In order to ascertain the financial status of the business every enterprise prepares certain

statements, known as financial statements. Financial statements are mainly prepared for
decision making purpose. But the information as is provided in the financial statements is
not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and
interpretation of financial statements is required. Analysis means establishing
a meaningful relationship between various items of the two financial statements with each
other in such a way that a conclusion is drawn. By financial statements we mean
two statements:
1. Profit and loss Account or Income Statement
2. Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are the indicators of
profitability and financial soundness of the business concern. The term financial analysis
is also known as analysis and interpretation of financial statements. It refers to
the establishing meaningful relationship between various items of the two financial
statements i.e. Income statement and position statement. It determines financial strength
and weaknesses of the firm. Analysis of financial statements is an attempt to assess the
efficiency and performance of an enterprise. Thus, the analysis and interpretation of
financial statements is very essential to measure the efficiency, profitability, financial
soundness and future prospects of the business units. Types of financial statement are:
1) Comparative statement
2) Common size statement
3) Trend analysis
Financial analysis serves the following purposes:
1. Measuring the profitability
The main objective of a business is to earn a satisfactory return on the funds invested in
it. Financial analysis helps in ascertaining whether adequate profits are being earned on the
capital invested in the business or not. It also helps in knowing the capacity to pay the
interest and dividend.
2. Indicating the trend of Achievements
Financial statements of the previous years can be compared and the trend regarding various
expenses, purchases, sales, gross profits and net profited. Can be ascertained. Value of
assets and liabilities can be compared and the future prospects of the business can
be envisaged. Assessing the growth potential of the business. The trend and other analysis
of the business provides sufficient information indicating the growth potential of the
business.

3. Comparative position in relation to other firms

The purpose of financial statements analysis is to help the management to make
a comparative study of the profitability of various firms engaged in similar businesses.
Such comparison also helps the management to study the position of their firm in respect
of sales, expenses, profitability and utilizing capital, etc.
4. Assess overall financial strength
The purpose of financial analysis is to assess the financial strength of the business.
Analysis also helps in taking decisions, whether funds required for the purchase of new
machines and equipment are provided from internal sources of the business or not if yes,
how much? And also to assess how much funds have been received from external sources.
5. Assess solvency of the firm
The different tools of an analysis tell us whether the firm has sufficient funds to meet
its short term and long term liabilities or not.
.
COMPARATIVE STATEMENT
Comparative statements are financial that cover a different time frame, but are formatted
in a manner that makes comparing line items from one period to those of a different period
an easy process. This quality means that the comparative statement is financial that lends
itself well to the process of comparative analysis. Many companies make use of
standardized formats in accounting functions that make the generation of a comparative
statement quick and easy.
IMPORTANCE AND USES
The benefits of a comparative statement are varied for a corporation. Because of the uniform
format of the statement, it is a simple process to compare the gross sales of a given product
or all products of the company with the gross sales generated in a previous month, quarter,
or year. Comparing generated revenue from one period to a different period can add another
dimension to analyzing the effectiveness of the sales effort, as the process makes it possible
to identify trends such as a drop in revenue in spite of an increase in units sold. Along with
being an excellent way to broaden the understanding of the success of the sales effort, a
comparative statement can also help address changes in production costs. By comparing
line items that catalogue the expense for raw materials in one quarter with another quarter
where the number of units produced is similar can make it possible to spot trends in
expense increases, and thus help isolate the origin of those increases. This type of data can
prove helpful to allowing the company to find raw materials from another source before
the increased price for materials cuts into the overall profitability of the company.

A comparative statement can be helpful for just about any organization that has to deal
with finances in some manner. Even non-profit organizations can use the comparative
statement method to ascertain trends in annual fund raising efforts. By making use of the
comparative statement for the most recent effort and comparing the figures with those of
the previous year’s event, it is possible to determine where expenses increased or
decreased, and provide some insight in how to plan the following year’s event.

FEATURES OF COMPARITIVE STATEMENTS:-

1) A comparative statement adds meaning to the financial data.

2) It is used to effectively measure the conduct of the business activities.

3) Comparative statement analysis is used for intra firm analysis and inters firm analysis.

4) A comparative statement analysis indicates change in amount as well as change in

percentage.

5) A positive change in amount and percentage indicates an increase and a negative change
in amount and percentage indicates adecrease.

6) If the value in the first year is zero then change in percentage cannot be
indicated. This is the limitation of comparative statement analysis. While interpreting the
results qualitative inferences need to be drawn.
7) It is a popular tool useful for analysis by the financial analysts.

8) A comparative statement analysis cannot be used to compare more than two years
financial data

TREND STATEMENT
Trend analysis calculates the percentage change for one account over a period of time of
two years or more.
Percentage change
To calculate the percentage change between two periods: Calculate the amount of the
increase/ (decrease) for the period by subtracting the earlier year from the later year. If the
difference is negative, the change is a decrease and if the difference is positive, it is an
increase. Divide the change by the earlier year's balance. The result is the percentage
change.

FEATURESOFTRENDANALYSIS

1) In case of a trend analysis all the given years are arranged in an ascending
order.
2) The first year is termed as the “Base year” and all figures of the base year are taken as
100%.
3) Item in the subsequent years are compared with that of the baseyear.
4) If the percentages in the following years is above 100% it indicates an increase over the
base year and if the percentages are below100% it indicates a decrease over the base year.
5) A trend analysis gives a better picture of the overall performance of the business.
6) A trend analysis helps in analyzing the financial performance over a period of time.
7) A trend analysis indicates in which direction a business is moving i.e. upward or
downwards.
8) A trend analysis facilitates effective comparative study of the financial performance
over a period of time.
9) For trend analysis at least three years financial data is essential. Broader the base the
more reliable is the data and analysis.

1.2 Profitability Ratio

5.2.1 Gross profit Ratio
Gross profit
Gross profit ratio= ∗ 100
Net sales

Table: 5.2.1
Year Gross profit Net sales Ratio
2013-2014 360472.4 1990048 18%
2014-2015 80874.5 626565 12%
2015-2016 9836.8 900549 1%
2016-2017 254186.91 2609097.16 10%
2017-2018 153934.95 5737593.77 3%
Source: Company Records
Chart 5.2.1
Gross profit ratio
 Gross profit ratio
20
18
16
14
12
10
8
6
4
2
0
2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Interpretation:
This ratio expresses the relationship between gross profit and sales. An increasing gross
profit ratio may be due to an increase in selling price without a corresponding increase in
the cost of goods sold or due to a decrease in the cost of goods sold without a corresponding
decrease in the selling price of goods. The figure shows the highest ratio in the years 2013-
14 and 2014-15 and 2015-16 as the lower ratio.

5.2.3 Net profit ratio

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
Net profit ratio= ∗ 100
𝑆𝑎𝑙𝑒𝑠

Table: 5.2.3
Year Net profit Sales Ratio
2013-14 446720.72 1990048 22%
2014-15 1712960 626565 27%
2015-16 2988901 900549 33%
2016-17 178230.74 2609097 6%
2017-18 78103.59 5737594 1%

Source: Company records

Chart: 5.2.3
 Ratio
350

300

250

200

150

100

50

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation:

The table 5.2.3 shows a higher ratio of 33% during the year 2015-16. In 2014-15 a slight
variation 27% was shown and in the next year a tremendous downfall in the profit of 22%
was seen that remains for one more year and ends with casual decreasing of profit 1% in
the year 2017-18.