INTRODUCTION: Financial statement are the instrument panel of the business enterprise, prepared for

decision making. They constitute a report on managerial managerial performance. success or Attesting & to



warning signals familiar impending difficulties. To a reader with a knowledge of accounting, a set of financial statement & tells a great deal about a business enterprise. NEEDLY FINANCIAL STATEMENT ANALYSIS: Financial statements are needed to be analyzed & interpreted to set clear information about business operation & financial position. Financial statement analysis is a process of

identifying the financial strengths and weaknesses of the firm by properly establishing relationship blow the items of the B/S and P&C A/C. TOOLS OF FINANCIAL STATEMENTS ANALYSIS:

Different types of techniques are used in financial statement analysis. These of includes changing comparative in warking



capital, common size percentages, fund analysis, trend analysis and ratio analysis. Ratio analysis is the power ful tool in the financial statment analysis. RATIO: It is simple mathematical expression of the

relationship of one item to another. It shows the relationship b/w statistical data.

INTRODUCTION: Ratio analysis is a widely used tool of financial analysis. It is defined as the “systematic use of ratio to interpret the financial statements so that the strengths & weaknesses of a firm, as well as

It yields significant inferences. analysis.its historical performance & warrant financial condition. say. as tools of financial as single Volvos their comparison ratios like absolute figures are not of much use. The comparison of the profitability of a firm. Ratios make the related information comparable. in Their use. Trend Analysis Inter firm comparison and Comparison average. A single figure by itself has no meaning. ii. i. viz. year with standards/industry .e. iii. Three types of comparisons are generally involved.. Trend ratios involve comparison of ratios of a firm over a period of time. but we expressed in terms of a related figure. The ratio are relative figures reflecting the relationship between related variables. can be determined. i. present same firm.

is an illustration of a trend ratio. among that is. 3. This. it reflects the firm’s performance in relation to its competitors. Trend ratios indicate the direction of change in the performance improvement. The IMPORTANCE OF A/CING RATIOS: importance of accounting out ratios. relationships worked various accounting data which are mutually interdependent & which influence each other in a significant manner arises from the fact that often absolute . or for the industry as a whole. deterioration or constancy over the years. Other types of of comparison items within may a relate single to the comparison year’s financial statement of a firm. and comparison with standards or plans. Inter firm comparison involves comparing the ratios of a firm with those of others in the same live of business.1 to year 5.

A firm earns a profit of Rs. will have to ascertain the .figures standing alone convey no meaning. Ratio may be expressed as a rational figure or as a percentage. Suppose. For example the ratio of 3.00. For purposes of analysis .000 may be expressed as 1. When we say that so and so is fat.000 to 2. Even if an a obsolete figure is considered aware significant. but for precise knowledge it will be necessary to analysis all the figures competely. They become significant only when considered along with other figures.000. 1. sales have increased but profit has fallen. This information is meaingress unless their the figure of capital employed to earn it or of sales affected is available.5 or 150%. what we are trying to say is that considering the age and height of the person. One may be vaguely aware of the causes.00. of the one other may be subconsciously relevant figures. For example.00. he is over weight. accounting ratios are indispensable.

.contribution to higher sales by change in prices and by increased or lower sales volume. For one firm against another or For one firm against the industry as a whole or against predetermined standards or. For one division or department of a firm against other division for departments of the same firm. In fact. the consumption of materials with also be analysed both for changes in prices and in quantities consumed. For the same firm over a period for years of ii. Such analysis is greatly facilitated by accounting ratios. iv. a meaning ful analysis of the financial situation and performance is the first great advantage of a / ing ratios. iii. This requires ratios and their comparison which may be: i.

they also indicate the causes leading up to the position to a large extent. 5. one should compare the rate of profit on capital employed for the firms concerned the size of the profit as such is not relevant.Inter firm comparison and intra firm comparison are. For example to judge which firm has the best overall efficiency. This helps in ascertaining other figures if on figure is available. this can also be attempted in other ways but accounting ratios are in dispensalbe in this respect. Best results are obtained when rtios for a number of years are put in a tabular form so that the figures for one year can be easily compared with those of other years. A/cing ratios tabulated for a number of years indicate the trend of the change. this. Accounting ratios not only indicate the present position. ADVANTAGES OF RATIO ANALYSIS: . both possible on the basis of accounting ratios.

2. planning. over valved and under valved firms. ratios tell the whole story of changes in the financial condition of the business. Facilitates inter firm comparison: It provides data for inter firm comparison ratios with highlight successful the and factors associated firm. 4. Simplifies simplifies financial the statement: It of comprehension financial statements . unsuccessful They also reved strong firms and weak firms. co-ordination. Makes Ratio inter firm comparison also the makes possible: possible of analysis of comparison performance . Ratios can assist management in its basic functions of for e casting. control and communication. Helps in planning: It helps in planning and fore casting.1. 3.

Ghani.differend divisions of the firm.S. The analysis of relationship between two or more line items of the financial statement. Advanced A/Cs by M.C Shula and T. USES & APPLICATION OF RATIO ANALYSIS: probably the most widely used financial analysis techinque is ratio analysis. a commonly used financial ratio. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. grewal • 6. Helps in investment decisions: It helps in investment decisions in the case of investors and leading decisions the case of bankers etc. Advanced A/Cs 1992 M. • • Financial Management by khan and Jain.A. Fore example. is the current ratio which is the relationship between .

current assets and current liabilities. Generally financial ratio are calculated for the purpose of evaluating four aspect of company’s operations: .

Under this classification ratios are grouped as follows: . (iii) Test of Solvency etc..g. e. These tests are (I) Test of Liquidity. Robert N. or the ratio of total assets to sales. (ii) Test of Profitability. antony suggested that ratios may be grouped on the basis of certain tests which satisfy needs of the parties having financial interest in the business concer. (B) Classification according to Function or Tests. The most commonly used inter statement ratios are given in the chart exhibiting traditional classification or statement ratios.ACCOUNTING RATIOS: Item. stock turnover ratio.

Gross Profit Ratio. Working Ratio. 5. 3. Return on equity capital. Inventory Financial Turnover 1. Creditors turnover Capital Turn over 5. Return on capital employed. ratio turnover 1. Liquid 1. Ratio. Payable 3. b) in relation to Investment 6 Return on investment . Debtors 2. ratio capital 2. Earnings per share. Test or 2. Cash flow Turn over 4. Operating Ratio. Interest Liquid coverage 4. 7. Debt to total 3. Debt equity turnover (Acid Ratio ratio. Current Operating Ratio Ratio Composite 2. 4. Absolute over Ratio. Operating Profit ratio.CLASSIFICATION ACCORDING TO TESTS Liquidity Ratio A) B) Long Solvency and Activity ratios Leverage Ratios 1. Debtors ratio. Total Assets Ratio. Net Profit Ratio Expense Ratio. Capital employed turnover ratio. Fixed Quick) capital ratio. a) in relation to sales 1. 3. 6. Inventory turnover Turn over ratio Ratio. Assets turn 3. Return on total resources. debt service 5. 2. Price earning ratio 7 8 9 10 11 . gearing Ratio.

Geni) Activity or turnover of assets. The various liquidity ratios and absolute liquidity ratios are: current ratio. These are the ratios which the short term solvency or financial measure position of a firm. e. 3..g. Leverage Profitability (further defail M. (b) Long term Solvency and Leverage patios.a. 4. Liquidity (m.A Gani) . These ratios are calculated to comment upon the short term paying capacity of a concern or the firm’s ability to meet its current obligations. debt Equity Ratio and interest coverage Ratio. Long term solvency rations convey a firm’s ability to meet the interest costs and repayment schedules of its long term obligations. Leverage Ration show 1. liquid ratio and absolute liquid ratio.(a) Liquidity Ratios. 2.

4. Profitability Ratios It helpful for evaluating management’s success in senerating returns for those who provides capital to the company. Activity or Turnover Ratio it is useful with for avaluating the the effectiveness which company uses its assets. 3. 2. .1. Each of these types of financial ratios in discussed thus applicable in business life. Liquidity Ratio It helps to to user to assess the company’s or shart ability meet currently maturing term obligations. Leverage Ratios It provide information about the company’s ability to meet both current and long term obligations.

that is . So ratios are helpful to make comparison. Ratio may express as a rational figure or as a percentage figure e. They become significant only when consider along with the other figures. But for precise knowledge it is better to analysis all the figure completely. along Suppase has sales fallen. worked out among are various mutually Lwhich interdependent and which influence each other in a significant manner arises from the fact aht aften absolute figure standing alone convey no meaning.USES AND OF ACCOUNT RATIOS: • The impartance of a/c ratios. relationship a/c data.g. has One inereased profit may vasuely aware of the causes. . • For the purpose of analysis the a/c ratios are indispensiable.5 or 150%. the ratios of 300000 to 200000 may be expressed as 1.

For the same firm over a period of year ii.g.• Infact the meaningful analysis of the financial situation and the performance in the first great advantage of financial ratios. iv. i. For one division or department of firm with other division or department of firm. to judge the efficiency of two firm one should compare the rate of profit on the capital employed for the firm concerned. . • Inter firm comparison or intra firm comparison thus both possible with ratio analysis e. iii. Our comparison may be. For one firm against another For one firm against the industry as a whole or against predetermined standards.

• A/c ratios tabulated for a number of years indicate the trend of changes.g. a/c ratios may indicate not only that financial position is precarions but also the past policies which have caused it. • Best results are obtained when ratios for a number of years are put in a tabular form so that the figures of one year can be easily compared with thase of the other year.They also indicate the causes leading to the position to a large extent e. • Ratio also help ascertaining other figures if one figure in reliable suppase it is known that ratio of wages to sales is 15% it is than easy to calculate the amount to be spent on wages if the amount of .• A/c ratios not only indicate the present position . This helps preparation of estimates for the futures.

• Financial ratios may be computed for on analysis of the statement.expected sales is known. Jthese ratios and the raw figures can be compared with those of the present and past financial statements financial direction condition of and using this infarmation analyze the of the the manager changes can in financial the firm performance over the past. the present. • Ratio can be e. and the future.g. ADVANTAGES OF RATIO ANALYSIS: Ratio Analysis is an important and age ord . used one to produce make faceast direct statement would statemnt of all the items on the balance sheet by progecting financial ratios into the future and than making estimate the basis of these ratios.

planning. MAKES INTER FIRM COMPARISON . 1. 3. 2. Ratios highhights the factors associated with successful firm. they also reveal strong firms and weak gfirms over valved and under valved firms. contror and communications. ratio can sassist managemnt. 4. The following are the show of the advantages of ratio analysis. co-ordination.technique of financial analysis. HELPS IN PLANNING: it helps in planning and fore casfing. ratio tells whole story of charges in financial comditions of the business. FACILITATES INTER FIRM COMPARISON it provides the data for inter firm comparison. In its basic finctions of forecasting. SIMPLIFIES FINANCIAL STATEMENTS: It simplifies the comprrohension of financial statements .

HELPS IN INVESTMENT DECISIONS: it helps in investment clecisions in the case of investors and rending decision in the case of bankers etc.POSSIBLE: ratio analysis also makes possible comparison of the performance of different divisions of the firm. Lthe ratios are helpful in deciding about their efficierly. other wise in the past and likely performance in The FUTURE. . 5.


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