BACHELOR OF COMPUTER

ST
APPLICATIONS (BCA 1 YEAR)
Accounting and financial management
Subject code:
Roll no: 191950040010
Submitted by: Shivam pandey
Submitted to: Mannan sir
 Assignment no.3
Question 1: what is financial statement
analysis?
Answer: Financial statement analysis (or financial
analysis) is the process of reviewing and analyzing a
company's financial statements to make better economic
decisions to earn income in future. These statements
include the income statement, balance sheet, statement of
cash flows, notes to accounts and a statement of changes
in equity (if applicable). Financial statement analysis is a
method or process involving specific techniques for
evaluating risks, performance, financial health, and future
prospects of an organization.[b
It is used by a variety of stakeholders, such as credit and
equity investors, the government, the public, and decision-
makers within the organization. These stakeholders have
different interests and apply a variety of different
techniques to meet their needs

Financial ratio analysis

Financial ratios are very powerful tools to perform some
quick analysis of financial statements. There are four main
categories of ratios: liquidity ratios, profitability ratios,
activity ratios and leverage ratios. These are typically
analyzed over time and across competitors in an industry.
Horizontal and vertical analysis

Horizontal analysis compares financial information over

time, typically from past quarters or years. Horizontal
analysis is performed by comparing financial data from a
past statement, such as the income statement
Vertical analysis is a percentage analysis of financial
statements. Each line item listed in the financial statement
is listed as the percentage of another line item.

Question 2: objective of financial statement

analysis?
Answer: The primary objective of financial statement analysis is to
understand and diagnose the information contained in financial
statement with a view to judge the profitability and financial
soundness of the firm, and to make forecast about future prospects of
the firm
However, the following purposes or objectives of financial
statements analysis may be stated to bring out the
significance of such analysis:

(i) To assess the earning capacity or profitability of the firm.

(ii) To assess the operational efficiency and managerial effectiveness.

the firm.
(iv) To identify the reasons for change in profitability and financial
position of the firm.

(v) To make inter-firm comparison.

(vi) To make forecasts about future prospects of the firm.

(vii) To assess the progress of the firm over a period of time.

(viii) To help in decision making and control.

Question 3: what is profitability ratio?

Answer : Profitability ratios are a class of financial
metrics that are used to assess a business's ability to
generate earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity over time,
using data from a specific point in time.
Examples of Profitability Ratios

Profitability ratios are the most popular metrics used

in financial analysis, and they generally fall into two
categories: margin ratios and return ratios. Margin ratios
give insight, from several different angles, on a company's
ability to turn sales into a profit.
Return ratios offer several different ways to examine how
well a company generates a return for its shareholders.
Question 4: what is liquidity ratio?
Answer: Liquidity ratios are an important class of financial
metrics used to determine a debtor's ability to pay off
current debt obligations without raising external capital.
Liquidity ratios measure a company's ability to pay debt
obligations and its margin of safety through the calculation
of metrics including the current ratio, quick ratio,
and operating cash flow ratio.
Liquidity is the ability to convert assets into cash quickly
and cheaply. Liquidity ratios are most useful when they
are used in comparative form. This analysis may be
internal or external.
The Current Ratio
The current ratio measures a company's ability to pay off
its current liabilities (payable within one year) with its
current assets such as cash, accounts receivable and
inventories. The higher the ratio, the better the company's
liquidity position:
The Quick Ratio
The quick ratio measures a company's ability to meet its
short-term obligations with its most liquid assets and
therefore excludes inventories from its current assets. It is
also known as the "acid-test ratio":

Question 5: what is solvency ratio?

Answer: The solvency ratio is a key metric used to
measure an enterprise’s ability to meet its debt obligations
and is used often by prospective business lenders. The
solvency ratio indicates whether a company’s cash flow is
sufficient to meet its short-and long-term liabilities. The lower a
company's solvency ratio, the greater the probability that it will
default on its debt obligations.

The Formula for the Solvency Ratio Is

Solvency Ratio= Net After − Tax Income + Non-Cash Expenses

Short term liabilities+ long term liabilities
The solvency ratio is one of many metrics used to
determine whether a company can stay solvent. Other
solvency ratios include debt-to-equity, total-debt-to-total-
assets, and interest coverage ratios.
The solvency ratio terminology is also used in regard to
insurance companies, comparing the size of its capital
relative to the premiums written, and measures the risk an
insurer faces of claims it cannot cover.

Question 6: what is activity ratio?

Answer: An activity ratio is a type of financial metric that
indicates how efficiently a company is leveraging the
assets on its balance sheet, to generate revenues and
cash. Commonly referred to as efficiency ratios, activity
ratios help analysts gauge how a company
handles inventory management, which is key to its
operational fluidity and overall fiscal health.

• An activity ratio broadly describes any type of

financial metric that helps investors and research
 analysts gauge how efficiently a company uses its
assets to generate revenues and cash.
• Activity ratios may be utilized to compare two different
businesses within the same sector, or they may be
used to monitor a single company's fiscal health over
time
Activity ratios can be broken down into the
following sub-categories:
• Accounts Receivable Turnover Ratio
• Merchandise Inventory Turnover Ratio
• Total Assets Turnover Ratio
• Return on Equity
• Asset Turnover Ratio

Question 7: what is gross and net working

capital?
Answer: Gross working capital is the sum of all of a
company's current assets (assets that are convertible to
cash within a year or less). Gross working capital includes
assets such as cash, accounts receivable,
inventory, short-term investments, and marketable
securities. Gross working capital less current liabilities is
equal to net working capital, or simply "working capital," a
more useful measure for balance sheet analysis.
Gross working capital, in practice, is not useful. It is just
one half of a picture of a company's short-term financial
health and ability to use short-term resources efficiently.
The other half is current liabilities. Gross working capital,
or current assets, less current liabilities equate to working
capital. When working capital is positive.
It means that current assets are greater than current
liabilities. The preferred way to express positive working
capital is the ratio of current assets to current liabilities
(e.g., > 1.0). If this ratio is not greater than 1.0, then it may
have trouble paying back its creditors in the short-term,
whether it's a bank or supplier or another party to which
the company has financial obligations.

Question 8: Difference between fund flow

and cash flow statement?
Answer: Cash Flow statement shows the changes in
the cash position (Inflows and outflows) of a firm. It is an
analytical reconciliation statement which explains the
reasons for the differences between the opening and
closing cash balances over a period. On the other
hand, Fund Flow statement is a statement that shows
the ups and downs of the financial position or the changes
in working capital of the entity between the two financial
years.
 BASIS FOR
CASH FLOW FUND FLOW
COMPARISON

Meaning A cash flow statement is a A fund flow statement is a

statement showing the statement showing the
inflows and outflows of changes in the financial
cash and cash equivalents position of the entity in
over a period. different accounting years.

Purpose of To show the reasons for To show the reasons for the
Preparation movements in the cash at changes in the financial
the beginning and at the position, with respect to
end of the accounting previous year and current
period. accounting year.

Basis Cash Basis of Accounting. Accrual Basis of Accounting.

Analysis Short Term Analysis of Long Term Analysis of

cash planning. financial planning

Discloses Inflows and Outflows of Sources and applications of

Cash funds

Opening and Contains opening and Does not contains opening

closing balance closing balance of cash balance of cash and cash
and cash equivalents. equivalents.

Question 9: meaning and objective of fund

flow statement?
Answer: Meaning of Fund Flow
Statement:
A fund flow statement is a statement in summary form that
indicates changes in terms of financial position between two
different balance sheet dates showing clearly the different
sources from which funds are obtained and uses to which
funds are put.

It summarizes the financing and investing activities of the

enterprise during an accounting period.

Objectives of Fund Flow Statement:

Some of the important objectives of preparing fund

flow statement are:

1. Fund flow statement reveals clearly the changes in items of

financial position between two different balance sheet dates
showing clearly the different sources and applications of
funds. Thus, it summarizes the financing and investing
activities of the enterprise.

2. It also reveals how much of the total funds is being collected

by disposing of fixed assets, how much from issuing shares or
debentures, how much from long-term or short-term loans,
and how much from normal operational activities of the
business.

3. It also provides information about the specific utilisation of

such funds i.e., how much has been used for acquiring fixed
assets, how much for redemption of preference shares,
debentures or short-term loans as well as payment of tax,
dividend etc.

4. It helps the management in depicting all inflows and

outflows of funds which cause a change in working capital of a
business organization.