FINANCIAL ANALYSIS
MEANING
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.
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.
TOOLS AND TECHNIQUES OF
FINANCIAL ANALYSIS
Comparative financial statements
Common size statements
Trend analysis
Ratio analysis
Fund flow statement
Cash flow statement
TYPESOF 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.
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.
3.
4. Vertical analysis: This is made to review and
analyse the financial statements of one year only.
IMPORTANCE OF FINANCIAL ANALYSIS
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 comparison
5. Making forecasts
LIMITATIONS
 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.
 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.
COMPARATIVE STATEMENTS
It is a tool of financial analysis that depicts
change in each item of the financial
statement in both absolute amount and
percentage terms.
OBJEVTIVES OF 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
forecasting and planning.
management
in
Comparative
statements
Comparative
Balance
sheets
Comparative
Income
statements
COMPARATIVE BALANCE
SHEET
Comparative balance sheet analysis is the
study of trend in two or more balance
sheets of the same business enterpise on
different dates.
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
Balance Sheet
COMPARATIVE INCOME
STATEMENTS
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.
QUESTION
From the following information prepare comparative
income statement:
2007
2008
Sales
30,00,000
33,00,000
Cost of goods sold
24,00,000
25,20,000
Administration
expenses
Other income
1,50,000
1,80,000
60,000
60,000
Interest paid
60,000
60,000
Tax rate
50%
50%