Analysis of Financial Statements.final
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Transcript of Analysis of Financial Statements.final
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7/29/2019 Analysis of Financial Statements.final
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ANALYSIS OF FINANACIALSTATEMENTS
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FINANCIAL STATEMENT ANALYSIS
Analysis of financial statement means a
systematic and specialized treatment ofthe information found in financialstatements so as to derive usefulconclusions on the profitability and
solvency of the business entityconcerned.
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Objectives of
Financial StatementAnalysis
Profitability Analysis Liquidity Analysis Solvency Analysis
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Profitability Analysis: Users of financial statementsmay analyze financial statements to decide past and
present profitability of the business
Liquidity Analysis: Suppliers of goods, moneylendersand financial institutions may do a liquidity analysis
to find out the ability of the company to meet itsobligations
Solvency Analysis: It refers to analysis of long term
financial position of the company. This analysis helpsto test the ability of a company to repay its debts.
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Qualitative characteristics of Financial
Statements
Attributes that make the information provided
in the financial statements useful to users.
These attributes include
Understandability
Relevance
Materiality
Reliability Comparability
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Components of Financial Statements
Balance Sheet
Income Statement
Cash flow Statement Statement of Changes of Equity
Notes, comprising a summary of significant
accounting policies and other explanatoryNotes
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Balance Sheet
The Financial Report which shows the
Financial position of the Business entity at a
given time.
Balance sheet Equation
ASSETS= CAPITAL + LIABILITIES
Where the funds are invested= Where thefunds came from
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Balance Sheet
A balance sheet is a statement of the total assets andliabilities of an organization at a particular date -usually the last date of an accounting period.
The balance sheet is split into two parts:
(1) A statement offixed assets, current assets andthe liabilities (sometimes referred to as "NetAssets")
(2) A statement showing how the Net Assets have
been financed, for example through share capital andretained profits.
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INCOME STATEMENT
Income statement shows all revenues and expenditureover the period and the profitability .Specificinformation in the income statement include, Revenue,Cost of Sales, Gross Profit, Operating Expenditures,finance costs, Depreciation.
An income statement reports the organizationsfinancial performance over a specified period of time.It summarizes all revenue earned and expensesincurred during a specified accounting period. An
institution prepares an income statement so that it candetermine its net profit or loss (the difference betweenrevenue and expenses).
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CASH FLOW STATEMENTA cash flow statement shows where an institutionscash is coming from and how it is being used over a
period of time. A cash flow statement Classifies the cash flows into
operating, investing and financing activities.
Operating activities: services provided (income-
earning activities). Investing activities: expenditures that have been
made for resources intended to generate futureincome and cash flows.
Financing activities: resources obtained from andresources returned to the owners, resourcesobtained through borrowings (short-term or long-term) as well as donor funds.
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TYPES OF
FINANCIAL
ANALYSIS
Intra Firm
Analysis
Inter Firm
Analysis
Standard
Analysis
Horizontal
Analysis
Vertical
Analysis
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Intra Firm Analysis: Analysis of performance of theorganization over a number of years. It is also referred toas Time Series Analysis or Trend Analysis
Inter Firm Analysis: It is a comparison of two or moreorganizations in terms of various financial variables.
Standard Analysis: only one set of financial statements
of an organization is analyzed on the basis of standard setfor the firm or industry
Horizontal analysis: It is a comparison of figuresreported in financial statements of two or more
consecutive accounting periods i.e. Analysis across years
Vertical Analysis: comparing figures I the financialstatements of a single period is known as Vertical Analysis
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1. COMPARATIVE FINANCIAL STATEMENTS
Comparative financial statements are statementsof the financial position of a business so designedas to facilitate comparison of different accountingvariables for drawing useful inferences
Comparative financial statements show:
a) Absolute data for each of the periods stated
b) Changes in absolute data in terms of rupeesc) Changes in absolute data in percentages
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Advantages
Indicates the direction of movement and thefinancial position of the company.
Used to compare the position of the every
month or every quarter. Used to compare with other firms.
Presents a review of the past activites and
their effect on the financial position. Helps to determine the nature of trends of
current changes affecting the enterprise.
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Disadvantages
Loose their purpose if the application of accountingprinciples over a period of time is not consistent.
Consistent changes in price levels render accountingstatements useless for comparisons
To carry out inter firm comparison the firms need to be of
the same age, size and follow the same principle.
If the accounting period follows an abnormal period the
analysis would be rendered useless 15
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2. Common-Size Statements
It is a statement which facilitates
comparison of two or more business
entities with a common base
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Advantages
It reveals the sources of funds and the
application of the total funds in the assets of a
business enterprise.
It indicates the changing proportion of the
assets, liabilities, costs etc.
It assists corporate evaluation and ranking.
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Disadvantages
Do not show variation in various item from
time to time
If it is not prepared on a consistent basis
comparative study will be misleading.
It does not establish any relationship between
items in profit and loss account with that of
items of balance sheet
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3. Trend Analysis overview
What is trend analysis?
Advantages of trend analysis
Disadvantages of trend analysis Example of trend analysis
Comments derived from trend analysis.
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What is Trend Analysis
Also termed as trend percentage.
Used for comparing financial statements over
a number of years.
At least 3 years data required.
Base year
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Trend analysis
Each base year item taken as 100.
Upward trend will be indicated by the trend %being more than 100.
Downward trend % will be indicated by thetrend% being less than 100.
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Comments/derivations
Company reliance on borrowed funds has declined
whereas the dependence on owned funds has
increased which can be revealed by 80%.
The company has gone for an expansion programwhich is reflected by addition to the Fixed assets
which has increased by 50% in the year 2003 and
70% in 2004 compared to the base year calculated
on net Fixed Assets.
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Due to increase in Fixed Assets there is also an
additional requirement of working capital in
order to mobilize the Fixed Assets which is
reflected by 24% in the year 2003 and 50%increase in the year 2004 compared to the
base year.
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Comments/derivations
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Advantages
Indicates the direction of movement offinancial performance of the company.
Indicated the increase or decrease in an
accounted item. Shows the magnitude change , hence more
effective than regular data.
An efficient method to showcase the financialperformance of a company over a period oftime.
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Disadvantages
Any 1 trend by itselfdoes notshow the truepicture.
Trend percentages without absolute data
reference tend to be absurd. Comparison of trend meaningless if
accounting practices change during the years.
The base year selected may not be normal ortypical.
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