FINANCIAL STATEMENTS

A financial statement is an organized

collection of data according to logical and
consistent accounting procedures. Its purpose
is to convey an understanding of some
financial aspects of business firm
 FINANCIAL STATEMENTS

1. Income statement: discloses net profit

or net loss during the year
2. Balance sheet: financial position in terms
of reserves, capital, borrowed funds. These
are financial statements.
 Financial analysis:
The analysis is important as it helps in
ascertaining financial weaknesses and
strengths of the company in terms of its
activity, liquidity, solvency and profitability.
 Financial analysis:
Methods of analysis:
Horizontal analysis: The financial statements
of a company for more than one year are
analyzed. It is a time series analysis.
Vertical analysis: A financial statement of only
one year is analyzed. Relationship is
established between different important
accounting figures contained in financial
statements.
 Financial analysis:
Tools of financial analysis:
1. Comparative financial statement
2. Common size financial statement
3. Trend percentages
4. Ratio analysis
5. Fund flow analysis
6. Cash flow analysis
Trend percentages of total sales (2015 = 100%)

2020 2019 2018 2017 2016 2015

Sales 617 583 492 413 627 445

(Rs. In
crores)
Sales – 100%
trend %
 Trend %

Current Year X 100

Base Year
2016
 Trend %

Current Year X 100

Base Year
2016 627 X 100 141
445
Trend percentages of total sales (2015 = 100%)

2020 2019 2018 2017 2016 2015

Sales 617 583 492 413 627 445

(Rs. In
crores)
Sales – 141% 100%
trend %
 Trend %

Current Year X 100

Base Year
2016 627 X 100 141
445
2017 413 X 100 93
445
Trend percentages of total sales (2015 = 100%)

2020 2019 2018 2017 2016 2015

Sales 617 583 492 413 627 445

(Rs. In
crores)
Sales – 139% 131% 111% 93% 141% 100%
trend %
 COMPARATIVE FINANCIAL
STATEMENTS
All figures in the financial statements of two
or more years can be compared with each
other to know whether there is positive or
negative change.
For this, financial statements of two or more
years are vertically placed side by side for
comparison.
 COMPARATIVE FINANCIAL
STATEMENTS

These are comparative statements.

They help us find absolute change and also
relative change in terms of percentage.
Two types are:
Comparative balance sheet
Comparative income statement
 CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash $ 12,000 $ 23,500 $ (11,500) (48.9)
Accounts receivable, net 60,000 40,000 20,000 50.0
Inventory 80,000 100,000 (20,000) (20.0)
Prepaid expenses 3,000 1,200 1,800 150.0
Total current assets 155,000 164,700 (9,700) (5.9)
Property and equipment:
Land 40,000 40,000 - 0.0
Buildings and equipment, net 120,000 85,000 35,000 41.2
Total property and equipment 160,000 125,000 35,000 28.0
Total assets $ 315,000 $ 289,700 $ 25,300 8.7
 Absolute change=
Current year balance –
Previous year balance
Cash
 Absolute change=
Current year balance –
Previous year balance
Cash 12000-23500 (11500)
 % Change

Absolute Change___ X 100

Base Year (previous year)
Cash
 % Change

Absolute Change___ X 100

Base Year (previous year)
Cash 11500 X 100 48.9
23500
 CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash $ 12,000 $ 23,500 $ (11,500) (48.9)
Accounts receivable, net 60,000 40,000 20,000 50.0
Inventory 80,000 100,000 (20,000) (20.0)
Prepaid expenses 3,000 1,200 1,800 150.0
Total current assets 155,000 164,700 (9,700) (5.9)
Property and equipment:
Land 40,000 40,000 - 0.0
Buildings and equipment, net 120,000 85,000 35,000 41.2
Total property and equipment 160,000 125,000 35,000 28.0
Total assets $ 315,000 $ 289,700 $ 25,300 8.7
 CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Assets
Current assets:
Cash $ 12,000 $ 23,500 $ (11,500) (48.9)
Accounts receivable, net 60,000 40,000 20,000 50.0
Inventory 80,000 100,000 (20,000) (20.0)
Prepaid expenses 3,000 1,200 1,800 150.0
Total current assets 155,000 164,700 (9,700) (5.9)
Property and equipment:
Land 40,000 40,000 - 0.0
Buildings and equipment, net 120,000 85,000 35,000 41.2
Total property and equipment 160,000 125,000 35,000 28.0
Total assets $ 315,000 $ 289,700 $ 25,300 8.7
 CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
Increase (Decrease)
1999 1998 Amount %
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 67,000 $ 44,000 $ 23,000 52.3
Notes payable 3,000 6,000 (3,000) (50.0)
Total current liabilities 70,000 50,000 20,000 40.0
Long-term liabilities:
Bonds payable, 8% 75,000 80,000 (5,000) (6.3)
Total liabilities 145,000 130,000 15,000 11.5
Stockholders' equity:
Preferred stock 20,000 20,000 - 0.0
Common stock 60,000 60,000 - 0.0
Additional paid-in capital 10,000 10,000 - 0.0
Total paid-in capital 90,000 90,000 - 0.0
Retained earnings 80,000 69,700 10,300 14.8
Total stockholders' equity 170,000 159,700 10,300 6.4
Total liabilities and stockholders' equity $ 315,000 $ 289,700 $ 25,300 8.7
Common-size financial statements
Standardizing financial statements by
introducing a common denominator
In a common-size balance sheet each
component of the balance sheet is
expressed as a percentage of total assets
In a common-size income statement each item
is expressed as a percentage of sales
Common-size financial statements
Allow comparison of companies of different
size (in terms of total assets and sales)

Allow (internal) structural analysis of the

financial statements of a company

Combination of horizontal and vertical

analysis
Common-size Balance Sheet
Published Common size
€m %

Assets
Fixed assets
Tangible assets 113.9 22.4
Investments 8.6 1.7
Current assets
Inventories 53.2 10.5
Receivables 218.6 43
Bank 114.3 22.4
Totals 508.6 100

Liabilities and equity

Trade and related liabilities 111.6 22
Short-term borrowing 201.3 39.6
Long-term borrowing 3.1 0.6
Provisions 24.1 4.7
Equity 168.5 33.1
Totals 508.6 100
 Common size %

Amount X 100
Base Value
Tangible 113.90 X 100 22.40
assets 508.60
Common-size Balance Sheet
Published Common size
€m %

Assets
Fixed assets
Tangible assets 113.9 22.4
Investments 8.6 1.7
Current assets
Inventories 53.2 10.5
Receivables 218.6 43
Bank 114.3 22.4
Totals 508.6 100

Liabilities and equity

Trade and related liabilities 111.6 22
Short-term borrowing 201.3 39.6
Long-term borrowing 3.1 0.6
Provisions 24.1 4.7
Equity 168.5 33.1
Totals 508.6 100
Common-size Balance Sheet
Published Common size
€m %

Assets
Fixed assets
Tangible assets 113.9 22.4
Investments 8.6 1.7
Current assets
Inventories 53.2 10.5
Receivables 218.6 43
Bank 114.3 22.4
Totals 508.6 100

Liabilities and equity

Trade and related liabilities 111.6 22
Short-term borrowing 201.3 39.6
Long-term borrowing 3.1 0.6
Provisions 24.1 4.7
Equity 168.5 33.1
Totals 508.6 100
Common-size Income Statement
Published Common size
€m %

Sales 5,356 100

Cost of sales (2,601) (48.6)
2,755 51.4
Distribution costs (382) (7.1)
Administrative expenses (874) (16.3)
Profit before interest and tax 1,499 28.0
Interest (362) (6.8)
Profit before taxation 1,137 21.2
Taxation (384) (7.1)
Net profit for the period 753 14.1
 Common size %

Amount X 100
Base Value
Net
Profit
 Common size %

Amount X 100
Base Value
Net 753__ X 100 14.1
Profit 5356
Common-size Income Statement
Published Common size
€m %

Sales 5,356 100

Cost of sales (2,601) (48.6)
2,755 51.4
Distribution costs (382) (7.1)
Administrative expenses (874) (16.3)
Profit before interest and tax 1,499 28.0
Interest (362) (6.8)
Profit before taxation 1,137 21.2
Taxation (384) (7.1)
Net profit for the period 753 14.1
 Common-size Income Statement

2016 % 2015 %
Net sales $5,700 100.0 $6,600 100.0
Cost of goods sold 4,000 70.2 4,800 72.7
Gross profit on sales $1,700 29.8 $1,800 27.3
Selling expense $1,120 19.6 $1,200 18.2
General expense 400 7.0 440 6.7
Total operating expenses $1,520 26.6 $1,640 24.9
Operating income (loss) $ 180 3.2 $ 160 2.4
Other revenue (expense) 80 1.4 130 2.0
Income before taxes $ 260 4.6 $ 290 4.4
Income tax 80 1.4 85 1.3
Net income $ 180 3.2 $ 205 3.1