Financial statement analysis-Notes

NOTES

CHAPTER 12: Financial Statements Analysis

Analysis of financial statements is a systematic process of analyzing the financial information in the financial statements to understand and take economic decisions.

Tools or techniques of financial statements analysis:

  1. Comparative statements - mean a comparative study of individual items or components of financial statements i.e. Balance sheet and statements of profit and loss of two or more years of the enterprise itself.
  2. Common- Size statements - means statements in which individual items of financial statements in which individual items of financial statements of two or more year are placed side by side and there after converted into percentage taking a common base.
  3. Ratio Analysis - is an arithmetic expression of relationship between two related or interdependent components of financial statements of an accounting period.
  4. Cash flow statements - statements showing flow of cash and cash equivalents during the accounting period classified as operating activity, investing activity and financing activities.

Uses of financial Statements:

  1. Securities Analysis: it is a process by which the investor comes to know whether the firm is fulfilling his expectations with regard to payment of dividend, capital appreciation and security of money.
  2. Credit Analysis
  3. Debt Analysis
  4. Dividend Analysis
  5. General Business Analysis

Tools of Financial Statement Analysis

Purpose of comparative financial Statements:-

  1. Data presentation becomes simple and comparable
  2. Indicates trend
  3. Indicates strengths and weaknesses
  4. Comparison with other firms and industry performance
  5. Forecasting and planning

Importance of comparative financial statements:

  1. Shareholders
  2. Decisions and plans
  3. Lenders
  4. Investment decisions

Example 1:

From the following balance sheets of A Ltd. as on 31st March prepare comparative balance sheet.

Balance sheet as at 31st March 2019
Particulars Note No. 31st March 2019 31st March 2018
I. Equity And Liabilities
• Shareholders’ funds
• Share capital (Equity)
• Non- Current Liabilities
 Long term borrowings: 8% Debentures
• Current Liabilities
 Trade payables
   
18,00,000
 
6,00,000
 
6,00,000
 
12,00,000
 
6,00,000
 
3,00,000
Total
 
30,00,000
21,00,000
II. Assets
a) Non–Current Assets
 Fixed Assets: Tangible Assets
b) Current Assets
 Trade Receivables
 Cash and cash Equivalents
 
 
18,00,000
 
 
10,00,000
2,00,000
 
15,00,000
 
 
5,00,000
1,00,000
Total
 
30,00,000
21,00,000
 

Solution:

Comparative Balance Sheet as at 31st March 2018 and 2019
Particulars Note No. 31st March 2018 (A) 31st March 2019 (B) Absolute change (increase/decrease) (C = B − A) Percentage change   (increase/decrease)% (D= C/A × 100)
1. Equity & Liabilities
2. Equity And Liabilities
 Shareholders’ funds
 Share capital (Equity)
b) Non- Current Liabilities
 Long term borrowings: 8 % Debentures
c) Current Liabilities
 Trade payables
 
 
 
18,00,000
 
 
6,00,000
 
 
6,00,000
 
 
12,00,000
 
 
6,00,000
 
 
3,00,000
 
 
6,00,000
 
 
---------
 
 
3,00,000
 
 
50.00
 
 
---------
 
 
100.00
Total
 
21,00,000
30,00,000
9,00,000
42.86
II. Assets
a) Non–Current Assets
 Fixed Assets: Tangible Assets
b) Current Assets
 Trade Receivables
 Cash and cash Equivalents
 
 
18,00,000
 
 
10,00,000
2,00,000
 
15,00,000
 
 
5,00,000
1,00,000
 
3,00,000
 
 
5,00,000
1,00,000
 
20.00
 
 
100.00
100.00
Total
 
21,00,000
30,00,000
9,00,000
42.86

 

 

Example 2:

From the following balance sheet of S Ltd. as at March 2017. Prepare a common size balance sheet:-

Particulars Note No. 31st March 2017 31st March 2016
I. Equity And Liabilities
1. Shareholders’ Funds
a) Share Capital
b) Reserves and Surplus
2. Non–current Liabilities
 Long term Borrowings
3. Current Liabilities
 Trade Payables 
 
 
 
10,00,000
2,00,000
 
8,00,000
 
4,00,000
 
 
5,00,000
3,00,000
 
5,00,000
 
2,00,000
Total
 
24,00,000
15,00,000
II. Assets
1. Non–Current Assets
 Fixed Assets–Tangible Assets
2. Current Assets
 Cash and Cash Equivalents
 
 
 
15,00,000
 
9,00,000
 
 
10,00,000
 
5,00,000
Total
 
24,00,000
15,00,000

Solution:

Common Size Balance Sheet of S Ltd.  as at  31st March 2017 & 2016.
Particulars Note No. Absolute amounts
31st March 2016 31st March 2017 31st March 2016(%) 31st March 2017(%)
I. Equity And Liabilities
1. Shareholders’ Funds
c) Share Capital
d) Reserves and Surplus
2. Non–current Liabilities
 Long term Borrowings
3. Current Liabilities
 Trade Payables 
 
 
 
5,00,000
3,00,000
 
5,00,000
 
2,00,000
 
 
10,00,000
2,00,000
 
8,00,000
 
4,00,000
 
 
33.33
20.00
 
33.34
 
13.33
 
 
41.67
8.33
 
33.33
 
16.67
Total
 
15,00,000
24,00,000
  100.00
     100.00
II. Assets
1. Non–Current Assets
 Fixed Assets–Tangible Assets
2. Current Assets
 Cash and Cash Equivalents
 
 
 
10,00,000
 
5,00,000
 
 
15,00,000
 
9,00,000
 
 
     66.67
 
     33.33
 
 
      62.50
 
      37.50
Total
 
15,00,000
24,00,000
  100.00
     100.00

Example 3:

Prepare comparative statement of profit and loss for the year ended 31st March 2015.

Particulars Note No. 2014-15 2013-14
Revenue from operations
Other income
Expenses
 
20,00,000
10,00,000
21,00,000
15,00,000
4,00,000
15,0,000

Rate of income tax was 50%.

Solution:

Particulars Note no. 31st March 2014 (A) 31st March 2015 (B) Absolute Change (increase/decrease)(C = B – A) Percentage change (increase/decrease) % (D = C/A × 100)
1. Revenue from operations
2. Other income
15,00,000
4,00,000
20,00,000
10,00,000
5,00,000
6,00,000
33.33
150.00
3. Total Revenue (I + II)
4. Expenses
 
19,00,000
15,00,000
30,00,000
21,00,000
11,00,000
  6,00,000
57.89
40.00
5. Profit before Tax (III – IV)
6. Less: Tax (50%)
 
4,00,000
2,00,000
9,00,000
4,50,000
5,00,000
2,50,000
125.00
125.00
7. Profit after Tax (V – VI)
 
2,00,000 4,50,000 2,50,000 125.00