ANALYSIS OF FINANCIAL STATEMENTS

S.S.T College of Arts & Commerce

Ulhasnagar-421004.
PROJECT REPORT

ON

TITLE OF PROJECT

Financial Management
MASTER OF COMMERCE

(M.COM-2)

Pooja Ashok Kadu

PREPARED BY

ROLL NO: 1662094

UNDER THE GUIDANCE

PROF. Vinod Israni

Sumitted

In partial fulfillment of the required

For the Award of the Degree of

Masters of commerce in Accounts.

S.S.T College of Arts & Commerce

Ulhasnagar-421004

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 ANALYSIS OF FINANCIAL STATEMENTS

CERTIFICATE

This is to certify that Pooja Ashok Kadu

Of master of commerce M.Com-I (2016-17) has successfully

completed the project on Title of Subject Financial
management Under the guidance of . vinod israni

Co.ordinator Internal Examination

External Examination

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 ANALYSIS OF FINANCIAL STATEMENTS

ANALYSIS OF
FINANCIAL
STATEMENTS
OF CORPORATE
FIRM

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 ANALYSIS OF FINANCIAL STATEMENTS

INDEX

Sr.no TOPIC PAGE NO

1. MEANING OF FINANCIAL
STATEMENT
2. NATURE OF FINANCIAL STATEMENT
3. ESSENTIAL QUALITIES OF
FINANCIAL STATEMENT
4. LIMITATION OF FINANCIAL
STATEMENT
5. FINANCIAL STATEMENT ANALYSIS
6. TOOLS & TECHNIQUES OF
ANALYSIS
7. TYPES OF COMPARISON
8. INTERPRETATION

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 ANALYSIS OF FINANCIAL STATEMENTS

NATURE OF FINANCIAL STATEMENT

The data exhibited by financial statements are affected by

a) Recorded facts
b) Accounting Concepts, Conventions & Principles•
c) Personal Judgment

Accounting Principle
Accounting concepts Accounting Convention
a) Entity Concept a) Disclosure
b) Going Concern Concept b) Materiality
c) Accounting period concept c) Consistency
d) Money Measurement Concept d) Conservatism
e) Cost Concept
f) Cost Attach Concept
g) Dual Aspect Concept
h) Accrual concept
Periodic Matching of cost and
Revenue Concept
j) Realisation Concept
k) Verifiable Objective Evidence Concept

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 ANALYSIS OF FINANCIAL STATEMENTS

ESSENTIAL QUALITIES OF
FINANCIAL STATEMENTS

1. Relevance
2. Understandability
3. Reliability and Accuracy
4. Comparability
5. Completeness
6. Timeliness

LIMITATIONS OF FINANCIAL
STATEMENTS
1. Lack of Precision
2. Lack of Exactness
3. Incomplete Information
4. Interim Reports
5. Hiding of Real Position or Window Dressing
6. Lack of Comparability
7. Historical Costs

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 ANALYSIS OF FINANCIAL STATEMENTS

Analysis
• Analysis – To Analyse – to cut into pieces
• But only analyse – No – It means also Interpretation.
• Thus
• Financial Statement Analysis means “Analysis, comparisons and
interpretation of Financial data to achieve the desired result”

TOOLS OF FINANCIAL STATEMENT

ANALYSIS
1. Comparative Statements
2. Common Size Statements
3. Trend Analysis
4. Ratio Analysis
5. Fund Flow Statement
6. Cash Flow Statement

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 ANALYSIS OF FINANCIAL STATEMENTS

Types of Financial Analysis

1. Intra-Firm Comparison
2. Inter-firm Comparison
3. Industry Average or Standard Analysis
4. Horizontal Analysis
5. Vertical Analysis

Interpretation
• The Analysis is of no use without interpretation The Company has
to interpret the financial statement which it has analysed.
• The Analysis is made to serve the following purpose
1. Profitability Analysis
2. Liquidity Analysis
3. Solvency Analysis (To know the financial structure)

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 ANALYSIS OF FINANCIAL STATEMENTS

Interested Parties in Analysis of Financial

Statements
1. Management
2. Investors (In the form of Shareholders or Debentureholders)
3. Banks and Financial Institution
4. Trade Creditors
5. Government and their Agencies
6. Employees
7. Customers
8. Public
9. Trade Association
10. Stock Exchange

Comparative Financial Statements

• Comparative Financial Statements is a statement of Financial
Position of a business designed in such a way where a comparative
study is undertaken of different accounting items, to measure the
performance of a Business Activity.

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 ANALYSIS OF FINANCIAL STATEMENTS

Types of Comparison
 There are 3 types of Comparison
1) Inter Firm Comparison
2) Intra Firm Comparison
3) Inter Period Comparison

Advantages of financial statement

1) Indicate the Direction of Financial Position
2) Reveal Nature & Trend
3) Identifying Trouble Spots

Disadvantages of financial statement

1)Misleading picture, if consistency in accounting principle not
followed.
2) Constant change in price level tender accounting statement useless
for comparison.
3) Inter firm comparison is useless, unless all the firms are of the
same age, size and follow the same principles.
4) If there exists any Abnormal Period between 2 successive
accounting period then it will prove to be a pointless analysis.

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 ANALYSIS OF FINANCIAL STATEMENTS

Common Size Statements

• It is a Statement in Vertical Form in which every item of the
Financial Statement is reduced to a common base. This was
introduced with a view to overcome the limitation of Comparative
Statement.

Types of common size statements

(1)Common Size Balance Sheet
(2)Common Size Income Statement:

Advantages of Common Size Statement

1) It reveals Sources and Application of Funds in a nutshell which
help in taking decision.
(2) If common size statements of 2 or more years are compared it
indicate the changing proportion of various components of Assets,
Liabilities, Cost, Net Sale & Profit.
(3) When Inter Firm Comparison is made with the help of Common
size statement it helps in doing corporate evaluation and Ranking.

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 ANALYSIS OF FINANCIAL STATEMENTS

Disadvantages of Common Size

Statement
(1) No Established Standard Proportion:
Common Size Statements are regarded as useless as there is
no established standard proportion of an asset to the total asset
or an item of expense to the net sales.
(2) Consistency Required:
If Financial Statement of a Particular business organization
are not prepared year after year on a consistent basis
comparative study of common size statement will be misleading

Trend Analysis
Trend Analysis is a statement in vertical form where the earliest year
is taken as base year and the value of all the items in the financial
statements will be related to the base year in terms of % where value
of each item in base year will be considered as 100. Trend % analysis
move in one directions either upward or downward progression or
regression.

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 ANALYSIS OF FINANCIAL STATEMENTS

Advantages
(1) Trend % indicate the increase or decrease with the magnitude of

change in % which is more effective than absolute data.

•Ex. If we say profit increases by Rs. 50,000/- it will be

meaningless unless we find by what % the profit has increased.•

(2) Facilitate efficient comparative study of financial performance

Limitations
(1) It will give a misleading picture if consistency in accounting

principle is not followed

(2) Constant change in price level render accounting statement useless

for comparison.

(3) During inflationary period the data over a period of time become

incomparable, unless the absolute rupee data is adjusted.

(4) There is always the danger of selecting the base year which may

not be representative, normal & typical.

(5) Trend % should be studied in relation with Absolute figure

otherwise it give misleading picture. For ex. No. of student where 2,

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 ANALYSIS OF FINANCIAL STATEMENTS

the next year they increased to 4. Now trend % show 100% increase

but absolutely we get clear picture than trend %.

Ratio Analysis
• TRADITIONAL CLASSIFICATION
• BALANCE SHEET RATIOS
(1) Current Ratio
(2) Quick Ratio / Liquid Ratio / Acid Test Ratio.
(3) Super Quick Ratio
(4) Stock to work Capital Ratio
(5) Capital Gearing Ratio
(6) Debt Equity Ratio
(7) Proprietary Ratio
(8) Long Term Borrowing : Total Asset
(9) Fixed Assets : Net Worth.

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 ANALYSIS OF FINANCIAL STATEMENTS

REVENUE STATEMENT RATIOS

• Gross Profit Ratio
• Net Profit Ratio
• Operating Net Profit Ratio
• Operating Ratio
• Operating Expenses Ratio
• Stock Turnover Ratio
• Stock Holding Period

COMBINED RATIOS
• Return on Investment (ROI) or Return on Capital Employed
(ROCE)
• Return on Proprietor / Shareholder fund
• Return on Equity shareholder fund
• Earning per share
• Dividend per share
• Dividend Payout Ratio
• Price Earning Ratio
• Interest Coverage Ratio

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 ANALYSIS OF FINANCIAL STATEMENTS

COMBINED RATIOS
• Debt : Service Coverage Ratio
• Debit Collection period
• Debtor Turnover Ratio
• Creditor Payment Period
• Creditor Turnover Ratio
• Preference Dividend Cover
• Equity Dividend Cover

BASED ON FUNCTIONS
• SOLVENCY RATIOS
• Short Term Solvency
• Current Ratio
• Quick Ratio / Liquid Ratio / Acid Test Ratio
• Super Quick Ratio
• Stock : Working Capital Ratio.

Long Term Solvency / Leverage Ratio

 Capital Gearing
• Debt : Equity Ratio
• Proprietary Ratio
•Long Term Borrowing: Total Assets
• (1 – Net Worth)/ Total Assets
• Fixed Asset : Net worth

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 ANALYSIS OF FINANCIAL STATEMENTS

ACTIVITY RATIO / TURNOVER

RATIOS
• Stock Turn Over Ratio Stock Holding Period Debt Collection Period
Debtor Turnover Ratio Creditor Payment Period Creditor Turnover
Ratio

PROFITABILITY RATIO
• In relation to sales
• Gross Profit Ratio
• Net Profit Ratio
• Operating Net Profit Ratio
• Operating Ratio
• Operating Expenses Ratio.

In relation to capital employed

• Return on Interest (ROI) or Return on Capital Employed (ROLE)
• Return on Proprietor / Shareholder funds
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 ANALYSIS OF FINANCIAL STATEMENTS

• Return on Equity Shareholder Fund

• Earning per Share
• Dividend per Share
• Dividend Payout Ratio
• Price Earning Ratio

COVERAGE RATIOS
• Interest Coverage Ratio
• Preference Dividend Cover
• Equity Dividend Cover
• Debt Service Coverage Ratio

USER BASED CLASSIFICATION

• FOR SHORT TERM CREDITORS
(1) Current Ratio
(2) Quick / Liquid Ratio / Acid Test Ratio
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 ANALYSIS OF FINANCIAL STATEMENTS

(3) Super Quick Ratio

(4) Stock: Working Capital Ratio
(5) Stock Turnover Ratio
(6) Stock Holding Period
(7) Creditor Payment Period
(8) Creditor Turnover Ratio

FOR LONG TERM CREDITORS

• Capital Gearing Ratio
• Debit: Equity Ratio
• Proprietary Ratio
• Long Term Borrowing: Total Asset Ratio
• Fixed Asset: Net worth
• Interest Coverage Ratio
• Debt Service Coverage Ratio

FOR SHARE HOLDERS

• Return on Investment (ROI) or Return on Capital Employed
(ROCE)
• Return on Proprietary / Shareholder fund

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 ANALYSIS OF FINANCIAL STATEMENTS

• Return on Equity Shareholder fund

• Earning per share
• Dividend per share
• Dividend payout Ratio
• Price Earning Ratio
• Preference Dividend Cover
• Equity Dividend Cover

FOR MANAGEMENT
• Return on Investment (ROI) or Return on Capital Employed
(ROCE)
• Debtor Turnover Ratio
• Debtor Collection Period
• Creditor Payment period
• Creditor Turnover Ratio
• Stock Turnover Ratio
• Stock Holding Period

FOR MANAGEMENT

• Gross Profit Ratio

• Net Profit Ratio
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 ANALYSIS OF FINANCIAL STATEMENTS

• Operating Net Profit Ratio

• Operating Ratio
• Proprietary Ratio
• Fixed Asset: Net Worth
• Long Term Borrowing: Total Assets

CONCLUSION
The withholding of retention is common in the construction industry.
When retention is withheld, the accounts receivable is separated

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 ANALYSIS OF FINANCIAL STATEMENTS

into two categories, one for retention and for the rest of the
accounts receivable.
Accounts payable are similarly split into two accounts. The standard
financial ratios must be modified to take retention into account. The
retention portion of the accounts receivable is ignored when
calculating the quick ratio and the collection period used measuring
the effectiveness of the company's collection efforts.
Subcontractors are used as a source of capital for construction
companies. As a result, when calculating the working capital turns,
the revenues are reduced by the amount of money that is paid to the
subcontractor when the contractor gets paid by the owner.

Bibliography
 Agrawal, N.K. (2003) Management of Working Capital, Sterling
 Publishers Pvt, Ltd, New Delhi.

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 ANALYSIS OF FINANCIAL STATEMENTS

 Agrawal, N.P (1983) Analysis of Financial Statements, National

Publishing House, New Delhi.
 Anil Kumar (2000): Working Capital Management of Munjal Shows
Ltd; in
 M.Com Dissertation submitted to University of Rajasthan Jaipur
 Anthony, Robert N (1984): Management accounting, Text and
Cases, Richard D. Irwin, Inc.illionois

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