Map or Maze

A map helps its user reach a

desired destination through
clarity of
representation.

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Financial Statements
Analysis – An
Introduction

FINANCIAL ANALYSIS AND REPORTING

1 ST TERM, A.Y 2024-2025
 Financial Statement Analysis
Critical tool for understanding the financial health, performance and
future prospects of a business
➢Resource allocation
➢Risk assessment
➢Strategic planning
 Financial Statement Analysis
Key financial metrics Solvency is the ability of a
company to meet its long-term
✓Profitability debts and financial obligations.
Profitability is a
✓Liquidity measure of how Liquidity refers to how easily an asset
efficiently a can be converted to cash, or how
✓Solvency company earns efficiently a market or a company can
a profit, while meet short-term obligations
✓Efficiency
profit is the
actual amount
of income or Efficiency refers to the ability of the
revenue above firm to effectively employ its
expenses. resources, such as capital and assets,
to produce income
 FINANCIAL STATEMENTS
Statement of Financial Position
General-Purpose
Statement of Comprehensive Income Financial
Statement of Cash Flows Statements
Statement of Changes in Equity
Notes and Explanatory Information
 Statement of Comprehensive
Income
-presents a company's total revenues, expenses, and the resulting
comprehensive income.
-the structure :
Net income: This is the difference between revenue and expense
reported on the statement of profit or loss
Other comprehensive income items: These are listed individually with
their corresponding amounts.
Total comprehensive income: The sum of net income and other
comprehensive income.
 Statement of Financial Position
-formerly known as balance sheet
-presents a company's financial condition at a specific point in time.
-the Components include:
Assets: These are resources owned by the company that are expected to
provide future benefits
Liabilities: These obligations of the company that are expected to result
in the transfer of assets or services in the future
Equity: This represents the residual interest in the assets of the company
after deducting its liabilities
 Statement of Cash Flows
-provides information about the cash inflows and outflows of a
company during a specific period
-The three main sections:
Operating activities: This section shows the cash generated or used
from the company’s core operations
Investing activities: This includes buying or selling long-term
assets and investing in other companies
Financing activities: This shows how funds where obtained
(issuance or repurchase of shares, borrowing of money and
repayment of debts)
FINANCIAL STATEMENTS ANALYSIS
Statement of Financial Position
Statement of Comprehensive
Income Establishing
Statement of Cash Flows relationships between
Statement of Changes in Equity different items on the
financial statements to
Notes and Explanatory evaluate the firm’s
Information financial strengths and
weaknesses
For example, are inventories adequate to support the
projected level of sales?
Does the firm have too heavy an investment in account
receivable?
Does large account receivable reflect a lax collection policy?
To ensure efficient operations of a firm’s manufacturing facility,
does the firm have too much or too little invested in plant and
equipment?
Financial statement analysis provides answers to all of these
questions.
Map or Maze
A maze attempts to
confuse its user by
purposefully
introducing conflicting
elements and
complexities that
prevent reaching the
desired goal.
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Map or Maze
A maze of information
Auditor’s Report MD&A

Income Statement
Notes

Statement of Cash Flows

Statement of Shareholders’ Equity

Balance Sheet

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Map or Maze
Financial statements have the potential
for being map and maze.

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Financial Statements as a Map
Form the basis for understanding the financial
position of a firm
Allow users to assess historical and prospective
financial performance
Present clear representations of firm’s financial
health, leading to informed business
decisions

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 Financial Statements as a Maze
Overwhelming amount of information
Unreliable auditing
Constantly changing and complex policies
and reporting requirements
Considerable discretion given to
management, influencing content and
presentation
Key information hidden or omitted
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Usefulness
Financial statements and accompanying
notes contain a wealth of information.
• Financial position of the company
• Success of operations
• Policies and strategies of management
• Insight into future performance

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The Journey Through the Maze
Continues
Ch. 2: The Balance Sheet
Ch. 3: Income Statement
Ch. 4: Statement of Changes in Equity
Ch. 5: Statement of Cash Flows
Ch. 6: The Analysis of Financial Statements

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 FINANCIAL STATEMENT
ANALYSIS
➢integral parts of the management functions of
control and financial management
➢Process of critical evaluation of the financial
information contained in the financial statements
to understand and make decisions regarding the
operations of the firm
 FINANCIAL STATEMENT
ANALYSIS
➢basically a study of relationship among
various financial facts and figures as given in
a set of financial statements, and the
interpretation thereof to gain an insight into
the profitability and operational efficiency of
the firm to assess its financial health and
future prospects.
 FINANCIAL STATEMENT
ANALYSIS
➢Assess overall financial strength:
Analysis also helps in taking decisions, whether
funds required are provided from internal or
external sources.
➢Assess solvency of the firm:
The different tools of an analysis tell us whether
the firm has sufficient funds to meet its short term and
long-term liabilities or not.
 FINANCIAL STATEMENT
ANALYSIS
➢Measuring the Profitability:
Financial analysis helps in ascertaining whether
adequate profits are being earned on the capital
invested in the business or not
➢Indicating the Trend of Achievements: Financial statements
of the previous years can be compared and the trend
regarding various accounts can be ascertained and the
future prospects of the business can be envisaged.
 FINANCIAL STATEMENT
ANALYSIS
➢Assessing the Growth Potential of the Business:
The trend and other analysis of the
business provides sufficient information
indicating the growth potential of the
business.
➢Comparative Position in Relation to Other
Firms:
Comparison helps the management study
the position of their firm in respect to
sales, expenses, profitability and in
utilizing capital, etc
 FINANCIAL ANALYSIS
➢Includes both analysis and interpretation

simplification of
financial data by explaining the
methodical meaning
classification given and significance of
in the financial the data.
statements
Techniques and Tools of Financial
Statement Analysis
Cross-sectional Analysis:
It is also known as inter firm comparison. This
analysis helps in analyzing financial
characteristics of an enterprise with financial
characteristics of another similar enterprise in
that accounting period

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 Techniques and Tools of Financial
Statement Analysis
Time Series Analysis:
-also called as intra-firm comparison
-different items of financial statements is
established, comparisons are made and results
obtained.
oComparison of the financial statements of
different years of the same business unit.
oComparison of financial statements of a
particular year of different business units.

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Techniques and Tools of Financial
Statement Analysis
Cross-sectional cum Time Series
Analysis:
•This analysis is intended to compare the
financial characteristics of two or more
enterprises for a defined accounting period.
•This approach is most effective in analyzing of
financial statements.

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Techniques and Tools of Financial
Statement Analysis
1. Horizontal analysis
2. Vertical analysis
3. Trend analysis
4. Ratio analysis
5. Funds flow analysis
6. Cash flow analysis

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Horizontal Analysis
-otherwise known as year-on-year
analysis or comparative statements
-involves comparing particular year’s
results with that of the previous year

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Horizontal Analysis
The financial data will be comparative only
when the same accounting principles are used
in preparing these statements.
Comparative figures indicate the trend and
direction of financial position and operating
results.

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Horizontal Analysis
Indicates the duration of the movement with
respect to the financial position and profit or
loss results
Comparative profit or loss presents a review of
operating activities of the business
Comparative SoFP shows the effect of
operations on the assets and liability and
changes in the financial position during the
period

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1-31
 ABC COMPANY
Comparative Statement of Financial Position
For the year ended 12/31/22 and 12/31/23
12/31/2022 12/31/2023
Assets
Current Assets
Cash 240,000 80,000
Accounts receivable (net) 120,000 96,000
Merchandise inventory 260,000 320,000
Prepaid insurance 100,000 80,000
Total current assets 720,000 656,000
Noncurrent Assets
Land 100,000 200,000
Building (net) 380,000 520,000
Furniture and Fixtures (net) 60,000 80,000
Equipment 240,000 480,000
Total noncurrent assets 780,000 1,280,000
Total Assets 1,500,000 1,936,000
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 ABC COMPANY
Comparative Statement of Financial Position
For the year ended 12/31/22 and 12/31/23
12/31/2022 12/31/2023
Liabilities and Stockholder’s Equity
Current Liabilities
Accounts payable 234,000 510,000
Accrued expenses 400,000 360,000
Total current liabilities 634,000 870,000
Stockholder’s Equity
Common Shares 400,000 500,000
Retained Earnings 466,000 566,000
Total Stockholder’s Equity 866,000 1,066,000
Total Liabilities and Stockholder’s Equity 1,500,000 1,936,000

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 ABC COMPANY
Comparative Statement of Financial Position
For the year ended 12/31/22 and 12/31/23
12/31/2022 12/31/2023 (+) / (-) %
Assets
Current Assets
Cash 240,000 80,000 (160,000) (66)
Accounts receivable (net) 120,000 96,000 (24,000) (40)
Merchandise inventory 260,000 320,000 66,000 46
Prepaid insurance 100,000 80,000 (20,000) (40)
Total current assets 720,000 656,000 (64,000) (18)
Noncurrent Assets
Land 100,000 200,000 100,000
Building (net) 380,000 520,000 140,000
Furniture and Fixtures (net) 60,000 80,000 20,000 66
Equipment 240,000 480,000 240,000 200
Total noncurrent assets 780,000 1,280,000 500,000 128
Total Assets 1,500,000 1,936,000 436,000 58
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 ABC COMPANY
Comparative Statement of Financial Position
For the year ended 12/31/22 and 12/31/23
12/31/2022 12/31/2023 (+) / (-) %

Liabilities and Stockholder’s Equity

Current Liabilities

Accounts payable 234,000 510,000 276,000 108

Accrued expenses 400,000 360,000 (40,000) (20)
Total current liabilities 634,000 870,000 236,000 74
Stockholder’s Equity
Common Shares 400,000 500,000 100,000 50
Retained Earnings 466,000 566,000 100,000 42
Total Stockholder’s Equity 866,000 1,066,000 200,000 46
Total Liabilities & Stockholder’s Equity 1,500,000 1,936,000 436,000 58

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 ABC COMPANY
Comparative Statement of Profit or Loss
For the year ended 12/31/22 and 12/31/23
12/31/2022 12/31/2023
Net sales 1,370,000 1,442,000
Cost of goods sold 838,000 926,000
Gross profit 532,000 516,000
Operating expenses
Selling expenses 188,000 182,000
General & Admin. 94,000 92,000
Total OPEX 282,000 274,000
Operating profit 250,000 242,000
Add: Rent income 44,000 50,000
Less: Interest paid 44,000 44,000
Income tax 124,000 124,000
Net Profit/Income 126,000 124,000

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The following is the profit and loss account of TATA Cars Ltd. For
December, 2022 and 2023. Prepare comparative statement of profit or
loss and comment on the profitability undertaking.
Particulars 2022 2023 Particulars 2022 2023
To cost of goods 231,635 241,950 By Sales less 360,728 417,125
sold returns
To Office 23,266 27,068
expenses
To selling 45,912 57,816 By other income 354,934 410,173
expenses
To interest paid 2,137 1,750 By interest & 1,898 1,310
dividend
To loss on sale 627 175 By discount on 2,125 1,898
of fixed assets purchased
To income tax 21,519 40,195

To net profit 35,371 44,425 By profit on sale of 1,500

land
360,457 413,379 360,457 413,379
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The following are the various items in the statement of financial position
of GS COMPANY for the fiscal year ended, March 31, 2023 and 2024.
Particulars 2023 2024
Common Shares 200,000 330,000
Preference Shares 100,000 150,000
Share Premium 20,000 30,000
Profit and loss account 15,000 20,000
Bank overdraft 50,000 50,000
Accounts payable 40,000 50,000
Tax payable 20,000 25,000
Dividend payable 15,000 25,000
Property, plant and equipment (net) 240,000
Accrued income 20,000 60,000
Accounts receivable 140,000 175,000
Prepaid expense 10,000 12,000
Cash on hand 40,000 53,000
Cash in bank 10,000 30,000
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 Vertical Analysis
known as Common Size Statement or Component
Percentage Statement
study the key changes and trends of a company by:
Allowing comparison of companies of different size
(in terms of total assets and sales)
Allow (internal) structural analysis of the financial
statements of a company.
– Relative magnitude of asset, liability, equity and
income statement components
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Vertical Analysis
-deals with expressing each figure in the profit
and loss account, and balance sheet as a
percentage of one key figure.
In a common-size statement of financial
position, each component of the SoFP is
expressed as a percentage of total assets.
In a common-size income statement each item
is expressed as a percentage of sales

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 Angel Company
Statement of Profit or Loss
For the fiscal year ended March 31, 2023
Particular Amount
Sales 1,400,000
Raw materials 540,000
Direct labor 230,000
Factory overhead 160,000
Cost of goods sold 930,000
Gross profit 470,000
Administrative expenses 110,000
Selling and Distribution 80,000
Operating profit 280,000
Interest income 40,000
Interest expense 60,000
Profit before tax 260,000
Income tax 80,000
Profit after tax 180,000 1-42
 Angel Company
Statement of Profit or Loss
For the fiscal year ended March 31, 2023
Particular Amount %
Sales 1,400,000 100
Raw materials 540,000 38.6
Direct labor 230,000 16.4
Factory overhead 160,000 11.4
Cost of goods sold 930,000 66.4
Gross profit 470,000 33.6
Administrative expenses 110,000 7.9
Selling and Distribution 80,000 5.7
Operating profit 280,000 20.0
Interest income 40,000 2.9
Interest expense 60,000 4.3
Profit before tax 260,000 18.6
Income tax 80,000 5.7
Profit after tax 180,000 12.9 1-43
 Angel Company
Statement of Financial Position
For the fiscal year ended March 31, 2023
Assets Liabilities & Stockholder’s Equity
Current: Current Liabilities
Cash in bank 30,000 Accounts payable 220,000
Accounts receivable 210,000 Accrued expenses 40,000
Raw materials 80,000 Utilities payable 90,000
Work in process 50,000
Total current liabilities 350,000
Finished goods 160,000
Stockholder’s Equity
Total Current Assets 530,000
Common Shares 250,000
Noncurrent:
Preference Shares 100,000
Land 50,000
Share premium 80,000
Building 110,000
Equipment 250,000 Retained earnings 160,000
Total Noncurrent 410,000 Total Stockholder’s Equity 590,000
Total Assets 940,000 Total Liabilities & 940,000
Stockholder's Equity 1-44
Trend Analysis
determines the direction upwards or
downwards and involves the computation of
the percentage relationship that each item
bears to the same item in the base year.
The financial statements may be analyzed by
computing trends of series of information.

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Trend Analysis
important and useful technique of analysis and
interpretation of financial statement
different items for various periods are calculated
over a definite period of time like three to five years
to highlight the trend through the following ways:
1. Trend ratio
2. Trend percentage
3. Graphic and diagrammatic representation

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 Trend Analysis
Trend Ratio 1. The accounting principles and
policies should be consistently
- index numbers of followed throughout the
the movements of period for which the trend
reported financial ratios are calculated.
items in the
financial 2. The trend ratios should be
statements which calculated only for the items
are calculated for which have logical relationship
more than 1 year. with one another.

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Trend Analysis
3. The trend analysis should be made at least
for four consecutive years.
4. The financial statements one financial year
should be selected as base statement and
financial items of it should be assigned with
value as 100.

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Trend Analysis
5. Then trend ratios of subsequent years’
financial statements should be calculated by
applying the following formula :
Absolute figure of financial statement under study
X 100
Absolute figure of same item in baser financial statement.

6. Tabulate the trend ratios for analysis of trend

over a period

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 Trend Analysis
Trend Percentage The trend may sometimes be
- are calculated for affected by external factors like
select major government policies economic
financial items in conditions changes in income
the financial distribution, technology
statements to arrive development population growth,
at the conclusions changes in tastes and habits etc.
for important the trend analysis is a simple
changes.
technique and does not involve
tedious calculations.

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 From the given data, calculate trend
percentage taking 2021 as base:
Particulars 2021 2022 2023
Sales 50,000 75,000 100,000
Purchases 40,000 60,000 2,000
Expenses 5,000 8,000 15,000
Profit 5,000 7,000 13,000

Particulars 2021 2022 2023 Trend Percentage100

2021 2022 2023
Sales 50,000 75,000 100,000 100 150 180
Purchases 40,000 60,000 2,000 100 160 300
Expenses 5,000 8,000 15,000 100 140 260
Profit 5,000 7,000 13,000 100 150 200

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Complete the following Trend Analysis Statement for D
Corp. (in thousands)
Particulars 2020 2021 2022 2020 2021 2022
(%) (%) (%)
Sales 10,000 15,000 20,000 100 ? ?
Cost of goods sold 7,000 ? ? 100 125 200
Gross profit 3,000 ? ? 100 ? ?
Administrative expenses 1,000 1,250 1,500 100 125 150
Finance expenses 500 625 750 100 ? ?
Selling expenses 250 375 500 100 ? ?
Net profit before tax 1,250 4,000 3,250 100 329 260
Income tax expense 250 800 1,000 100 ? ?
Net profit after tax 1,000 ? ? 100 320 225

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End of Chapter 6

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