 Creditors and Shareholders
Classication by relati"e importance
%rimary4 Secondary4 Creditors and @rowth ratiosClassication of ratios by purpose
%rotability4 #urno"er and Sol"ency ratios
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Classication of Ratios by
Statements
F!om "alance Sheet
&i,uid Ratio4 Current Ratio4 Ade,uate &i,uid Ratio4%roprietary Ratio4 Fied Assets Ratio4 2ebt 9,uity Ratioand Capita @earing Ratio.
F!om !ot 0 Loss@ross %rot Ratio4 8perating %rot Ratio4 -et %rotRatio and 9penses Ratio.
Composite #atios
Return on in"estment4 Return on net worth4 Stoc #urno"er Ratio4 2ebtors #urno"er Ratio4 Creditors
#urno"er Ratio4 Fied Assets #urno"er Ratio4 9arning perShare Ratio and %ayout Ratio.
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Classication by ?sers#atios fo! Mana$ement
8perating Ratio4 Stoc #urno"er Ratio4 2ebtors #urno"er Ratio4 Fied Assets #urno"er Ratio4 Creditors #urno"er Ratio4 Boring Capital #urno"er Ratio4 -et%rot Ratio4 @ross %rot Ratio4 8perating %rot Ratio4
Short term Sol"ency Ratio and &ong term Sol"encyRatio.
#atios fo! C!edito!s
Fied charges co"er Ratio4 2ebt Ser"ice co"er Ratio4
&i,uid Ratio4 Current Ratio4 2ebt 9,uity Ratio4 Capital@earing Ratio4 Sol"ency Ratio and Creditors #urno"erRatio.
#atio fo! Sha!eholde!s
Return on Shareholders fund4 Shareholders fund4%ayout ratio4 2i"idend yield ratio4 2i"idend co"er ratio
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2etailed Formulaefor Calculating Ratios
!ota1ility #atios#etu!n on In*estment
8perating %rot DD
Capital 9mployed#etu!n on Sha!eholde!s2 fund
-et %rot after ta and interest DD
Shareholders fund
#etu!n on E3uity Sha!eholde!s2 fund
-et %rot after ta and %ref. di"idend DD
9,uity Shareholders fund
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2etailed Formulaefor Calculating Ratios
#etu!n on Total Assets
-et %rot after ta and interest DD
Shareholders fund
4!oss !ot #atio
@ross %rot DD
-et Sales
Ope!atin$ !ot #atio8perating %rot DD
-et Sales
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2etailed Formulaefor Calculating Ratios
E%penses #atio
Specic epenses DD
-et Sales
Net !ot #atio
-et %rot DD
-et Sales
Ea!nin$ pe! sha!e 5ES6-et %rot after ta and %ref. di"idend DD
-o. of e,uity shares
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2etailed Formulaefor Calculating Ratios
!ice Ea!nin$ #atio
6aret price per e,uity share
9arning per e,uity share
ayout #atio
9,uity 2i"idend DD
-et %rot after ta and %ref. di"idend
#etainin$ Ea!nin$s #atioRetained 9arnings DD
-et %rot after ta and %ref. di"idend
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2etailed Formulaefor Calculating Ratios
Inte!est Co*e! #atio
%rot before interest and ta
Fied interest charges
Fi%ed .i*idend Co*e! #atio
%rot after ta
%ref. 2i"idend
.i*idend Yield #atio2i"idend per share DD
6aret price per share
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2etailed Formulaefor Calculating Ratios
Tu!no*e! #atiosIn*ento!y Tu!no*e! #atio
Cost of goods soldA"erage Stoc
.e1to!s Tu!no*e! #atio
-et Credit SalesA"erage recei"able
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2etailed Formulaefor Calculating Ratios
C!edito!s2 Tu!no*e! #atio
-et credit purchase
A"erage accounts payable
7o!8in$ Capital Tu!no*e! #atio
Cost of Sales
-et Boring Capital(Boring Capital E Current Assets Current&iabilities)
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2etailed Formulaefor Calculating Ratios
Fi%ed Assets Tu!no*e! #atio
Cost of Sales
-et Fied Assets
Capital Tu!no*e! #atioCost of Sales
Capital 9mployed
O9ned Capital Tu!no*e! #atioCost of Sales
Shareholders Fund
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2etailed Formulaefor Calculating Ratios
Sol*ency #atiosCu!!ent #atio
Current AssetsCurrent &iabilities
Li3uid #atio
&i,uid AssetsCurrent &iabilities
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2etailed Formulaefor Calculating Ratios
A1solute Li3uid #atioCash = 'an = 6aretable securities
Current &iabilities
Fi%ed Assets #atio
Fied Assets
&ong term funds
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2etailed Formulaefor Calculating Ratios
.e1t E3uity #atio
#otal long term debt
Shareholders funds
!op!ieta!y #atioShareholders fund
#otal tangible assets
Capital 4ea!in$ #atio&ong term loan = 2ebentures = %ref. Capital
9,uity Shareholders funds
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%rotability Ratios
%rotability refers to the ability to mae moreprot from optimum utili$ation of resourcesby a business concern.
%rotability in"ol"es study of sales4 cost ofgoods sold4 analysis of gross margin onsales4 analysis of operating epenses4operating prot and analysis of prot in
relation to capital employed.%rots are the goals of e"ery business rm.
#hey indicate a rms progress.
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%rotability Ratios
%rotability Ratios are in two models/
!ot Ma!$in #atio
It shows the di*erence between protsand sales.
#ate of #etu!n #atio
It eplains the relationship betweenprot and capital.
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%rotability Ratios
4!oss !ot #atio
Refers to the relationship between gross prot and net sales.A higher ratio is preferable for showing higher protability.
Ope!atin$ #atio
Re+ects the di*erence between total operating epenses andnet sales. 8perating epenses includes cost of goods sold4administrati"e epenses and selling epenses but ecludesnance epenses. -et sales means sales sales returns.
Ope!atin$ !ot #atio
9plains the operating eciency of the rm and is a measureof the managements eciency in running the businessoperations.
8perating prot ratio E @ross prot operating epenses
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%rotability Ratios
E%penses #atio
?seful to support operating ratio and indicates thee*ecti"eness of the business. @uides management toascertain the sa"ings or wastages in di*erent items of
epenses.Net !ot #atio
Also called as net prot to sale ratio. :igher the ratiobetter is the operational eciency of the business.
Ea!nin$ pe! sha!e 5ES6:ighlights the o"erall success of the business from
owners. It is calculated by di"iding the net prot afterta and pref. di"idend by number of e,uity shares.
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%rotability Ratios
!ice Ea!nin$s #atio
%09 ratio is important to prospecti"e in"estors to decidewhether to in"est in the e,uity shares of a company ata specic maret price or not. Shows earnings per
share re+ected by the maret price.Inte!est co*e! o! Fi%ed Cha!$es co*e! #atio
Re+ects the relationship between prot before interestand ta and ed interest charges.
.i*idend Yield #atio2i"idend yield ratio based on maret "alue of shares.
#he calculation of this ratio related with di"idend pershare and maret price per share.
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#urno"er Ratios
In*ento!y Tu!no*e! o! Stoc8 Tu!no*e! #atio
Also nown as stoc "elocity ratio. It is e*ecti"e to determinethe eciency of the in"entory. Shows relationship betweenthe cost of goods sold and a"erage in"entory.
Cost of goods sold means Sales @ross prot.e1to!s2 Tu!no*e! !atio
Also called as Account recei"able ratio or 2ebtors "elocityratio. #his ratio indicates the number of times the recei"ableare rotated in a year in terms of sales. It shows the eciency
of credit collection and credit policy.C!edito!s Tu!no*e! #atio
Also called as Account payable or Creditors "elocity.Indicates the number of times the payable rotate in a year.
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#urno"er Ratios
7o!8in$ Capital Tu!no*e! #atio
Boring capital means the relationship between current assetsand current liabilities. #his ratio measures the e*ecti"eutili$ation of woring capital and the relationship between costof sales and net woring capital.
Fi%ed Assets Tu!no*e! #atio
2etermines the eciency of utili$ation of ed assets andprotability of business concern. :igher ratio indicates eciencyin utili$ation and lower ratio indicates under utili$ation of edassets.
Capital Tu!no*e! #atio6anagerial eciency is calculated with the help of capitalturno"er ratio. It is the relationship between cost of sales andamount of capital in"ested in the business.
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Sol"ency Ratios
Cu!!ent #atio
#he ratio of current assets to current liabilities. #his ratioindicates the ability of a concern to meet its currentobligations as and when they are due for payments.
Current ratio E G Li3uid #atio
Also nown as <uic ratio or acid test ratio. It is calculatedby comparison of ,uic assets and current liabilities.
A1solute #atio
Also called cash position ratio or super ,uic ratio.It measures li,uidity in terms of cash and cash
e,ui"alents.
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Sol"ency Ratios
Fi%ed Assets #atio
9press the relationship between ed assetsand long term funds. #he benet of calculatingthis ratio is to ascertain the proportion of longterm funds in"ested in ed assets.
.e1t E3uity #atio
2etermining long term sol"ency position of a
company. 2ebt e,uity ratio is calculated inrelationship between eternal debt and internaldebt. Also called eternal internal ratio.
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Sol"ency Ratios
!op!ieta!y #atio
9presses the relationship between theproprietors funds and the total tangible assets. Itshows the soundness of the company. A high ratio
indicates safety to creditors and a low rate showsgreater ris to the creditors.
Capital 4ea!in$ #atio
It is used to analy$e the capital structure of therm. 9stablishes relationship between edinterest and di"idend bearing funds and e,uityshareholders fund.
Inter rm H Intra rm
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Inter/rm H Intra/rmComparison
Inter/rm comparison refers to comparing two or morerms in the same rm or industry. #he main ob1ecti"eis to analy$e the features and e*ecti"eness of the rmto highlight the location of strength and weaness.
Inter rm comparison is a diagnostic tool whicheplains the e*ect of certain di*erences in thefeatures and practices of rms on their performance.
Intra rm comparison is a "oluntary4 condential andanonymous pooling of ey management data for thepurpose of pro"iding to the management of eachparticipating rm with data on its areas of strengthand weaness in relation to other similar rms.
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Cash Flo9 Analysis
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Cash Flow Analysis
Cash +ow incudes cash in+ows and out+ows(cash receipts and cash payments) during aperiod. &i,uidity and short term sol"ency of a rmare dependent on its cash +ows.
A fundamental ob1ecti"e of nancial managementis to match the in+ows and out+ows of cash.
A cash +ow statement is a statement whichre+ects the changes in the cash position between
two accounting periods. It helps in taing shortterm nancial decision and also in the preparationof cash budget for the net period.
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Cash Flow Analysis
Cash +ow analysis can re"eal the causes fore"en highly protable rm eperiencingacute cash shortages.
An elaborate study of the sources of cashhelps to impro"e in+ow and analysis ofdi*erent application of cash helps to slowdown or decrease the out +ow of cash.
#he highest benet can be in getting a clearinsight into the method of matching thein+ows with the out+ows.
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Cash Flow Analysis
.enitions
Cash +ows are in+ows and out+ows of cash and cashe,ui"alents.
Cash e,ui"alents are short term4 high li,uid
in"estments that are readily con"ertible into nownamounts of cash and which are sub1ect to aninsignicant ris of changes in "alue.
Cash consists of cash on hand and demand deposit
with ban.In"esting acti"ities are the ac,uisition and disposal of
long term assets and other in"estment not includedin cash e,ui"alent.
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Cash Flow Analysis
"enets
:istorical analysis as guide to forecasting.
9*ecti"e cash management
Formulation of nancial policies%reparation of cash budgets
Short term nancial decision
&i,uidity positionRe"aluation
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Cash Flow Analysis
Limitations
2iscloses in+ows and out+ows ofcash alone
Scope of cash +ow statement islimited
Can be easily altered or more +eible
in nature
-on/cash items of epenses andincomes are ecluded.
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Cash Flow Analysis
Cash and Cash E3ui*alents
Cash e,ui"alents are held for the purpose ofmeeting short term cash commitments
rather than for in"estment or other purposes.It must be readily con"ertible to a nownamount of cash and be sub1ected to aninsignicant ris of changes in "alue.
Cash management include the in"estment ofecess cash in cash e,ui"alents.
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Cash Flow Statement
Cash +ow statement should epresscash +ow during the period classiedby operating4 in"esting and nancing
acti"ities.Classication by acti"ity pro"idesinformation that allows users to assess
the impact of those acti"ities on thenancial position of the enterprise andthe amount of its cash and cash
e,ui"alents.
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Cash Flow Statement
Ope!atin$ Acti*ities
#he amount of cash +ows arising fromoperating transactions is a ey indicator to
the etent to which the operations of theenterprise ha"e increased sucient cash+ow to maintain the operating capacity ofthe enterprise4 pay di"idends4 repay loans
and mae new in"estments withoutrecourse to eternal source of nancing.
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Cash Flow Statement
In*estin$ Acti*ities
Represent the etent to which ependituresha"e been made for resources intended to
generate future incomes and cash +ow.Financial Acti*ities
Cash +ow arising from nancing acti"ities isimportant because it is useful indetermining claims on future cash +ow bypro"iders of funds to the enterprise.
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%reparation of Cash Flow Statement
Cash +ow statement is prepared on the basis ofsource and uses of cash. Also based on theopening and closing balance sheet4 prot and lossaccount and other rele"ant information.
Cash +ow statement begins with the cash andban balances at the commencement of theperiod. If there is ban o"erdraft and cashbalance4 the net cash balance or net ban
o"erdraft becomes the starting point. #he "arious sources of cash are added to theopening balance and the application of cash aresubtracted. #he balance represents cash or ban
balances at the end of the accounting period. If a
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Sources of Cash
Cash f!om Ope!ations
Refers to a business generating cash in+owthrough its normal business operations which
is usually the most important and routinesource of cash.
Computation of Cash f!om Ope!ations
Bhen all transactions are cash transactions
Bhen all transactions are not cashtransactions
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Sources of Cash
7hen all t!ansactions a!e casht!ansactions
Bhen all epenses4 incomes and
re"enues are recei"ed or paid in cash4the net prot ascertained by prot andloss account represents cash from
operations.-et loss represents cash out +ow onaccount of operations.
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Sources of Cash
7hen all t!ansactions a!e not cash t!ansactions
'asically income statements are prepared on accrual
basis4 se"eral non/cash items are duly accounted inthe statements.
In such situations4 cash from operations is ascertainedin two stages/
Calculation of funds from operations
#his is be dealt in the net topic !Fund Flow
Analysis7Calculation of cash from operations
Bill be discussed in detail in this topic
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Calculation of Cash from 8perations
#he cash from operations is essentialto con"ert the "arious items a*ectingthe prot into cash basis.
2etermining funds from operations byadding bac to the net prot all non/cash epenses shown in the prot and
loss account and subtracting the non/cash incomes.
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Calculation of Cash from 8perations
E:ect of c!edit sales and de1to!s
Cash from operations E -et prot = opening
debtors closing debtors 5O!6
Cash from operation E -et prot = decrease indebtors increase in debtors
E:ect of c!edit pu!chases and c!edito!s
Cash from operations E -et prot = closing
creditors opening creditors 5O!6Cash from operation E -et prot = increase increditors decrease in creditors
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Calculation of Cash from 8perations
E:ect of unsold $oods in stoc8 oncash ;o9
Cash from operation E -et prot =
8pening stoc Closing stoc 5o!6
Cash from operation E -et prot =decrease in stoc 5o!6
Cash from operation E -et prot /increase in stoc
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Calculation of Cash from 8perations
E:ect of outstandin$ e%penses 0incomes !ecei*ed in ad*ance
Cash from operation E -et prot = closing
outstanding epenses and income recei"edin ad"ance / opening outstanding epensesand income recei"ed in ad"ance 5o!6
Cash from operation E -et prot = increase
in outstanding epenses and incomerecei"ed in ad"ance / decrease outstandingepenses and income recei"ed in ad"ance
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Calculation of Cash from 8perations
E:ect of p!epaid e%penses andacc!ued incomes
Cash from operation E -et prot =
opening accrued incomes and prepaidepenses closing accrued incomesand prepaid epenses 5o!6
Cash from operation E -et prot =decrease accrued incomes and prepaidepenses increase accrued incomes
and prepaid epenses
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Calculation of Cash from 8perations
#he changes during the accounting period incurrent assets and current liabilities other thancash and ban balances ha"e to be noted. #henthe amount of such changes should be added to
or subtracted from the funds from operations onthe basis of the following principle /
Increase in current liability / Increases cash
2ecrease in current liability / decreases cash
Increase in current asset / decreases cash
2ecrease in current asset / Increases cash
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9ternal sources of cash
Fresh issue of shares
Issue of debentures or bonds
&ong term borrowings
Sale of ed assets and in"estment
Cash out+ow on account of operation
%urchase of ed assets and longterm in"estment
%ayment of ta and di"idend
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Statement of cash from operationsa!ticula!s #s< #s<
-et prot
Add = Non)ope!atin$ e%penses
2epreciation on ed assets
&oss on sale of in"estment
@oodwill written o*
%reliminary epenses
#ransfer to reser"e
2iscount on issue of shares%ro"ision for depreciation
Less = Non)ope!atin$ incomes
%rot on sale of ed assets
%rot on sale of in"estments
Ad1usted %rot and &oss
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Ad1usted %rot and &ossAccount
a!ticula!s #s< a!ticula!s #s<
#o depreciation on edassets
'y 'alance '0d
#o loss on sale ofin"estment
'y prot on sale ofin"estment
#o loss on sale of edassets
'y prot on sale of edassets
#o @oodwill written o* "y Cash f!omOpe!ations
#o preliminary epenses
#o 'alance C0d
#otal #otal
Statement of cash from
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Statement of cash fromoperations
a!ticula!s #s< #s<
Funds f!om ope!ations
Add Increase in current liabilities
2ecrease in current assets other than cash and
ban&ess Increase in current assets other thancash and ban
2ecrease in current liabilities
Cash f!om Ope!ation
#otal
Cash Flow Statement
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Cash Flow Statementfor the year ended .
a!ticula!s #s< #s<
Openin$ 1alances= Cash
"an8
Add = Sou!ces of Cash
Cash from operation
Issue of shares
Issue of debentures
Sale of ed assets
Sale of in"estment
Increase in current liabilities
&ong term loans taen
Cash Flow Statement
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Cash Flow Statementfor the year ended .
a!ticula!s #s< #s<
Less = Application of cash
Redemption of preference shares
Redemption of debentures
&oan repaid
#a paid
2i"idend paid
2ecrease in current liabilities
Increase in current assets
&oss on sale of ed assets
&oss on sale of in"estment
Closin$ 1alances = Cash
"an8
C h Fl St t t
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Cash Flow Statement
In;o9 o! Sou!cesof Cash
Amount
Out;o9 o! Application ofCash
Amount
8pening balance ofCash and 'an
JJ Redemption of %ref. shares JJ
Issue of shares JJ Repayment of 2ebenture JJ
Issue of debentures JJ Repayment of loans JJ
Raising of loans JJ %urchase of ed assets JJ
Sale of ed assets JJ 2i"idend paid JJ
2i"idends recei"ed JJ Income #a paid JJ
Share %remiumrecei"ed
JJ Cash from 8perations (&ossin operation)
JJ
Cash from 8perations JJ Closing balance of Cash and'an
JJ
JJ JJ
9 t di It
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9traordinary Items
Fo!ei$n Cu!!ency cash ;o9?nreali$ed gains and losses arising from changes inforeign echange rates are not cash +ows.
Inte!est and .i*idend
Cash +ow arising from interest paid and interest anddi"idend recei"ed in the case of nancial rm shouldclassify as cash +ows arising from operating acti"ities.
Non)cash t!ansactions
Financing and in"esting transactions that do not usecash or cash e,ui"alents should be ecluded from a
cash +ow statement. 9.g.4 con"ersion of debt to e,uity.
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Fund Flo9 Analysis
F d Fl A l i
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Funds Flow Analysis
#he International Accounting Standard -o.Keplains Funds +ow as ! Statement of changes innancial position7. #he word fund refers to cashand cash e,ui"alents or to woring capital.
Concept of woring capital is di"ided into two/4!oss 9o!8in$ capital concept
It refers to the rms in"estment in current assets
Net 9o!8in$ capital concept
It refers to the ecess of current assets o"ercurrent liabilities.
F d Fl A l i
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Funds Flow Analysis
Non)cu!!ent lia1ilities #hese liabilities are not re,uired to be payable within a yearand paid out of current assets.
Cu!!ent lia1ilities
#hese liabilities are payable within a year and paid out ofcurrent assets.
Non)cu!!ent assets
#hese assets are purchased in the business for use o"er along period of time for earning purpose.
Cu!!ent assets #hese assets are easily con"erted into cash and reasonablyreali$ed in cash or sold or consumed within a year.
F d Fl St t t
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Funds Flow Statement
Funds +ow statement is a nancial statementwhich re"eals the methods by which the businesshas been nanced and how it has used its fundsbetween the opening and closing balance sheet
dates. #he funds +ow statement describes the sourcesfrom which additional funds were deri"ed andthe uses to which these funds were put.
It is also called as Statement of Sources andApplication of funds and Statement of Changesin Boring Capital.
F d Fl St t t
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Funds Flow Statement
O1>ecti*es?nderstand the changes in assets
:ow loans in the business ha"e been used
Re"ealing nancial strength and weanessIndication of nancial results
2istinguishing internal and eternal
sources@i"ing prominence to the dynamic
concept of business.
Funds Flo Statement
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Funds Flow Statement
Ad*anta$es %ro"ides detailed analysis and understanding
of changes in the distribution of nancialresources between two balance sheet dates.
Shows how funds were obtained and usedduring a period
Computation of cost of capital from sources offunds Indication of weaness and strength in
the nancial position of the rm Actuals compared with rele"ant budgets to
access usage
Formulating long term nancial plan and
olicies
Funds Flow Statement
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Funds Flow Statement
Si$nicance #he sources4 amount and timing of
nance
?tili$ation of funds on priority basis
Amount of di"idends through aconsistent di"idend policy
Appropriate decisions regardingpurchase of assets
Funds Flow Statement
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Funds Flow Statement
Limitations:istorical in nature
Shows only past happenings
Simply termed as secondary data
9*ect of current assets and liabilitiesnot shown
Ignores transactions between longterm assets and liabilities
Funds Flow Statement
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Funds Flow Statement
!epa!ation of Funds ;o9statement
Statement of changes in woringcapital
Funds +ow statement
Funds from operationAd1usted prot and loss account
B i C it l St t t
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Boring Capital Statement
Statement of chan$es in 9o!8in$ capitalIt is concerned with the current assets and currentliabilities only4 as they are shown in the balance sheet ofthe current year and the pre"ious year. -on/current assetsand non/current liabilities4 prot and losses4
additional information a"ailable are completely omitted.
Increase in current assets / Increases woring capital
2ecrease in current assets / 2ecreases woring capital
Increase in current liability / 2ecreases woring capital
2ecrease in current liability / Increases woring capital
Statement of changes
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gin woring capital / specimen
Changes in Boring Capital
a!ticula!s Yea! Yea! Inc!ease
.ec!ease
Cu!!ent Assets
Cash 'alance
'an 'alance
Stoc
Sundry 2ebtors
#rading In"estment
%repaid epenses
'ills Recei"able
Total 5A6
Statement of changes
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gin woring capital / specimen
Changes in Boring Capitala!ticula!s Yea! Yea! Inc!eas
e.ec!eas
e
Less= Cu!!ent Lia1ilities
Creditors'ills %ayable
8utstanding epenses
Short term loans
'an 8"erdraft
Total 5"6
7o!8in$ Capital
(Increase 0 2ecrease) 5A ?
"6
Funds Flow Statement /
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specimenFunds ;o9 statement fo! the yea! endin$@@@@
Sou!ces of funds #s<
Issue of shares
Issue of debentures
Sale of ed assets
In"estment sold
Funds from operations
Total Sou!ces 5A6
Funds Flow Statement /
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specimenApplication of funds #s<Repayment of long term loans
Redemption of preference shares
Redemption of debentures
%urchase of ed assets
#a paid
2i"idend paid
In"estment purchased
8ut +ow of funds
#otal Application (')
Increase 0 2ecrease in woring capital ( A ' )
Statement of Funds from
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8perations
Ad>usted !ot 0 Loss Account #s< #s<Net !ot fo! the yea!
Add= Items 9hich do not dec!ease fundsf!om ope!ation
2epreciation on ed assets
&oss on sale of ed assets
&oss on sale of in"estment
@oodwill written o*
2iscount on debentures written o* %ro"ision for ta
%roposed 2i"idend
Total
Statement of Funds from
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8perations
Ad>usted !ot 0 Loss Account #s< #s<Less= Items 9hich do not inc!ease fundsf!om ope!ations
%rot on sale of ed assets
%rot on sale of in"estment
Income from in"estment
Income ta refund
Funds from 8perations ('alancing gure)
Total