Types of Financial Statements

Income Statement Balance Sheet Statement of Retained earning or Profit and Loss Appropriation account Funds Flow Statement Cash Flow statement

Techniques of Financial Statement Analysis

Comparative Statements ( of two years are present together) Common Size Statements (% of the total figures) Trend Analysis ( Changes from various periods.) Funds and Cash Flow Analysis Ratio Analysis

Ratio Analysis
It concentrates on the interrelationship among the figures appearing in the Income Statement, Balance Sheet, Statement of retained earnings, Statement of Changes in the financial position. It helps the management to analyze the past performance of the firm and and to make further projections.

Categories of Ratios
Liquidity ratios ( ability of the firm to meet its short term liabilities) Solvency ratios (ability of the firm to meet its long term liabilities Activity ratios ( to measure the effectiveness and efficiency with which the firm is managing its current assets.) Profitability ratios ( to measure the profitability condition of the company) Market test Ratios it relates the firms stock price to its earnings and book value per share.

Liquidity ratios
Current ratio= Current assets ( Ideal is 2:1) Current Liabilities Quick Ratio = Liquid asset ( Ideal is 1:1) Current Liabilities

Super Quick Ratio = Cash + marketable securities ( Ideal is 0.5:1) Current Liabilities

Solvency ratios
Debt Equity ratios = External Equities Internal Equities Proprietary Ratio = Shareholders funds Total assets Fixed assets to net worth ratio= Fixed assets Total Long term funds Capital Gearing ratio = Fixed Interest Bearing Funds Equity Shareholders Fund

Interest Coverage Ratios = Dividend Cover = PAT Dividend

PBDIT Interest

Activity or Turnover ratios

Stock Turnover Ratio= Cost of Goods Sold Average Inventory Debtors Turnover ratio = Net Credit Sales Average Drs. + B/R Average Collection period = No. of working Days Debtors Turnover ratio Creditors Turnover ratio = Net Credit Purchases Average Crs. + B/P Average Payment period = No. of working Days Creditors Turnover ratio

General Profitability Ratios

Gross Profit Ratio = Gross profit *100 Net Sales Operating ratio= Cost of Goods Sold + Operating Expenses
Net sales

Expense Ratio = Particular Expense *100 Net Sales Net profit Ratio = Net Profit after Tax *100 Net Sales

Overall Profitability Ratios

Return on Capital employed=
Net Profit after Tax and Preference Dividend Paid up equity Share Capital

Earnings Per Share = Net Profit after Tax and Preference Dividend
Number of Equity Share

Return on Shareholders Fund=

Net profit after Interest and Tax Shareholders Fund Return on Investment = Net profit before interest and Tax Total Investment Net profit * Sales Sales Investment in Assets

Market Test ratios: Dividend Payout Ratio = Dividend per Share EPS Dividend yield = Dividend per share Market price per share
P/E Ratio = Current Market price EPS

Ingredients
Current assets- Cash in Hand and Bank, Bills Receivable, Marketable securities, Prepaid Expenses,Closing Stock Current Liabilities: Sundry Creditors, Bills Payable, bank overdraft, Outstanding Expenses, Short term loans, income received in advance, accrued expenses. Liquid assets: Current assets- (Closing Stock+ Prepaid expenses) Absolute Liquid assets: Cash at hand and Bank, marketable securities. Average: (Opening + Closing)/2 Inventory only means stock of finished goods in Inventory turnover Ratio. External Equity: short and long term creditors Internal Equities or net worth : Equity and preference Share capital, Reserves minus fictitious assets. Total assets: Assets- Fictitious assets

Fixed Interest Bearing Funds- Debentures, Long Term Loans and Preference Share Capital. Gross profit- sales minus COGS