Financial Statement Analysis

Faculty
Dr. Amit Kumar Nag

04/02/2023 1
Lecture Outline
Analysis and Interpretation of Financial
Statements
 Meaning & Concept of Financial
Analysis
 Types of Financial Analysis
 Tools and Methods of Financial
Analysis

04/02/2023 2
Meaning & Concept of Financial Statement
Analysis
 Financial Analysis is also known as analysis and
Interpretation of Financial Statements- Is the
process of determining financial strengths and
weaknesses of the firm by stabilizing relationships
between the items of the Balance Sheet, Income
Statement and other Operative data.
 Analysis-means methodical classification of the
data given in the financial statements so that they
are put in a simplified form.
 Interpretation- means explaining the meaning and
significance of data so simplified.

04/02/2023 3
Definition of Financial Analysis
Interpretation of accounts may be defined as
the art and science of translating the figures
therein in such a way as to reveal the
financial strength and weakness of a business
and the causes which have contributed
thereto.
- Spicer and Peglar

04/02/2023 4
Types of Financial Analysis
On the
basis of • External Analysis
Material • Internal Analysis
Used

Types Of On the • Intra-Firm

basis of Analysis
Financial Firms • Inter-Firm
Statement involved Analysis
Analysis

On the • Horizontal
basis of Analysis
Modus
Operandi • Vertical Analysis

04/02/2023 5
Tools or Methods of Financial Analysis
 Comparative Financial Statements
 Common Size Statements
 Trend Analysis
 Fund Flow Analysis
 Cash Flow Analysis
 Ratio Analysis

04/02/2023 6
 Name of the Organization
Comparative Income Statement

Increase or (Decrease)
Previous Year
Particulars Current Year Figures
Figures
Amount %

Revenue from Operations/ Sales Revenue xxxx xxxx

   
Less: Sales Return and Allowances xxxx xxxx
   
Net Sales xxxx xxxx
   
Less: Cost of Goods Sold xxxx xxxx
   
Gross Profit xxxx xxxx
   
Less: Selling, General and Administrative xxxx xxxx
Expenses
   
Operating Income xxxx xxxx
   
Add: Interest Income xxxx xxxx
   
Add: Other Income xxxx xxxx
   
Less: Interest Expenses xxxx xxxx
   
Income before Taxes xxxx xxxx
   
Less: Taxes xxxx xxxx
   
Income After Tax xxxx xxxx
   
04/02/2023 7
 Current Year Amount- Base Year Amount *100
Change Since Base Period= Base Year Amount

04/02/2023 8
 Name of the Organization
Comparative Balance Sheet
Increase or (Decrease)
Particulars Current Year Figures Previous Year Figures
Amount %
Assets        
Fixed Assets ( Long Term )        
Intangible Assets xxxx xxxx    
Long Term Investments xxxx xxxx    
Property, Plant & Equipments (less) Accumulated
Dep. xxxx xxxx
   
Total of Fixed Assets xxxx xxxx    
Current Assets        
Cash xxxx xxxx    
Accounts Receivables xxxx xxxx    
Inventory xxxx xxxx    
Prepaid Expenses xxxx xxxx    
Short Term Investments xxxx xxxx    
Total of Current Assets xxxx xxxx    
Total Assets xxxx xxxx    
Liabilities and Owners Equity        
Share Capital xxxx xxxx    
Retained Earnings xxxx xxxx    
Total Equity xxxx xxxx    
Long Term Liabilities xxxx xxxx    
Current Liabilities xxxx xxxx    
Accounts Payables xxxx xxxx    
Short Term Loan xxxx xxxx    
Income Taxes Payable xxxx xxxx    
Accrued Expenses xxxx xxxx    
Unearned Revenue xxxx xxxx    
Total Current Liabilities xxxx xxxx    
Total Liabilities and Owners Equity
04/02/2023 xxxx xxxx     9
Vertical Analysis- Common Size
Analysis

Evaluates Financial Statement data by

expressing each item in a financial Statement
as a percent of a base amount.

04/02/2023 10
 Name of the Organization
Common Size Income Statement
Current Year Previous Year % Previous
Particulars % Current Year
Figures Figures Year
Revenue from Operations/ Sales Revenue xxxx   xxxx  

Less: Sales Return and Allowances xxxx   xxxx  

Net Sales xxxx   xxxx  

Less: Cost of Goods Sold xxxx   xxxx  
Gross Profit xxxx   xxxx  
Less: Selling, General and Administrative xxxx   xxxx  
Expenses

Operating Income xxxx   xxxx  

Add: Interest Income xxxx   xxxx  
Add: Other Income xxxx   xxxx  
Less: Interest Expenses xxxx   xxxx  
Income before Taxes xxxx   xxxx  
Less: Taxes xxxx   xxxx  
Income After Tax xxxx   xxxx  

04/02/2023 11
 Name of the Organization
Common Size Balance Sheet
Previous Year
Particulars Current Year Figures % Current Year % Previous Year
Figures
Assets        
Fixed Assets ( Long Term )        
Intangible Assets xxxx   xxxx  
Long Term Investments xxxx   xxxx  
Property, Plant & Equipments (less)
Accumulated Dep. xxxx   xxxx  

Total of Fixed Assets xxxx   xxxx  

Current Assets        
Cash xxxx   xxxx  
Accounts Receivables xxxx   xxxx  
Inventory xxxx   xxxx  
Prepaid Expenses xxxx   xxxx  
Short Term Investments xxxx   xxxx  
Total of Current Assets xxxx   xxxx  
Total Assets xxxx   xxxx  
Liabilities and Owners Equity        
Share Capital xxxx   xxxx  
Retained Earnings xxxx   xxxx  
Total Equity xxxx   xxxx  
Long Term Liabilities xxxx   xxxx  
Current Liabilities xxxx   xxxx  
Accounts Payables xxxx   xxxx  
Short Term Loan xxxx   xxxx  
Income Taxes Payable xxxx   xxxx  
Accrued Expenses xxxx   xxxx  
Unearned Revenue xxxx   xxxx  
Total Current Liabilities xxxx   xxxx  
Total Liabilities and Owners Equity
xxxx   xxxx  
04/02/2023 12
Horizontal Analysis or Trend Analysis
Evaluates series of Financial data over a period of
time
Current Year Amount *100
Current Results in Relation to Base Period= Base Year Amount

Procedure for calculating Trends

Following steps are taken for calculating trends:
o One year taken as base year . Generally, the first or the last year is taken
as base year.
o The figures of base year are taken as 100.
o Percentage are calculated in relation to the base year. For this each year’s
figure is divided by the base year’s figure.
o If the figure of any year is less than the figure in the base year, the trend
percentage will be less than 100 and vice versa.
04/02/2023 13
 Name of the Organization
Trend Analysis of Income Statement
Particulars Year 1Figures Year 2Figures Year 3Figures % Year-1 % Year-2 % Year-3
Revenue from Operations/ Sales xxxx xxxx xxxx 100    
Revenue

Less: Sales Return and xxxx xxxx xxxx 100    

Allowances

Net Sales xxxx xxxx xxxx 100    

Less: Cost of Goods Sold xxxx xxxx xxxx 100    
Gross Profit xxxx xxxx xxxx 100    
Less: Selling, General and xxxx xxxx xxxx 100    
Administrative Expenses

Operating Income xxxx xxxx xxxx 100    

Add: Interest Income xxxx xxxx xxxx 100    
Add: Other Income xxxx xxxx xxxx 100    
Less: Interest Expenses xxxx xxxx xxxx 100    
Income before Taxes xxxx xxxx xxxx 100    
Less: Taxes xxxx xxxx xxxx 100    
Income After Tax xxxx xxxx xxxx 100    
04/02/2023 14
 Name of the Organization
Trend Analysis of Balance Sheet
Particulars Year 1Figures Year 2Figures Year 3Figures % Year-1 % Year-2 % Year-3
Assets            
Fixed Assets ( Long Term )            
Intangible Assets xxxx xxxx xxxx 100    
Long Term Investments xxxx xxxx xxxx 100    
Property, Plant & Equipments
(less) Accumulated Dep. xxxx xxxx xxxx 100    

Total of Fixed Assets xxxx xxxx xxxx 100    

Current Assets            
Cash xxxx xxxx xxxx 100    
Accounts Receivables xxxx xxxx xxxx 100    
Inventory xxxx xxxx xxxx 100    
Prepaid Expenses xxxx xxxx xxxx 100    
Short Term Investments xxxx xxxx xxxx 100    
Total of Current Assets xxxx xxxx xxxx 100    
Total Assets xxxx xxxx xxxx 100    
Liabilities and Owners Equity            
Share Capital xxxx xxxx xxxx 100    
Retained Earnings xxxx xxxx xxxx 100    
Total Equity xxxx xxxx xxxx 100    
Long Term Liabilities xxxx xxxx xxxx 100    
Current Liabilities xxxx xxxx xxxx 100    
Accounts Payables xxxx xxxx xxxx 100    
Short Term Loan xxxx xxxx xxxx 100    
Income Taxes Payable xxxx xxxx xxxx 100    
Accrued Expenses xxxx xxxx xxxx 100    
Unearned Revenue xxxx xxxx xxxx 100    
Total Current Liabilities xxxx xxxx xxxx 100    
Total Liabilities and Owners Equity
xxxx xxxx xxxx 100    
04/02/2023 15
Objectives of Financial Statement
Analysis
 Measures the efficiency of the Business.
 Judges the Profit Earning Capacity of the
Business.
 Helpful in knowing the Financial Strength of
the Organization.
 Provides information about activities of the
organization.
 Helpful in Comparison of Financial Results.

04/02/2023 16
Drawbacks/ Limitations of Financial Analysis
 Historical Analysis
 Ignores Price Level Changes
 Qualitative or Non- Monetary aspects ignored
 Limitations of Accounting Data
 Variation in Accounting Practices

04/02/2023 17
 Thank You
Have a Nice Day

04/02/2023 18