FINANCIAL STATEMENT ANALYSIS

By MK
 Course Objectives
 Enabling the participants of the course:

---To not merely read but to read through the

financial statements generated by a business
enterprise at the end of its accounting
period.
Lecture # 2
ACCOUNTING & ACCOUNTING
PRINCIPLES
Financial Statement Analysis

 Financial statement analysis (or financial

analysis) is the process of reviewing and
analyzing a company's financial
statements to make better economic
decisions. These statements include the
income statement, balance sheet,
statement of cash flows, and a statement of
changes in equity.
 What is Accounting?

 Accounting shows the results of the business

operations for an accounting period.

 It is the language of the business. Enterprise to

show its financial results.
i
 What is Accounting

 Accounting is a process through which an

business enterprise speaks of its
performance and give its operational results.
 That’s why in the context of business, in the
context of commercial enterprise, accounting
is known as the language of business.
 One of The Main Objectives
 Provides decision-makers with sufficient,
relevant information to make prudent and
intelligent business decisions.
 To give relevant , appropriate and suitable
information to users of the financial statements
so they may prudent intelligent and well
informed business decisions.

 One of The Main Objectives

 Information is provided through

accounting reports called financial
statements. The whole process is called
“financial reporting”
 Business has to report to the users,
creditors, investors, who ever interested in
that so this is called financial reporting.
 Financial Statements

 Income statement:
shows operational results of business
during/over the accounting period.
 ii) Statement of owners’ equity:
showing changes in owner’s equity through
profit/additional investment or through
losses/drawl by owner.
Flow from the income statement which is
statement of owners equity,
 Financial Statements

 Balance sheet:
Depicts financial position at a specific date.

 Statement of cash flows

Shows cash inflows (receipts) and cash outflows
(payments) over/during the accounting
period. It is prepared from the two major
financial statements viz Income Statement
and Balance Sheet.
 Financial Statements

 What's has been the cash receipt or what we

called the cash inflows. And what has been
the position of the cash outflows. That’s is the
actual cash payments during an accounting
period.
 So these are the 4 financial statements which
is through on up by the business at the end of
the accounting period
 Accounting Period

 Accounting period is the period of time

covered by an Income Statement by the
operational period.

 It is usually one year. It can either be calendar

year (Jan to Dec) or financial year (July to
June).
 Accounting year synchronizes with financial
year.
 Accounting Period

 Financial statements prepared at the end of the

accounting period.

 Financial statements are the end product of

accounting cycle/process.
 Generally Accepted Accounting
(GAAP)
 These are the ground rules for the
accountants to do the accounting and give the
financial statements at the end of the
accounting period or accounting cycle.
 These rules are very much important because
they enable a comparison between different
business enterprises and also within the same
enterprise over a period of time, 4, years, 5 ,
2,3.
 Generally Accepted
Accounting (GAAP)
 Entity principle:
specific business entity
separate from personal affairs of the
owner(s).

 Cost principle: valuation and recording of

assets at cost.
Generally Accepted
Accounting (GAAP)
 Going-concern assumption: connected with
cost principle, assets acquired for use and not for
resale.
 Objectivity principle: definite, factual basis for
assets valuation; measuring transactions
objectively.
 Generally Accepted
Accounting (GAAP)
 Stable currency principle. The currency remains
more or less stable and rate of inflation is
almost zero.
 Adequate disclosure concept: facts necessary
for proper interpretation of statements;
“subsequent events”, lawsuits against the
business, assets pledged as
securities/collaterals, contingent liabilities etc;
reflected in Notes.
 Generally Accepted
Accounting (GAAP)
 Subsequent events, lawsuits against the
business, assets pledged as securities/
collaterals, contingent liabilities etc; reflected
in notes.
 ACCOUNTING EQUATION

 ASSETS = LIABILITIES + OWNER’S EQUITY

Balance Sheet is based on Accounting
Equation which is based on detailed
statement of the Equation.
 Balance Sheet

 Balance sheet shows financial position on a

specific date.
 Elements of Balance Sheet

a) Assets
b) Liabilities
c) Owner’s Equity
 Dual Aspects of Accounting

 Each financial transaction affects two or more

elements or sub-elements of the accounting
equation.

 Each financial transaction affects balance

sheet i-e financial position of the business.
 Khizer Property Dealer

Financial Position as on 30th July, 2006.

July 1, 2006. Deposit in business by owner
Rs. 180,000. The cash account will
appear t Rs. 180,000 and owner’s equity
at Rs. 180,000 in balance sheet.
Jul 3,

 Purchased of land for cash for Rs.

141,000.
Land will appear as assets in the
balance sheet Rs, 39,000. cash will be
decreased from Rs, 180,000 to Rs,
39,000 due to purchased of land on
cash. Net result in Accounting
equation will be as follows:
July 5, 2006
Purchase building partly on cash (Rs.
15,000) and partly on credit (Rs. 21,000)
s
Asset (Rs) Liabilities & Equity (Rs)
July 10, 2006:
Sale of part of land will
decreased by Rs. 11,000

 The value of land will decreased by

Rs. 11,000 and account receivable will
appear in balance sheet at Rs. 11,000.
July 14, 2006

 Purchased of Office equipment for

Rs.5400/- for Rs. 5400 on credit.

 Again equipment account will appear in

balance sheet at Rs. 54,00 and liability of
Rs.54,00 will increase.
Assets (Rs) liabilities & equity(Rs)
July 20, 2006

 Partial Collection of Accounts Payable Rs.

15,00
 The account receivables will reduced to Rs.9,500
and cash will increase to Rs. 25,500.
Assets (Rs) Liabilities & Equity (Rs)
July 31, 2006

 Payment of Liability (A/C Payable) Rs.

3,000.
 The cash account will reduced to Rs. 22,500
and liability will also reduced by Rs. 3,000.
Assets (Rs) Liability & equity (Rs)
 It is thus clear from the above illustration that
each financial transaction affects financial
position, (which in effect is the balance
sheet). Accounting period in the example was
one month. It must also be noted no business
activity (commissions/ fees/ Revenues &
Expenses) was involved in above example.
Only setting up of business was involved and
therefore owner’s equity remains the same