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IMPORTANT INFORMATION
COURSE INSTRUCTOR
Dr. Sarveshwar Pande
CONTACT DETAILS
Email: prof.spande@gmail.com
This would be the most important way of
Communicating with me.
It should be used to query about attendance and
other academic matters

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Largely a practical course. Unless you do the
problems, you wont benefit anything.
TUTORIALS
Come prepared or prepare to be
crucified.
Spoon-feeding is ONLY DONE BY
YOUR PARENTS.
Probability of passing this course
is 50%.
Mandatory to do all student
activities
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Module I: Financial Statement Analysis

Introduction and Objectives of financial

statement analysis
WHAT ARE FINANCIAL STATEMENTS
These are documents which have been
prepared according to generally accepted
accounting procedures.
Their main purpose is to show the
financial position of a business entity after
a period of time.

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TYPES OF FINANCIAL
STATEMENTS
Revenue Statement
Balance Sheet
Cash flow Statement
Statement of Retained Earnings
Statement of Changes in Working Capital
 

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LIMITATIONS OF FINANCIAL STATEMENTS
• Net profit/Net loss does not tell much about
the actual position of any business.
• A Balance Sheet is always supposed to
balance, but is that all?
• Financial Statements are based on monetary
terms ONLY.
• Ignores value judgment and loyalty.
•  

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ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
• This assists decision-makers in making
decisions about current /future aspects of
the firm.
• Provides a true picture of a firm.
• Two major factors are identified out of
analysis and interpretation
– Profitability
– Financial soundness
– Turnover(efficiency)

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Techniques of :
– Ratio analysis
• (1)Profitability ratios
• Gross Profit ratio
• Operating Expenses ratio
• Operating profit ratio
• Net Profit ratio
• Return on Equity
• Return on Assets
• Return on Capital Employed
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Return on Shareholders Funds
Earnings per Share
Price-Earnings ratio
Debt Service Coverage ratio
Dividend payout ratio
Dividend yield ratio
Retained earnings ratio

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Financial(Liquidity)ratios
• Current ratio
• Quick Assets(Acid-Test) ratio
• Debt/Equity ratio
• Proprietary ratio

Turnover(Efficiency) ratios
• Stock Turnover ratio
• Debtors Turnover ratio
• Fixed Assets Turnover ratio

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Formulas
Gross Profit ratio
Gross Profit/Net sales x 100

Operating Expenses ratio

Operating Expenses/Net sales x 100

Operating profit ratio

Operating Profit/Capital employed x 100

Net Profit ratio

Net profit/Net sales x 100

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Return on Equity
Net profit(after Interest,Tax and Preference
Dividends)/Equity Shareholders Fundsx100 
Return on Assets
Net Profit after Tax/Total Assets x 100 

Return on Capital Employed

Net Operating profit before Interest and Tax/Total capital
employed x 100
Return on Shareholders Funds
Net profit after Interest and Tax/Shareholders Funds x 100

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Earnings per Share
Net profit after Tax and Pref Dividends/Number of Equity
Shares
Price-Earnings ratio
Market price per equity share/Earnings per share

Dividend payout ratio

Dividend per Equity Share/Earnings per equity Share

Dividend yield ratio

Dividend per Share/Market price per share

Retained earnings ratio

Retained Earnings/Total earnings x 100

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Current ratio
Current Assets/Current Liabilities

Quick Assets(Acid-Test) ratio

Current Assets(Less Closing Stock+Prepayments)/ Current
Liabilities
Debt/Equity ratio
Total Long Term Debts/Shareholders Funds

Proprietary ratio
Shareholders Funds/Total Tangible Assets

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Stock Turnover ratio
Average Inventory/Cost Of Goods Sold x 12 months

Debtors Turnover ratio

Average Debtors/Net Credit Sales x 12 months

Fixed Assets Turnover ratio

Fixed Assets/Long term Funds

Stock Turnover ratio

Average Inventory/Cost Of Goods Sold x 12 months
 

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Debtors Turnover ratio
Average Debtors/Net Credit Sales x 12 months
 
Fixed Assets Turnover ratio
Fixed Assets/Long term Funds

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Comparative analysis
 
• Good to have 2-3 years of Financial statements as a basis of making
comparisons.
• Ratios to be computed for 2-3 years and used to make decisions on the
corrective actions to be taken.
 
Limitations of financial statement analysis.AS-
20(no numerical)

• Ratio analysis does not say anything about the future position of any
business.
• Any unreported errors in these statements, would mean incorrect
decisions would follow.

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• management may not implement any new actions, so it
may not be that fruitful.
STUDENT ACTIVITIES
1. Read : Sec.3(2)- Financial Statements: Analysis &
Interpretations, Page 3.12-3.50.
2. Short Answers – Qn2,5,6,9-12,14;Pg-3.80-81
3. Practical Qns- 1,3,4,9,13,16,18; pg-3.81-3.91

End of Module-1

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