Chapter-2

Financial statement Analysis

Meaning of financial statement:
The term financial statements, generally refers to two statement Income statement or profit
and loss account showing the results of operations during a certain period and balance
sheet showing assets, liabilities and capital of a business enterprises on a particular date.
Meaning of financial Analysis:
The term financial analysis refers to the process of determining financial strengths and
weakness of a concern by establishing strategic relationship between the items of the
financial statements
Definition of financial statement analysis
According to Myer, Financial statement analysis is largely a study of relationship among
the various financial factors in a business as disclosed by a single set of statements and a
study of the trend of these factors as shown in a series of statements”

User of financial statement:

1. Managers
2. Share holders
3. Financial institutions
4. Suppliers
5. Employees
6. Competitors
7. General public
8. Government

Types of Financial Analysis:

 External analysis: It is carried out by external parties to the business that does not
have access to internal records of the company it is usually done by government,
creditors, investors etc..
 Internal analysis: It is carried out by the persons within the organisation who have
access to the record of the company. The internal persons may be executives,
managers ect
 Horizontal analysis: It refers to analysis of data relating to more than one year. The
data of different years are compared with standard or base year. It helps to focus
 attention on the items that have changed significantly during the period under
review
 Vertical analysis: It refers to the study of quantitative relationship of various items in
the financial statement relating to one accounting period.

Tools for financial analysis:

o Comparative statement
o Common size statement
o Trend analysis
o Ratio analysis
o Fund flow statement
o Cash flow statement

Comparative statement:
The comparative financial statements are statements of the financial position at
different periods of time. The components of financial position of two or more years are
shown in a comparative form so as to give an idea of financial position between two
periods.
The two comparative statements are:
 Comparative Income statement
 Comparative Balance sheet
 Proforma Comparative Income statement

Particulars Previous Current Absolute Absolute

year year change in change in
Amount(Rs) Percentage(%)
Net sales xxx xxx xxx xxx
Less: COGS xxx xxx xxx xxx
Gross profit(1) xxx xxx xxx xxx
Less: Operating expenses
Administrative expenses
Selling and distribution exp. xxx xxx xxx xxx
Total operating expenses(2) xxx xxx xxx xxx
Operating profit(1-2) xxx xxx xxx xxx
Add: Non-operating Income
Interest received
Dividend received
Rent received
Profit of sale of asset
TOTAL xxx xxx xxx xxx
Less: Non-operating expenses
Interest paid
Loss on sale of assets xxx xxx xxx xxx
EBT xxx xxx xxx xxx
Less:Taxes paid xxx xxx xxx xxx
Profit after tax xxx xxx xxx xxx
Note 1: Operating expenses are day-to-day expenses such as sales and administration; the
money the business spends in order to turn inventory into throughput
Note 2: Non-operating expenses refer to those expenses which are made by the
company but they are not directly related with the smooth running of business and hence
they are called as non-operating expenses

Guidelines for Interpretation of Income statement

1. The increase or decrease in sales should be compared with increase or decrease in COGS
2. The increase or decrease in operating expenses should be compared to know the
efficiency between two periods in relation to sales
3. The increase or decrease in non –operating income and expense should be compared to
know effect on profits of the concern
4. Finally conclusion should be drawn regarding the profitability position stating whether the
profitability position is good, satisfactory or not good.

Problem 1
The income statement of the concern are given for the year ending 31 st March 2014 and 31st
march 2015. Rearrange the figures in comparative form and study the profitability position
of the concern
Income statement for the year ending 31st March

Particulars 2013-14 2014-15

Net sales 785,000 900,000
Cost of goods sold 450,000 500,000
Administration expenses 70,000 72,000
Selling expenses 80,000 90,000
Interest paid 25,000 30,000
Income tax paid 70,000 80,000
Problem 2
Prepare comparative Income statement from the following Information

Particulars 31-03-2013 31-03-2014

Net sales 250,000 400,000
Cost of goods sold 50% of Net sales 75% of Net sales
Indirect expenses 40% of gross profit 25% of gross profit
Income tax paid 50% of profit before tax 50% of profit before tax

Problem 3
The income statement of the coca cola concern are given for the year ending 31 st March
2015 and 31st march 2016. Rearrange the figures in comparative form and study the
profitability position of the concern

Particulars 31-3-2015 31-3-2016

Net sales 20,092 19,889
COGS 6044 6204
Selling,general and admin 7893 9221
expenses
Depreciation expense 803 773
Interest(Reveneu) 308 292
Income tax paid 1691 1222

Problem 4
Prepare a comparative income statement from the following information and interpret
 Particulars 31-03-2014 31-03-15
Sales 790,000 910,000
Return inward 5,000 10,000
COGS 450,000 500,000
Administration expenses 70,000 72,000
Selling expense 80,000 90,000
Dividend received 10,000 20,000
Interest paid 25,000 30,000
Income tax 30% on profit 30% on profit

Problem 5
The following is the information relating to Rolly co for the year ended 31-3-12 and
2013.,re-arrange the following information and prepare a comparative income statement.

Particulars 31-3-12 31-3-13

Opening stock 100,000 200,000
Purchases 50,000 100,000
Purchase return 40,000 80,000
Closing stock 60,000 120,000
Carriage inwards 25,000 50,000
Sales 100,000
Selling expense:
Advertisement 2,000 4000
Commission 5,000 10,000
Administration expense:
Office supplies 3,500 7,000
Office equipment’s expen. 2,500 5,000
Interest revenue 5,000 10,000
Gain on sale of investment 3,000 6,000
Interest(expenses) 5000 10,000
Loss from lawsuit 1,500 3,000

Problem 6
From the following information prepare a comparative Income statement.

Particulars 2011-2012 2012-13

COGS 600,000(60% of sales) 900,000(75% of sales)
Operating expenses 25% of gross profit 25% of GP
Income tax paid 30% 30%

Comparative Balance sheet:

The comparative balance sheet analysis is the study of the trend of same items, group of
items and computed items in two or more balance sheet of the same business enterprise on
different dates.
Assets Previous year Current year Absolute change Absolute change in
in Amount(Rs) percentage(%)
I Current Assets
Cash in hand/bank
Stock/Inventory
Debtors
Bills receivable
Pre-paid expenses
O/S Income
Investments
Total Asset
II Long term Investments
III Fixed assets
L/B
P/M
Furniture
Motor vehicle
Goodwill
Patents/trade mark
Total fixed asset
Total Assets
Liabilities/Capital
I Current liabilities
Creditors
Bills payable
BOD
O/S expenses
Income Received in advance
Unclaimed dividend
Provision for taxes
Proposed dividend
Total current liabilities
II Long term Borrowings:
Debentures
Mortgage loan
Long term Loans
Total Long Term Borrowing
III Share holders Funds
Equity share capital
Preference share capital
General/Reserve fund
Share premium
Capital reserve
Sinking Fund
Profit /Loss a/c
Total share holders Fund
Total Liabilities

Guidelines for interpretation of comparative balance sheet

1.Increase or decrease in Current assets should be compared with Increase or decrease in
current liabilities to know working capital and short term solvency position
2.The increase or decrease in fixed assets should be compared with increase or decrease in
long term liabilities and capital to know the long term financial position.
3.An increase or decrease in retained earnings and reserves and surplus should be
compared to understand the financial position of the company. An increase indicates
increase in profitability and decrease indicates that the profits have been used for payment
of dividend,bonus or fall in profitability of the company
4.After analysing the above, overall conclusion should be drawn stating whether the short
term and long term financial position is satisfactory or not.
Problem 1
The following are the balance sheet of Ever shine ltd. For the year 2013 and 2014. Prepare a
comparative Balance sheet and interpret its financial position.

Liabilities 2013(Rs 2014(Rs) Assets 2013(Rs) 2014(Rs)

)
Equity share L&B 37,000 27,000
capital 60,000 80,000 P&M 40,000 60,000
General reserves 33,000 22,200 Furniture’s 2,000 2,500
6% debenture 20,000 30,000 Other fixed
Mortgage loan 15,000 20,000 assets 2,500 3,000
Bills payable 5,000 4,500 Cash at bank 2,000 8,000
S.creditors 10,000 12,000 Bills receivables 15,000 9,000
Other current Debtors 20,000 25,000
liabilities 500 1,000 Stock 25,000 35,000
Prepaid expenses - 200
1,43,500 1,69,700 1,43,500 1,69,700
Problem 2
The Following is the balance sheet of Nethravathi Company Ltd., as on 31.3.2014 and
31.3.2015. Prepare a comparative balance sheet and study the financial position of the
concern.
Liabilities 2014(Rs) 2015(Rs) Assets 2014(Rs) 2015(Rs)
Equity capital 600,000 800,000 L&B 370,000 270,000
Reserve/surplus 330,000 222,000 P&M 400,000 600,000
Debentures 200,000 300,000 Furniture 20,000 25,000
Long term loans 150,000 200,000 Other Fixed assets
Bills payable 50,000 45,000 Cash in Hand 25,000 30,000
Sundry creditors 100,000 120,000 Bills receivables 20,000 80,000
Other current Sundry Debtors 150,000 90,000
liabilities 5,000 10,000 Stock in trade 200,000 250,000
Prepaid expenses 250,000 350,000

- 2,000
14,35,000 16,97,000 14,35,000 16,97,000

Problem 2
The income statement of PH limited for year ending 31.3.2014 and 31.3.2015 and balance
sheets as on that dates are given below.
Income statement for the year ending

Particulars 2013-14 2014-15

Net sales 30,00,000 28,00,000
COGS 20,00,000 18,00,000
Operating expenses 700,000 600,000
Operating profit 300,000 400,000
Non-operating Income 25,000 20,000
Non-operating Expenses 75,000 60,000

Balance sheets

Liabilities 2013-14 2014-15 Assets 2013-14 2014-15

Equity Share
capital 200,000 300,000 L/B 180,000 240,000
8%P.Share 100,000 150,000 P/M 200,000 190,000
8% debenture 100,000 80,000 Furniture 100,000 110,000
Reserves/surplus 82,000 100,000 Stock 80,000 130,000
Creditors 75,000 90,000 Debtors 30,000 50,000
O/S expenses 43,000 30,000 Cash@bank 10,000 30,000
Total 600,000 750,000 Total 600,000 750,000

Prepare a comparative statement for the above data

Common size statement
They are the statements in which data in the financial statements are converted into
percentage by taking some common base
The two common size statements are:
1.Common size income statement
2.Common size Balance sheet
Common size income statement
It is the statement in which elements or components of income statements are
expressed as percentage of sales.The comparison of income statement can be made for a
period of two years of the same concern or comparison can be made between two firms of
similar nature for one financial year.

Particulars Previous percentag Current Percentage

year e year
Net sales xxx xxx xxx xxx
Less: COGS xxx xxx xxx xxx
Gross profit(1) xxx xxx xxx xxx
Less: Operating expenses
Administrative expenses
Selling and distribution exp. xxx xxx xxx xxx
Total operating expenses(2) xxx xxx xxx xxx
Operating profit(1-2) xxx xxx xxx xxx
Add: Non-operating Income
Interest received
Dividend received
Rent received
Profit of sale of asset
TOTAL xxx xxx xxx xxx
Less: Non-operating expenses
Interest paid
Loss on sale of assets xxx xxx xxx xxx
EBT xxx xxx xxx xxx
Less:Taxes paid xxx xxx xxx xxx
Profit after tax xxx xxx xxx xxx
Problem 1
Prepare a common size income statement from the following Information

Particulars 31-03-2013 31-03-2014

Net sales 750,000 900,000
COGS 450,000 540,000
Office/Administration exp 70,000 75,000
Selling/Distribution exp 80,000 90,000
Interest received 20,000 40,000
Interest paid 20,000 30,000
Income tax paid 75,000 90,000

Problem 2
Prepare common size income statement from the following information for the year ended
31/03/2015

Particulars X ltd Y ltd

Sales 790,000 910,000
Return inward 5,000 10,000
COGS 450,000 500,000
Operating expenses:
Administration expenses 70,000 72,000
Selling expenses 80,000 90,000
Non-operating Income:
Divided received 10,000 20,000
Non-operating expenses
Interest paid 25,000 30,000
Inncome tax 50% on profit 50% on profit
3.From the following Income statements of Sham ltd.,for the year ending 31.03.2013 and
31.3.2014 and 31.3.2015.Prepare common size Income statement

Particulars 2012-13 2013-14 2014-15

Sales
Cash Sales 450,000 448,000 520,000
Credit sales 13,50,000 17,52,000 20,80,000
Closing stock 150,000 180,000 210,000
Total 19,50,000 23,80,000 28,10,000
Opening stock 130,000 150,000 180,000
Purchases 13,70,000 17,02,000 20,32,000
Administration
expenses 180,000 231,000 286,000
Selling expenses 90,000 121,000 156,00
Debenture Interest 18,000 18,000 18,000
Depreciation 15,000 20,000 25,000
Provision for tax 73,500 69,000 56,500
Net profit 73,500 69,000 56,500
Total 19,50,000 23,80,000 28,10,000

Common Size Balance Sheet

A statement in which Balance sheet items are expressed as the ratio of each asset to
total assets and each liabilities to total liabilities is called Common size Balance sheet.
Assets X Ltd. Percentage Y Ltd. Percentage
Amount Amount
I Current Assets
Cash in hand/bank
Stock/Inventory
Debtors
Bills receivable
Pre-paid expenses
O/S Income
Investments
Total Asset
II Long term Investments
III Fixed assets
L/B
P/M
Furniture
Motor vehicle
Goodwill
Patents/trade mark
Total fixed asset
Total Assets
Liabilities/Capital
I Current liabilities
 Creditors
Bills payable
BOD
O/S expenses
Income Received in advance
Unclaimed dividend
Provision for taxes
Proposed dividend
Total current liabilities
II Long term Borrowings:
Debentures
Mortgage loan
Long term Loans
Total Long Term Borrowing
III Share holders Funds
Equity share capital
Preference share capital
General/Reserve fund
Share premium
Capital reserve
Sinking Fund
Profit /Loss a/c
Total share holders Fund
Total Liabilities

Problem 1
The balance sheet as on 31/3/2015 of Sri.Rama co.ltd and Krishna ltd are given below

Liabilities Sri.Rama Sri.Krishna Assets Sri.Rama Sri.Krishna

co.Ltd co.Ltd Co.Ltd co.Ltd
Equity share 200,000 500,000 Land/Building 300,000 625,000
capital Plant/Machiner 180,000 420,000
10%Preference y 150,000 200,000
share capital 100,000 500,000 Stock 100,000 135,000
Long term Loan 100,000 150,000 Sundry debtors 70,000 20,000
Proposed Cash and Bank
Reserves/surplus 100,000 120,000
Dividend 50,000 70,000
S.Creditors 250,000 410,000
BOD 50,000

Total 800,000 14,00,000 Total 800,000 14,00,000

You are required to prepare Common-Size Balance Sheet and Comment.

Problem 2
The Balance sheet of S ltd and R ltd., as on 31.3.2015 were given as below

Liabilities S ltd R ltd

Equity share capital 150,000 400,000
Preference share capital 120,000 160,000
Reserves 14,000 18,000
Long term Loans 115,000 130,000
Bills payable 2,000 -
Creditors 12,000 4,000
Outstanding expenses 15,000 6,000
Proposed Dividend 10,000 90,000

Assets 438,000 808,000

Land and Building 80,000 123,000
Plan and machinery 334,000 600,000
Temporary Investments 1,000 40,000
Inventories 10,000 25,000
Book Debts 4,000 8,000
Prepaid Expenses 1,000 2,000
Cash and bank Balances 8,000 10,000
Total 438,000 808,000

Compare the financial position of two companies with the help of Common size Balance
sheet.
TREND ANALYSIS:
This method determines the increase or decrease in the value when compared to the base
year and involves the computation of percentage relationship that each statement item
bears to the same items in base year. The information for a number of years is taken up and
one year, generally the first year, is taken as a base year. The figures of the base year are
taken as 100 and trend ratios for other years are calculated on the basis of base year
Problem 1
From the following information interpret the results of operations of a manufacturing
concern using Trend Analysis

Particulars 2005 2006 2007 2008

Net sales 10,000 9,500 12,000 13,000
Cost of goods sold 6,000 5890 6960 7280
Gross profit 4,000 3,610 5,040 5,720
Operating expense 1,000 970 1,100 1,200
Non-operating 3,000 2,640 3,940 4,520
expenses
Problem 2
From the following information, interpret the results of manufacturing operations using
trend ratio (Rs.in lakhs)

Particulars 2011-12 2012-13 2013-14 2014-15

Net sales 200 180 240 300
Less:COGS 120 120 140 160
Gross profit 80 60 100 140
Less:operating
expense 20 20 30 40
Operating profit 60 40 70 100
Less:Taxes 30 20 35 50
PAT 30 20 35 50

Trend-Percentage Balance sheet

Problem 1

Share capital 2012-13 2013-14 2014-15

Share capital 200,000 250,000 300,000
Reserves 100,000 150,000 150,000
Loan 200,000 100,000 50,000
Creditors 300,000 400,000 200,000
Buildings 200,000 250,000 300,000
Plant 200,000 250,000 100,000
Stock 250,000 250,000 150,000
Debtors 100,000 100,000 100,000
Cash at bank 50,000 50,000 50,000