FINANCIAL ANALYSIS

It is a systematic process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.

MEANING

Financial analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and a study of trends of these factors as shown in a series of statements.

Comparative financial statements

Common size statements

Trend analysis

Ratio analysis

Fund flow statement

Cash flow statement

TOOLS AND TECHNIQUES OF FINANCIAL ANALYSIS

1. External analysis: Conducted by those persons who do not have access to the detailed record of the enterprise and depend on the published reports.

2. Internal analysis: Conducted by management so as to know the financial position nd operational efficiency of the organization.

TYPESOF FINANCIAL ANALYSIS

3. Horizontal analysis: This analysis is made to review and analyse the financial statements for number of years and are therefore based on the financial data based on those years.

4. Vertical analysis: This is made to review and analyse the financial statements of one year only.

1. Judging the earning capacity or profitabilty: The earning capacity of the business firm may be computed. The future earning capacity can also be forecasted.

2. Judging the managerial efficiency: It helps to pinpoint the areas where the managers have shown better efficiency and the areas of inefficiencies.

3. Judging the long term and short term solvency of the firm

4. Inter firm comparison5. Making forecasts

IMPORTANCE OF FINANCIAL ANALYSIS

Historical analysis: It is historical analysis. It analyses what has happended till date. It does not reflect the future.

Ignores price level changes: Accounting records ignore change in value of money.

LIMITATIONS

Qualitative aspect ignored: the aspects like quality of management, public relations etc are ignored while carrying out the analysis of financial statements.

Not free from bias: the accountant has to make a choice from the alternatives available. So subjectivity can lead to biasness.

It is a tool of financial analysis that depicts change in each item of the financial statement in both absolute amount and percentage terms.

COMPARATIVE STATEMENTS

o It gives information about the nature of changes influencing financial position and performance of an enterprise.

o These pinpoint the weakness and soundness of an enterprise.

o The statements help the management in forecasting and planning.

OBJEVTIVES OF COMPARATIVE STATEMENTS

Comparative

statements

Comparative Balance

sheets

Comparative Income statements

Comparative balance sheet analysis is the study of trend in two or more balance sheets of the same business enterpise on different dates.

COMPARATIVE BALANCE SHEET

Balance Sheet

QUESTION

Liabilities 2007 2008 Assets 2007 2008

Equity share

capital

600000

900000 Fixed assets

1200000 1500000

Preferance share

capital

300000

600000 Investments

300000 300000

Reserves and surplus

300000

300000 Current Assets

600000 1200000

8% Debentures

600000

600000

Current liabilities

300000

300000

Comparative income statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be known.

COMPARATIVE INCOME STATEMENTS

From the following information prepare comparative income statement:

QUESTION

2007 2008

Sales 30,00,000 33,00,000

Cost of goods sold

24,00,000 25,20,000

Administration expenses

1,50,000 1,80,000

Other income 60,000 60,000

Interest paid 60,000 60,000

Tax rate 50% 50%