Management and Financial Accounting Financial Statements and Analysis

Financial Statements: are prepared on the basis of recorded facts. The recorded facts are those which can be expressed in monetary terms. These are the outcome of summarizing process of accounting. Financial statement is a collection of data organized according to logical and consistent accounting procedures. Types of Financial Statements: 1. Position Statement OR Ba ance Sheet !. "ncome Statement OR Profit and #oss $ccount %P&# $'c( ). Statement of *hanges in Owner+s e,uity OR Retained -arnings .. Statements of changes in /inancia Position

/und / ow Statement

*ash / ow Statement

Forms and Contents of Balance Sheet: %a( 0orizonta or T /orm or $ccount /orm of Ba ance Sheet %b( 1ertica or Report /orm of Ba ance Sheet (a) Horizontal or T Form of Balance Sheet ASS"TS #articulars

!AB! !T!"S #articulars Share Capital % "&uity'#reference (eser)es and Surplus 2 *apita and 3enera Reser4es 2 Share Premium $ccount 2 Profit & #oss $'c %Retained -arnings( 2 Other Reser4es Secured oans 2 /rom /"s and Ban5s 2 Secured 6ebentures7 Bonds *nsecured oans

Amt$ 2 Fi+ed Assets 2 #and7 Bui ding 2 2 3oodwi 2 /urniture7 P ant and 8achinery 2 Patent 2 *opy Rights 2 #i4e Stoc5 2 Trade 8ar5 2 !n)estments 2 3o4t. & Trust Securities 2 Shares7 6ebentures & Bonds of 2 Other *orporates

Amt$ 2

2 /ixed 6eposits 2 Other #oans & $d4ances 2 9nsecured Bonds etc. Current ia,ilities 2 Sundry *reditors 2 Bi s Payab e7 Outstanding -xp. 2 Ban5 O4erdraft7 6i4idend and Tax Payab e7 Short Term $d4ances etc. #ro)isions 2 /or Taxation 2 6i4idend 2 /or *ontingencies etc. 2

Current Assets 2 *ash in 0and & *ash at Ban5 2 8ar5etab e Securities7 Short Term "n4estment 2 Bi s recei4ab es7 sundry debtors 2 "n4entories: Raw materia 7 finished goods7 spares & too s7 wor52in2 progress. 2 Prepaid expenses7 accrued interest oans - Ad)ances 2 $d4ances & #oans 2 Pre iminary -xpenses7 6eferred -xp. 2 6iscount on issue of shares'bonds

2 2

xx Financial Statements #art ! (B): .ertical Form of Balance Sheet :ame of the *ompany ;;;;;.. Ba ance Sheet as at ;;;;;;.. Schedu e /igures as at the :o. end of current /inancia year %Rs.( ". Sources of Funds 1. Shareho der+s /unds %a( *apita %b( Reser4es & Surp uses !. #oans /unds %a( Secured #oans %b( 9nsecured #oans T/TA : "". Application of Funds 1. /ixed $ssets %a( 3ross B oc5 %b( #ess 6epreciation %c( :et B oc5 %d( *apita =or52in2Progress !. "n4estments ). *urrent $ssets7 #oans & $d4ances %a( "n4entories %b( Sundry 6ebtors

xx

/igure as at the end of pre4ious /inancia <ear %Rs.(

%c( *ash & Ban5 Ba ances %d( Other *urrent $ssets %e( #oans & $d4ances #ess: *urrent #iabi ities & Pro4isions %a( #iabi ities %b( Pro4isions Net Current Assets .. %a( 8isce aneous -xpenditure to the extent not written off or ad>usted %b( Profit & #oss $ccount %debit( T/TA : M-FA % Financial Statements "0# A1AT!/1 /F BA A1C" SH""T !T"MS: !AB! !T!"S 1. SHA(" CA#!TA : 8oney co ected from the promoters of the business and from genera pub ic in the form of ?S0$R-@. Share capita can be of two type: %i( "&uity Share Capital: Shareho ders of this capita ha4e 4oting right but they cannot demand di4idend e4en if *ompany is in profits. 6i4idend decision is ta5en by the 8anagement of the *ompany. %ii( #reference Shares: Shareho ders of these type of shares don+t ha4e any 4oting right. But these shareho ders are paid some fixed rate of di4idend7 if *ompany is in profit. They are 5nown as preference shares as they ha4e preference o4er e,uity shares in fo owing ways. $t the time of i,uidation or winding2up of the company7 these are paid before e,uity shareho ders but after the secured oans. They ha4e preference o4er the di4idend distribution a so. !. ("S"(."S - S*(# *S: This is created by undistributed profits or retained earnings. Reser4es are created from these retained earnings for 4arious purposes i.e. 3enera reser4es7 Reser4e for redemption of bonds etc.7 Reser4e for contingencies etc. =e can c assify the 4arious items of Reser4es & Surp uses as fo owing: Share Premium Reser4es %$ 5inds of reser4es( Retained -arnings %Pre4ious years profits( Surp us Profit %*urrent <ear(

). S"C*("2 /A1S: $ those oans against which security is pro4ided to raise the oans are 5nown as secured oans. These can be c assified as fo owing: #oans ta5en from financia institutions i5e "6B"7 "*"*" and other state financia institutions and Ban5s etc. Secured debentures OR bonds A these are the oans co ected from the genera pub ic instead of ta5en bu 5 oan from ban5s & /"s. Security is pro4ided against these bonds. .. *1S"C*("2 /A1S: These are the oans and ad4ances against which company has not gi4en any security. They are 2 /ixed deposits %open ended( 9nsecured bonds or debentures #oans from subsidiary company and Other unsecured oans etc. M-FA % F!1A1C!A STAT"M"1TS B. C*(("1T !AB! !T!"S: which are to be paid or are expected to be paid within a year or ear ier a so. These are 2 Sundry *reditors Bi s payab e $d4ance payments Ban5 o4erdraft 6i4idend payab e Tax payab e Outstanding ' accrued expenses C. #(/.!S!/1S: which are pro4ided to pay short term iabi ities from the profits. These are 2 Pro4ision for tax Pro4ision for di4idends etc. %Proposed( Pro4ision for insurance7 pension or for pro4ident fund scheme ASS"TS S!2": 1. F!0"2 ASS"TS: are those which are used for ong period. 3enera y in4estment in fixed assets are ir2re4ersib e in nature. =e can broad y c assify these assets in two parts 2 (i) (ii) Tangi,le Fi+ed Assets #and7 Bui ding7 /urniture7 P ant & 8achinery7 1ehic es7 #i4e Stoc5s etc. !ntangi,le Fi+ed Assets 3oodwi 7 Patent7 *opyright7 Brand 1a ue7 Trademar5

!.

!1."STM"1TS: are done to obtain some returns out of surp us funds. These in4estments can be made under 4arious sub2heads: 2 "n4estments in go4t. securities %gifts( 2 "n shares and debentures of other corporates and in2rea estates etc. C*(("1T ASS"TS: are those assets or possessions which are used or uti ized within a year or can be con4erted in to cash within a year. These are fo owing: %"n the decreasing order of i,uidity( 2 *ash in hand 2 *ash at Ban5 2 8ar5etab e Securities 2 Short2term in4estments 2 Bi s Recei4ab es 2 Sundry 6ebtors 2 Prepaid -xpenses 2 $ccrued "ncomes 2 "n4entories of raw materia 7 finished goods7 spares & too s7 wor52in2progress /A1S A12 A2.A1C"S: Short2term ad4ances and oans gi4en by the firm ' company to others. 2"F"(("2 "0#"12!T*("S: Those expenses which are not debited fu y to the Profit & #oss $'c of the year in which they ha4e been incurred. These expenses are spread o4er a no. of years and the unwritten ba ance is shown in the ba ance sheet. These are2 2 Pre iminary -xpenses 2 6iscount on issue of shares ' bonds etc.

).

.. B.

M-FA % F!1A1C!A STAT"M"1TS Financial Statements The 8anufacturing7 Trading and Profit & #oss $ccounts are genera y prepared in T2/orm. The genera forms of these accounts are gi4en as fo ows: Manufacturing Account For the year ending 3$$ 2e,it To opening Stoc5 Raw 8ateria s Part y 8anufactured 3oods To Purchase of Raw 8ateria s To *arriage "nwards To 8anufacturing =ages To /actory Rent To 6epreciation: /actory Bui ding 8achinery To Repair to P ant To *oa To Sa ary of =or5s 8anager ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. xxx Trading and #rofit - oss Account For the year ending 3$$ 2e,it To Opening Stoc5 of finished goods To *ost of finished goods transferred from 8anufacturing $ccount To 3ross Profit c'dD To 3ross #oss b'dD To Sa aries To Office Rent To $d4ertising To *arriage Outward To 6iscount $ owed To Pro4ision for Bad and 6oubtfu 6ebts To 6epreciation: Office Bui ding /urniture ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. ;.. Credit By Sa es By * osing Stoc5 of By /inished 3oods By 3ross #oss c'dD By 3ross Profit b'dD By 6iscount Recei4ed By :et #oss transferred to *apita $ccount ;.. ;.. ;.. ;.. ;.. ;.. ;.. xxx Credit By *ost of finished goods transferred to trading account By * osing Stoc5: Raw 8ateria s Part y 8anufactured 3oods ;..

;.. ;..

To :et Profit2transferred to *apita $ccount

;.. xxx xxx

D On y one figure wi be there. #rofit - oss Appropriation A'c For the year ending 3$$ 2e,it To Transfer to 3enera Reser4e To Transfer to Sin5ing /unds To "nterim 6i4idends To Proposed 6i4idends ;.. ;.. ;.. ;.. xxx M-FA % F!1A1C!A STAT"M"1TS A1A 4S!S Format To Find /ut 51"T #(/F!T6 From 57(/SS #(/F!T8 -arning Before "nterest7 6epreciation & Tax %6epreciation( A #ess -arning Before "nterest & Tax %"nterest( A #ess -arning Before Tax %Tax( A #ess -arning $fter Tax OR2 Profit $fter Tax OR2 :et Profit 2 2 2 2 2 2 2 -B6"T 6 - B " TEE "EE - B TEEE TEEEEEEEEE -$T ' P$T ' :.P. Credit By Ba ance b'd %Ba ance of Profit from Pre4ious <ear( By :et Profit %/or the *urrent <ear( ;.. ;.. xxx

1"T #(/F!T #ess A 6i4idend to preference share ho dersEEEEEEEEE 2istri,uta,le #rofit999 #ess A 6i4idend to -,uity Share 0o ders EEEEEEEEEEEEEE Surplus #rofit999999999 $dd A 6epreciationEEEEEEEEEEE CASH #(/F!T99999999

Ta+ Shield (By 2epreciation): Tax Shie d is the benefit obtained by a firm or company from the tax because of the existence of depreciation i.e. sa4ings of company or firm by paying ess tax due to deducting depreciation from the 3ross Profit as an expense. :et =orth: Share *apita F Reser4es & Surp us

$ so 5nown as A ?:et Own /unds@ OR ?Owner+s /und@ etc. Boo5 1a ue: 1a ue of a share that shou d be according to the financia position of the company.

EEEE:et =orthEEEE :o. of -,uity Share

-arning Per Share %-PS(:

:et Profit $fter Payment of 6i4idend to P. SharesEEEEEE :o. of -,uity Shares

Profit earned by the *ompany for each share

M-FA % F!1A1C!A STAT"M"1TS A1A 4S!S

Meaning - Concept of Financial Analysis: /inancia $na ysis is a so 5nown as ana ysis and interpretation of financia statements. A1A 4S!S A means the simp ification of financia data by methodica c assification of the data gi4en in the financia statement. !1T"(#("TAT!/1 A means exp aining the meaning and significance of simp ified data %by ana ysis(. Both ana ysis and interpretation are inter in5ed and comp imentary to each other. The purpose of this ana ysis is to diagnose the information contained in financia statements so as to >udge the profitabi ity and financia soundness of the firm. Types of Financial Analysis

On the basis of materia used

On the basis of modus operandi

-xterna $na ysis

"nterna $na ysis

0orizonta $na ysis

1ertica $na ysis

1. "+ternal Analysis: 6one by outsiders who don+t ha4e access to the detai ed interna accounting records. These are shareho ders7 potentia in4estors7 creditors7 go4t. agencies7 credit agencies7 genera pub ic etc. This ana ysis depends on pub ished financia statements. !. !nternal Analysis: 6one by persons who ha4e access to the interna accounting records of a business firm. These may be executi4es and emp oyees of the company. :orma y this is done for manageria purposes. ). Horizontal Analysis: "t is a comparison of financia data of a company for se4era years7 presented horizonta y o4er a no. of co umns for the data of 4arious years. Beginning point is chosen as base or standard year and the figures of other years are compared with the base or standard year. "+ample: Comparati)e and trend analysis .. .ertical Analysis: "t is the study of re ationship of the 4arious items in the financia statements of one accounting period. "n this figures from one year+s financia statements are compared with a base se ected from the same years statement. "t is a so 5nown as ?Static Analysis@. "+ample: Common size statement analysis and ratio analysis

M-FA % F!1A1C!A STAT"M"1T A1A 4S!S

Methods or Techni&ues of Financial Statement Analysis Se4era methods and techni,ues are used for the financia ana ysis but genera y we use the fo owing techni,ues2 1. !. ). .. B. C. G. *omparati4e Statement $na ysis Trend or Trend Percentage $na ysis *ommon Size Statement $na ysis Ratio $na ysis /unds / ow $na ysis *ash / ow $na ysis *ost21o ume2Profit $na ysis

1. Comparati)e Statement Analysis: *omparati4e statements show financia position of different periods of time. So they gi4e an idea of financia position at two or more periods. =hen figures of pre4ious periods are gi4en a ong with the figures of current period7 ana yst wi be ab e to study the trends of 4arious items i5e sa es7 profits etc. and a so the trend and direction of financia position and operating resu ts. These statements can be of two types2 %a( *omparati4e Ba ance Sheet7 %b( *omparati4e "ncome Statement

%a( Comparati)e Balance Sheet: This ana ysis is done on two or more ba ance sheets of the same company to find out the changes which he p in forming an opinion about the progress of the company. /o owing points can be considered whi e ana yzing the comparati4e ba ance sheet. %i( Current Financial #osition: by ana yzing wor5ing capita i.e. -xcess of *urrent $ssets %*$( o4er *urrent #iabi ities %*#( =or5ing *apita %=.*.( K *$ A *# "ncrease in =.*. wi mean impro4ement in current financia position of the company. %ii( i&uidity #osition: by ana yzing i,uid assets i.e. cash etc. %iii( ong:Term Financial #osition: by ana yzing changes in fixed assets ong2term iabi ities7 capita etc. %i4( #rofita,ility of the Concern: By ana yzing changes in retained earning and surp us. M-FA % F!1A1C!A STAT"M"1T A1A 4S!S BA A1C" SH""T As on 31st December 1HH. Assets Rs. J7II7III #and & Bui dings !7!!7III P ant & 8achinery )7II7III /urniture & /ixtures Other /ixed $ssets !7II7III *ash in hand & at ban5 .B7III Bi s Recei4ab es 17!I7III Sundry 6ebtors Stoc5 1I7III Prepaid -xpenses 1C7HG7II I

Liabilities -,uity Share *apita Reser4es & Surp us 6ebentures #ong2term oans on 8ortgage Bi s Payab e Sundry *reditors Other *urrent #iabi ities

1HH) Rs. C7II7III )7)I7III !7II7III 17BI7III BI7III 17II7III B7III 1.7)B7II I

1HH) Rs. )7GI7III .7II7III !I7III !B7III !I7III 17BI7III !7II7III !7BI7III 1.7)B7II I

1HH. Rs. !7GI7III C7II7III !B7III )I7III JI7III HI7III !7BI7III )7BI7III !7III 1C7HG7III

Solution: C/M#A(AT!." BA A1C" SH""T /F A C/M#A14 For t e !ear ending December 31" 1##3 and 1##$

<ear ending )1st 6ecember 1HH) 1HH. Assets Current Assets% *ash in hand & at Ban5 Bi s Recei4ab es Sundry 6ebtors Stoc5 Prepaid -xpenses Tota *urrent $ssets Fi&ed Assets% #and & Bui dings P ant & 8achinery /urniture & /ixtures Other /ixed $ssets Tota /ixed $ssets Tota $ssets (s$ !I7III 17BI7III !7II7III !7BI7III 222 C7!I7III )7GI7III .7II7III !I7III !B7III J71B7III 1.7)B7III (s$ JI7III HI7III !7BI7III )7BI7III !7III G7G!7III !7GI7III C7II7III !B7III )I7III H7!B7III 1C7HG7III

"ncrease' 6ecrease %$mounts( (s$ FCI7III 2CI7III FBI7III F17II7III F!7III F17B!7III 217II7III F!7II7III FB7III FB7III F171I7III F!7C!7III

"ncrease' 6ecrease %Percentages( (s$ F)II 2.I F!B F.I F!..B! 2!G.I) FBI.II !B.II !I.II F1)..H F1J.!C

Financial Statements Analysis <ear ending )1st 6ecember 1HH) 1HH. ia,ilities - Capital Current Liabilities% Bi s Payab e Sundry *reditors Other *urrent #iabi ities Tota *urrent #iabi ities 6ebentures #ong2term oans on 8ortgage Tota #iabi ities -,uity Share *apita Reser4e & Surp uses Tota !nterpretation (s$ BI7III 17II7III B7III 17BB7III !7II7III 17BI7III B7IB7III C7II7III )7)I7III 1.7)B7III (s$ .B7III 17!I7III 1I7III 17GB7III )7II7III !7II7III C7GB7III J7II7III !7!!7III 1C7HG7III "ncrease' 6ecrease %$mounts( (s$ 2B7III F!I7III FB7III F!I7III F17II7III EEFBI7III F17GI7III F!7II7III 217IJ7III F!7C!7III "ncrease' 6ecrease %Percentages( (s$ 21I F!I F1II F1!.H FBI EEEF)) F)).CC F)) 2)!.G) F1J.!C

%1( The comparati4e ba ance sheet of the company re4ea s that during 1HH. there has been an increase in fixed assets of 171I7III i.e. 1)..HL whi e ong2term iabi ities to outsiders ha4e re ati4e y increased by Rs. 17BI7III and e,uity share capita has increased by Rs. ! a5hs. This fact depicts that the po icy of the company is to purchase fixed assets from the ong2term sources of finance thereby not affecting the wor5ing capita . %!( The current assets ha4e increased by Rs. 17B!7III i.e. !..B!L and cash has increased by Rs. CI7III. On the other hand7 there has been an increase in in4entories amounting to Rs. 1 a5h. The current iabi ities ha4e increased on y by Rs. !I7III i.e. 1!.HL. This further confirms that the company has raised ong2term finances e4en for the current assets resu ting into an impro4ement in the i,uidity position of the company. %)( Reser4es and surp uses ha4e decreased from Rs. )7)I7III to Rs. !7!!7III i.e. )!.G)L which shows that the company has uti ized reser4es and surp uses for the payment of di4idends to shareho ders either in cash or by the issue of bonus shares. %.( The o4era financia position of the company is satisfactory. !. C/M#A(AT!." !1C/M" STAT"M"1T The "ncome Statement gi4es the resu ts of the operations of a business. The comparati4e income statement gi4es an idea of the progress of a business o4er a period of time. The changes in abso ute data in money 4a ues and percentages can be determined to ana yze the profitabi ity of the business. #i5e comparati4e ba ance sheet7 income statement a so has four co umns. /irst two co umns gi4e figures of 4arious items for two years. Third and fourth co umns are used to show increase or decrease in figures in abso ute amounts and percentages respecti4e y.

M-FA % F!1A1C!A STAT"M"1T A1A 4S!S

7uidelines for !nterpretation of !ncome Statement: "ncrease and decrease in sa es shou d be compared with or in cost of goods so d. Profitabi ity wi impro4e on y when increase in the cost of goods so d wi be ess than the increase in sa es. Operating profit wi impro4e when either sa e wi impro4e or operating expenses wi reduce or 4ice24ersa. "ncrease or decrease in net profit wi show the progress of the concern. O4era profitabi ity of the concern shou d a so be e4a uated. Sa es A *ost of goods produced %8fg. or production cost( EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE 7(/SS #(/F!TEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE ess A Operating -xpenses %Office and administration expenses7 se ing and distribution expenses etc.(

EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE /#"(AT!17 #(/F!TEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE ess A :on2operating -xpenses %"nterest on oans7 oss on sa e of assets7 writing off of deferred expenses payment of taxes etc.( EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE 1"T #(/F!T999999999999999999999999999999999999999 "+ample: "ncome statements of a firm are gi4en for the year ending on )1 st 6ecember 1HH) and 1HH.. Re2arrange the figures in a comparati4e form and study the profitabi ity position of the concern. ;<<= (s$ (???) GJB .BI GI JI !B GI ;<<> (s$ (???) HII BII G! HI )I JI

:et sa es *ost of goods so d /perating "+penses: 3enera & $dmin. -xpenses Se ing -xpenses 1on:/perating "+penses: "nterest Paid "ncome2Tax

Solution: C/M#A(AT!." !1C/M" STAT"M"1T For t e !ear ended 31st December 1##3 and 1##$ )1st 6ecember "ncrease %F( 6ecrease %2( 6ecrease %2( 1HH) 1HH. Rs. %MIII( Rs. %MIII( Rs. %MIII( :et Sa es GJB HII F11B Less: *ost of goods so d .BI BII FBI 3ross Profit ))B .II FCB Operating -xpenses: 3enera & $dministrati4e -xpenses Se ing -xpenses Tota Operating -xpenses Operating Profit Less: Other deductions "nterest paid :et profit before tax Less: "ncome tax :et Profit after tax GI JI 1BI 1JB !B 1CI GI HI G! HI 1C! !)J )I !IJ JI 1!J F! F1I F1! FB) FB F.J F1I F)J

"ncrease %F( 6ecrease %2( %Percentages( F1..CB F11.I F1H..I F!.J F1!.B FJ.I F!J.CB F!I F)I.I F1..) F.!.!!

!nterpretation The comparati4e income statement gi4en abo4e re4ea s that there has been an increase in net sa es of 1..CBL whi e the cost of goods so d has increased near y by 11L thereby resu ting in an increase in the gross profit of 1H..L. $ though the operating expenses ha4e increased by JL the increase in gross profit is sufficient to compensate for the increase in operating expenses and hence there has been an o4era increase in operationa profits amounting to Rs. B)7III i.e. !J.CBL in spite of an increase in financia expenses of Rs. B7III for interest and Rs. 1I7III for income2tax. There is an increase in net profits after tax amounting to Rs. )J7III i.e. .!.!!L. "t may be conc uded that there is a sufficient progress in the company and the o4era profitabi ity of the company is good. !llustration =. The "ncome Statements of Sanyasi #td. are gi4en for the years 1HH) and 1HH.. *on4ert them into *ommon2size "ncome Statement and interpret the changes.

3ross Sa es Less: Sa es returns :et Sa es *ost of Sa es 3ross Profit

!ncome Statements For t e !ears ending 1##3 and 1##$ ;<<= (s$ G7!B7III !B7III G7II7III B7HB7III 17IB7III !)7III 1!7GII )B7GII CH7)II 17!II GI7BII 17GBI CJ7GBI

;<<> (s$ J71B7III 1B7III J7II7III C71B7III 17JB7III !.7III 1!7BII )C7BII 17.J7BII J7IBI 17BC7BBI 17H.I 17B.7C1I

'perating (&penses% Se ing & 6istribution -xpenses $dministrati4e -xpenses Tota -xpenses Operating "ncome Other "ncomes :on2Operating -xpenses :et Profit during the year

Solution: C/MM/1:S!@" !1C/M" STAT"M"1T For t e !ear ending 1##3 and 1##$ 1HH) 1HH. Rs. L Rs. G7II7III 1II.II J7II7III B7HB7III JB.II C71B7III 17IB7III 1B.II 17JB7III !)7III 1!7GII )B7GII CH7)II 17!II GI7BII 17GBI CJ7GBI ).!H 1.J1 B.1I H.HI I.1G 1I.IG I.!B H.J! !.7III 1!7BII )C7BII 17.J7BII J7IBI 17BC7BBI 17H.I 17B.7C1I

:et Sa es Less: *ost of Sa es 3ross Profit

L 1II.II GC.JG !).1) ).II 1.BC ..BC 1J.BC 1.II 1H.BC I.!. 1H.)!

'perating (&penses% Se ing & 6istribution -xpenses $dministration -xpenses Tota -xpenses Operating "ncome Other "ncomes Tota "ncome Less: :on2Operating -xpenses :et profit during the year

!. Trend Analysis: "n this ana ysis is done by computing trends of series of information. This method determines the direction upwards or downwards. The information for a no. of years is ta5en up and one year7 genera y the first year7 is ta5en as a base year. Base year+s figures are compared with other years to find a trend. Base year is considered as 1IIL %trend percentage(. "+ample: /igures of MN+ td from 1HHC are fo owing: 4ear 1HHC 1HHG 1HHJ 1HHH !III Sales 1JJ1 !).I !CBB )I!1 )GCJ StocA GIH GJ1 J1C H.. 11B. 7$#$ %/igures in Rs. #acs( )!1 .)B .BJ B!G CG!

Solution: T("12 #"(C"1TA7"S (Base 4ear % ;<<B C ;??) ((s$ !n acs) 4ear Sales (D) StocA (D) 7ross #rofit (D) 1HHC 1JJ1 1II GIH 1II )!1 1II 1HHG !).I 1!. GJ1 11I .)B 1)C 1HHJ !CBB 1.1 J1C 11B .BJ 1.) 1HHH )I!1 1C1 H.. 1)) B!G 1C. !III )GCJ !II 11B. 1C! CG! !IH !nterpretation: Sa e is increased in a the years and has grown to twice of 1HHC in year !III. Stoc5 is a so growing e4ery year but increase was more between 1HHH and !III. Profit is a so growing substantia y. "t has doub ed from 1HHC to !III. "ncrease was more in 1HHG but max in !III. O4era performance of firm is good. "t+s sa es & profits are doub ed in >ust fi4e years. "ncrease of profit is more than increase in sa es that shows contro o4er cost. ). Common:Size Statements: *ommon size ba ance sheet and income statements are shown in ana ytica percentages. The figures are shown as percentages of tota assets and tota sa es and tota iabi ities. The tota assets are ta5en as 1II and different assets are shown as percentage of the tota assets and same way in the iabi ities. Simi ar y in income statements a the components are shown as percentage of sa es.

%i( Common Size Balance Sheet: "n this a the assets and a the iabi ities are expressed in percentages of tota of assets and iabi ities. The tota figure of assets Rs. !7II7III is ta5en as 1II and a other assets are expressed as a percentage of tota assets. The re ation of each asset to tota assets is expressed in the statement. The re ation of each iabi ity to tota iabi ities is simi ar y expressed. The common2size ba ance sheet can be used to compare companies of differing size. The comparison of figures in different periods is not usefu because tota figures may be affected by a number of factors. "t is not possib e to estab ish standard norms for 4arious assets. The trends of figures from year to year may not be studied and e4en they may not gi4e proper resu ts. !llustration B. The Ba ance Sheets of S & *o. and O & *o. are gi4en as fo ows: BA A1C" SH""TS As on Dec. 31" 1##$ S & Co. (s$ 17!I7III 17BI7III 1.7III 171B7III !7III 1!7III 1B7III EE1I7III .7)J7III JI7III )7).7III 17III 1I7III .7III 17III J7III .7)J7III

Liabilities Preference Share *apita -,uity Share *apita Reser4e & Surp uses #ong2term #oans Bi s Payab e Sundry *reditors Outstanding -xpenses Proposed 6i4idend #and and Bui ding P ant and 8achinery Temporary "n4estment "n4entories Boo526ebts Prepaid -xpenses *ash and Ban5 Ba ances

K & Co. (s$ 17CI7III .7II7III 1J7III 17)I7III 222 .7III C7III HI7III J7IJ7III 17!)7III C7II7III .I7III !B7III J7III !7III 1I7III J7IJ7III

*ompare the financia position of two companies with the he p of common size ba ance sheet.

Solution C/MM/1:S!@" BA A1C" SH""T As on Dec. 31" 1##$ S - Co$ $mount L Rs. JI7III )7).7III .71.7III 17III 1I7III .7III 17III J7III !.7III .7)J7III 17!I7III 17BI7III 1.7III !7J.7III 171B7III !7III 1!7III 1B7III 1I7III )H7III .7)J7III 1J.!C GC.!C H..B! I.!) !.!J I.H1 I.!) 1.J) B..J 1II.II !G.)H )..!B ).1H C..J) !C.!B I..C !.G. )... !.!J J.H! 1II.II

Assets

E - Co$ $mount L Rs. 17!)7III C7II7III G7!)7III .I7III !B7III J7III !7III 1I7III JB7III J7IJ7III 17CI7III .7II7III 1J7III B7GJ7III 17)I7III 222 .7III C7III HI7III 17II7III J7IJ7III 1B.!! G..C! JH..J ..HB ).IJ I.HH I.!B 1.!B 1I.B! 1II.II 1H.JI .H.BI !.!) G1.B) 1C.IH 222 I..H I.G. 11.1B 1!.)J 1II.II

Fi&ed Assets #and & Bui ding P ant & 8achinery Tota /ixed $ssets Current Assets Temporary "n4estments "n4entories Boo5 6ebts Prepaid -xpenses *ash & Ban5 Ba ance Tota *urrent $ssets Tota $ssets S are Capital ) *eser+es Preference Share *apita -,uity Share *apita Reser4es & Surp uses Tota *apita & Reser4es #ong2term #oans Current Liabilities Bi s Payab e Sundry *reditors Outstanding -xpenses Proposed 6i4idend Tota of #iabi ity Side

Comments: %1( $n ana ysis of pattern of financing of both the companies shows that O & *o. is more traditiona y financed as compared to S & *o. The former company has depended more on its own funds as is shown by ba ance sheet. Out of tota in4estments7 G1.B)L of the funds are proprietor+s funds and outsiders+ funds account on y for !J..GL. "n S& *o. proprietors+ funds are C..J)L whi e outsiders+ share is )B.1GL which shows that this company has depended more upon outsiders funds. "n the present day economic wor d7 genera y7 companies depend more on outsiders+ funds. "n this context both the companies ha4e good financia p anning but O & *o. is more financed on traditiona ines.

%!( Both the companies are suffering from inade,uacy of wor5ing capita . The percentage of current iabi ities is more than the percentage of current assets in both the companies. The first company is suffering more from wor5ing capita position than the second company because current iabi ities are more than current assets by )...L and this percentage is 1.JCL in the case of second company. %)( $ c ose oo5 at the ba ance sheets shows that in4estments in fixed assets ha4e been financed from wor5ing capita in both the companies. "n S & *o. fixed assets account for H..B!L of tota assets whi e ong2term funds account for H1.IJL of tota funds. "n O & *o. fixed assets account for JH..JL whereas ong2term funds account for JG.C!L of tota funds instead of using ong2term funds for wor5ing capita purposes the companies ha4e used wor5ing capita for purchasing fixed assets. %.( Both the companies face wor5ing capita prob em and immediate steps shou d be ta5en to issue more capita or raise ong2term oans to raise wor5ing capita position. %ii( C/MM/1 S!@" !1C/M" STAT"M"1T: The items in income statement can be shown as percentages of sa es to show the re ation of each item to sa es. $ significant re ationship can be estab ished between items of income statement and 4o ume of sa es. The increase in sa es wi certain y increase se ing expenses and not administrati4e or financia expenses. "n case the 4o ume of sa es increases to a considerab e extent7 administrati4e and financia expenses may go up. "n case the sa es are dec ining7 the se ing expenses shou d be reduced at once. So7 a re ationship is estab ished between sa es and other items in income statement and this re ationship is he pfu in e4a uating operationa acti4ities of the enterprise. !llustration F. /o owing are the "ncome Statements of a company for the years ending 6ec. )17 1HH) and 1HH.: 1HH) %Rs. in MIII( BII !I B!I )!B !I )I !B .II 1!I B!I C1I 1IB G1B 1HH. %Rs. in MIII( GII 1B G1B B1I !B .B )I

Sa es 8isce aneous "ncome (&penses% *ost of Sa es Office -xpenses Se ing -xpenses "nterest :et Profit

Solution: C/MM/1:S!@" !1C/M" STAT"M"1T For t e !ears ending Dec. 1##3 and 1##$ 1HH) 1HH. Rs. %MIII( L Rs. %MIII( BII 1II.II GII )!B CB.II B1I 1GB )B.II 1HI !I )I BI 1!B !I 1.B !B 1!I ..II C.II 1I.II !B.II ..II !H.II B.II !..II !B .B GI 1!I 1B 1)B )I 1IB

Sa es Less: *ost of Sa es 3ross Profit

L 1II.II G!.JC !G.1. ).BJ C..! 1I.II 1G.1. !.1. 1H.!J ..!J 1B.II

'perating (&penses% Office -xpenses Se ing -xpenses Tota Operating -xpenses Operating Profit 8isce aneous "ncome Tota "ncome Less: :on2Operating -xpenses: "nterest :et Profit

!nterpretation %1( The sa es and gross profit has increased in abso ute figures in 1HH. as compared to 1HH) but the percentage of gross profit to sa es has gone down in 1HH.. %!( The increase in cost of sa es as a percentage of sa es has brought the profitabi ity from )B to !G.1.L. %)( Operating expenses ha4e remained the same in both the years but non2operating expenses ha4e decreased as a percentage in 1HH.. $ s ight decrease in non2operating expenses in the atter year cou d not he p to impro4e profits. %.( :et profits ha4e decreased both in abso ute figures and as a percentage in 1HH. as compared to 1HH). %B( The o4era profitabi ity has decreased in 1HH. and the reason is arise in cost of sa es. The company shou d ta5e immediate steps to contro its cost of sa es7 otherwise the company wi be in troub e.

!llustration G$ The fo owing are the Ba ance Sheets of N #td. and < #td. for the year ending )1st of 6ecember7 1HH.. Liabilities -,uity Share *apita Preference Share *apita Reser4es & Surp us #oans Bi s Payab e Sundry *reditors Outstanding -xpenses 6i4idend 6ec ared 0 td$ (s$ !7BI7III 17!I7III BI7III )7BI7III !B7III 1J7III J7BHI !7III J7!)7BHI 4 td$ (s$ 17GI7III JI7III GI7III !7GH7III 1.7III J7III .7BII G7BII C7))7III Assets #and & Bui ding P ant & 8achinery "n4estment %Temporary( Boo526ebts Prepaid -xpenses *ash & Ban5 0 td$ 4 td$ (s$ (s$ )7BI7III !7GB7III !7GI7III )7II7III G!7III 1!7III .G7BII )B7.II .J7CHI !B7III 222 !17III

J7!)7BHI C7))7III

Present the data in such a way that proper ana ysis is possib e. 6o your own. 3i4e your interpretations a so. #imitations of /inancia $na ysis: Though financia ana ysis is a powerfu too of determining financia position %strengths & wea5nesses( of a firm7 but this ana ysis is based on the information a4ai ab e in the financia statements. Thus this ana ysis suffers from inherent imitations of financia statements. The financia ana ysts ha4e to be carefu about the impact of price e4e changes7 window2dressing of financia statements7 changes in accounting po icies7 persona >udgements etc. Some of the important imitations of financia ana ysis are7 howe4er7 summed up as under: 1( "t is on y a study of interim reports. !( This ana ysis is based upon on y monetary information and non2monetary factors are ignored. )( "t does not consider changes in price e4e . .( *hanges in accounting procedure may often ma5e financia ana ysis mis eading. B( $na ysts ha4e to ma5e interpretations and draw his own conc usions. 6ifferent peop e may interpret the same ana ysis in different ways. C( Sometimes accounting concepts and con4entions cause a serious imitation to financia ana ysis.

(AT!/ A1A 4S!S: $ ratio is a simp e arithmetica expression of the re ationship of one no. to another. $ financia ratio is a re ationship between two accounting figures expressed mathematica y. $ ratio can be expressed in percentages by mu tip ying the ratio by 1II. $ ratio of BIII can be expressed as: 1III %i( B:17 or %ii( B7 or %iii( B'17 or %i4( B to 17 or %4( BIIL "n a these cases the inference is that first figure %BII( is fi4e times than that of the second.

(AT!/ % A1A 4S!S

1AT*(" /F (AT!/ A1A 4S!S: Ratio ana ysis is a techni,ue of ana ysis and interpretation of financia statements. "t is a process which he ps in ma5ing certain decisions. On y ca cu ation of ratios does not ser4e purpose if it is not ana yzed and interpreted proper y. Se ection of appropriate data and re e4ant ratios is a so 4ery important. *se and Significance of (atio Analysis: "t is important for different persons7 for different purposes. A) *tility for Managers 1. 0e ps in decision ma5ing !. 0e ps in financia forecasting & p anning ). 0e ps in communicating .. 0e ps in communicating B. 0e ps in co2ordination C. 0e ps in contro B) C) 2) ") F) *tility to Shareholders ' !n)estors *tility to Creditors *tility to "mployees *tility to 7o)ernment Ta+:Audit (e&uirements

imitations of (atio Analysis: #imited use of sing e ratio #ac5 of ade,uate standards "nherent imitations of accounting *hange of accounting procedures =indow2dressing of financia statements Persona >udgement

 Price2#e4e changes Classification of (atios: *an be broad y c assified under four categories: (;) i&uidity (atios (H) Acti)ity (atios a( *urrent Ratio b( #i,uid or Puic5 or $cid2test Ratio c( $bso ute #i,uid Ratio (=) e)erage or ong:Term Sol)ency (atios (>) #rofita,ility (atios (i) !n relation to sales a( 3ross Profit Ratio'3P8 b( Operating Profit Ratio':P8 c( :et2Profit Ratio':P8 (ii) !n relation to in)estments (/! a( Return on :etwor5 b( Return on -,uity c( Return on *api. -mp . d( -PS e( P'- Ratio

a( 6ebtor+s Turno4er a( 6ebt2-,uity Ratio b( *reditor+s T'o Ratio c( "n4entory T'o Ratio d( =or5ing *apita T'o Ratio b( 6ebt to tota *apita Ratio c( "nterest *o4erage Ratio d( -,uity Ratio e( So 4ency Ratio