TOPIC 4 - Financial Statement Analysis
TOPIC 4 - Financial Statement Analysis
STATEMENTS
•
Accounting concepts Accounting Conventions
• a) Entity Concept a) Disclosure
• b) Going Concern Concept b) Materiality
• c) Accounting period concept c) Consistency
• d) Money Measurement Concept d) Conservatism
• e) Cost Concept
• f) Cost Attach Concept
• g) Dual Aspect Concept
• h) Accrual concept
• i) Periodic Matching of cost and
• Revenue Concept
• j) Realisation Concept
• k) Verifiable Objective Evidence Concept
ESSENTIAL QUALITIES OF
FINANCIAL STATMENTS
• 1. Relevance
• 2. Understandability :
• 3. Reliability and Accuracy
• 4. Comparability
• 5. Completeness
• 6. Timeliness
LIMITATIONS OF FINANCIAL
STATEMENTS
• 1. Lack of Precision
• 2. Lack of Exactness
• 3. Incomplete Information
• 4. Interim Reports
• 5. Hiding of Real Position or Window Dressing
• 6. Lack of Comparability
• 7. Historical Costs
Analysis
• Analysis – To Analyse – to cut into pieces
• But only analyse – No – It means also
Interpretation.
• Thus
• Financial Statement Analysis means
“Analysis, comparisons and interpretation
of Financial data to achieve the desired
result”
TOOLS OF FINANCIAL
STATEMENT ANALYSIS
• 1. Comparative Statements
• 2. Common Size Statements
• 3. Trend Analysis
• 4. Ratio Analysis
• 5. Fund Flow Statement
• 6. Cash Flow Statement
Types of Financial Analysis
• 1. Intra-Firm Comparison
• 2. Inter-firm Comparison
• 3. Industry Average or Standard
Analysis:
• 4. Horizontal Analysis
• 5. Vertical Analysis
Interpretation
• The Analysis is of no use without interpretation
The Company has to interpret the financial
statement which it has analysed.
Position
• 2) Reveal Nature & Trend:
• 3) Identifying Trouble Spots:
•
Disadvantages:
• SOLVENCY RATIOS
• Short Term Solvency
• Current Ratio
• Quick Ratio / Liquid Ratio / Acid Test
Ratio
• Super Quick Ratio
• Stock : Working Capital Ratio.
Long Term Solvency /
Leverage Ratio /
• Capital Gearing
• Debt : Equity Ratio
• Proprietary Ratio
• Long Term Borrowing: Total Assets
• ( 1 – Net Worth )/ Total
Assets
• Fixed Asset : Net worth
ACTIVITY RATIO / TURNOVER
RATIOS
• In relation to sales
• Gross Profit Ratio
• Net Profit Ratio
• Operating Net Profit Ratio
• Operating Ratio
• Operating Expenses Ratio.
In relation to capital employed