Project 3

INTRODUCTION TO FINANCIAL
S T AT E M E N T S
Accounting is the service activity. One of its functions is

communication of information at a specific interval, usually at
the year end by the financial statement. In accounting, financial
statements are the means of conveying to management, owners
and to interested outsider a concise picture of profitability and
financial position of the business. The preparation of financial
statement is not the first step in the accounting process but they
are the end products of the accounting process which give concise
accounting information of the accounting period after the
accounting period is over. All financial transactions are recorded
first in subsidiary books and subsequently they are posted to
relevant ledger accounts. The balances of the ledger accounts at
the end of the year are ultimately presented through financial
statements. These statement are called final accounts because
they are prepared after the accounting period is over and they
give final picture of the financial transactions of an accounting
period.
Definitions
According to John N. Myer “The financial statements
provide a summary of the accounts of a business enterprise,
the Balance sheet reflecting the assets and liabilities and the
income statement showing the results of operations during a
certain period.”
Seshadripuram College, Bangalore-20 Page 1

According to Smith and Ashbure define Financial statements
as “The end product of financial accounting is a set of
financial statement, that purports to reveal the financial
position of the enterprise the result of its recent activities, and
an analysis of what has been done with earning
Meaning of Financial Statements
Financial Statements refer to at least two statements, which

are prepared by a business concern at the end of the year. These
are; (1) Income Statement or Trading and Profit and Loss a/c
which are prepared by a business concern in order to know the
profit earned and loss sustained during a specified period; (2)
Position Statement or Balance Sheet which is prepared by a
business concern on a particular date in order to know its
financial position. To these statements, are added the statement
of retained earnings and some other statements such as Fund Flow
Statement, Cash Flow Statement, Schedule of Fixed assets and
Debtors etc.
“Money is an arm or a leg, you either use it or lose it”. It

speaks the significance of finance function of an organization.
Nature of Financial Statements
Financial Statements are prepared for the purpose of

presenting a periodical review or report by the management and
deal with the state of investment in business and result achieved

during the period under review. They reflect a combination of
recorded facts, accounting conventions and personal judgments.
The nature of financial statements of business entities are
reflected in the following points:
• Financial Statements are the reports of summarized reviews

about the performance, achievements and weaknesses of the
business for a particular period.
• They are prepared at the end of accounting period.
• The reliability of financial statements depends upon the

reliability of accounting data.
• The figures in financial statements are a combination of

recorded facts.
• The figures recorded in financial statements are historical

in nature. Price level changes are not considered.
• These statements are prepared as per accounting concepts

and conventions.
• Financial Statements are prepared by accountants and are

influenced by their personal judgment.
Characteristic Financial Statement

1. Relevance. Financial statements prepared should be
relevant for the purpose they are supposed to serve. As far
as possible, relevant and material information should be

disclosed properly but confusing and irrelevant disclosures
should be avoided.
2. Accuracy and Freedom from Basis. Financial

statements should be prepared accurately so that these may
convey a full and correct idea about the progress, Position
and prospects of an enterprise. Inaccurate financial
statements prepared, besides invoking legal consequences,
may defeat the objectives for which then are meant. Those
persons, who prepare and present financial statement, must
keep themselves free from personal basis
3. Comparability. Comparison if the foundation of

financial analysis as it increases the utility of financial
statements. Comparison of present statements with previous
statements helps in assessing the performance and knowing
the trends in progress and position of the business
enterprise. Inter or intra firm comparison reveals the
strength and weakness of the enterprise vis-à-vis other
departments, firm and industry.
4. Analytical presentation. Financial statement should

be presented in analytical and classified form so that a
better and meaning analysis can be made. It also helps in
tracing and understanding in causes of result as shown in
these statement, in revealing inefficient performances and
wasteful activities and in speedier analysis of these
documents.
5. Promptness. Financial statement should be prepared

after the end of the accounting period without any delay
may present difficultly in tracing the cause of the results
as disclosed by these statement. Such delays and delayed

action thereon, may do more harm than good to the
enterprises.
6. Generally Accepted Principles. Financial statements

must be prepared in accordance with the generally accepted
accounting principles to have wider acceptability and
understandability by clients. This will also increase the
reliability of the statement and adds confidence to the user.
7. Consistency. Financial statement must be prepared on

consistent basis following the same rules, procedures and
principles in successive period, unless the situation
demands otherwise. Consistency also affects the
comparability of these statement.
8. Authenticity. Financial statements prepared must be

authenticated by an independent and capable person (called
Auditor) in order to make them more reliable and
acceptable by the user. Unaudited statements are unreliable
and give room to doubt.
Importance of Financial Statements
Owners:
Owners provide funds or capital for the operation of the
business. Financial statements provide all the necessary
information and the profitability position of the business to
ensure the owners as to whether their funds are being properly
utilized or not.
Creditors:
The financial statements reveal the position, profitability
and solvency of the business. This way it helps the creditors

know the position of the business before they provide any
financial assistance such as giving loans or granting credit.
Investors:
Prospective investors, who want to invest money in a firm,
would like to make an analysis of the financial statements of that
firm to know how safe the proposed investment will be.
Employees:
Employees are interested in the financial position
of a concern they serve, particularly when payment of
bonus depends upon the size of profits earned. They
would like to know whether the bonus paid to them is
correct; so they become interested in preparation of
correct profit & loss a/c.
5.Government:
Financial statements reflect earnings for a particular period,

which is the main source for the purpose of taxation for central
and state government. They are also
used for compiling statistics concerning business, which, in turn,
help in compiling national accounts.
Limitations of Financial Statements
Interim & not final reports:
Financial statements do not depict the exact position and

are essentially interim reports. The exact position can be only
known if the business is closed.

Lack of precision and definiteness:
Financial statements may not be realistic because they are

prepared by following certain basic concepts and conventions.
For instance a going concern gives us an idea that business will
continue and assets are to be recorded at cost but the book value
at which the asset was bought may not be actually realizable.
Lack of objective judgment:
Financial statements are influenced by the personal

judgment of the accountant regarding the method of depreciation,
valuation of stock, amortization of fixed assets and treatment of
deferred revenue expenditure, which will definitely affect the
preparation of financial statements if based on integrity and
competency of the accountant.
Historical in nature:
Financial statements are historical in nature & have nothing

to do with the accounting for future. They do not directly help
management in making future estimates, forecasting and taking
decisions for future.
Artificial view:
These statements do not give a real & correct report about

the worth of assets and their loss of value as these are shown on
historical basis. Price level fluctuations are not taken into
consideration and thus, they provide an artificial view.
1. DOCUMENTATION

Since the study was conducted at the under graduation level
recent documents were not provided by the bank.
2. Approval
It took three week to obtain permission letter from
The bank so the major time was consumed
3. Secrecy
To maintain the secrecy of the bank. Bank provided only the
previous year balance sheet and data.
Scope of manipulations:
These statements are sometimes prepared according to the

needs of the situation or the whims of the management.
Cancellation of profitability or disclosure of minimum profit or
loss or declaration of dividend by wrongly showing profit, under
or over valuation of inventory, over or under charged
depreciation, excessive or inadequate provision for anticipated
losses, window dressing and other such manipulations may be
restored to.
Meaning of analysis of Financial Statements
Analysis is the process of critically examining in

detail accounting information given in the financial
statements. For the purpose of analysis, individual
items are studied; their interrelationships with other
related figures established, the data is sometimes
rearranged to have better understanding of the
information with the help of different techniques or
tools for the purpose. Analyzing financial statements is

a process of evaluating relationship between
component parts of financial statements to obtain a
better understanding of firm’s position and
performance.
Objectives or uses of analysis of Financial Statements
Financial statements analysis is helpful in assessing the

financial position and profitability of a concern. This is done
through comparison by ratios for the same concern over a period
of years; or for one concern against another; or for one concern
against the industry as a whole; or for one concern against the pre
determined standards; or for the department of a concern against
other departments of the same concern.
The main objectives of analysis of financial statements are to
asses:
 The present and future earnings capacity or profitability of the

concerns.
 The operational efficiency of the concern as a whole and of its

various parts or departments
 The short-term and long-term solvency of the concern for the

benefit of the debenture holders and trade creditors.
 The comparative study in regard to one firm with another firm

or one department with another department.

 The possibility of the developments in future by making
forecasts and preparing budgets.
 The financial stability of a business concern.
 The long-term liquidity of its funds.
Techniques or tools used for analysis and interpretation of

financial statements
The following techniques can be used in analysis &

interpretation of financial statements:
A. Comparative Financial Statement (or analysis)
B. Common Measurement Statement (or analysis)
C. Trend percentage analysis
D. Fund Flow Statement (or analysis)
E. Net Working Capital Analysis
F. Cash Flow Statements (or analysis)
G. Ratio Analysis

RATIO ANALYSIS
INTRODUCTION
One of the techniques of analysis of financial statements is

to calculate ratios. Ratio is the numerical or an arithmetical
relationship between two figures.
Ratio analysis is the most widely used method for the
analysis of financial statements. Financial statements, no doubt,
contain the items relating to the profit or loss and the financial
position of a concern. But the items or figures found in the
financial statements will not be of much use, if they are
considered independently. They will be very useful only when
the item is considered in the light of another item. For instance,
the item of net profit will be meaningful, not when it is
considered in isolation, but only when it is considered in the light
of capital employed in the business. So, if the items appearing in
the financial statements are to be really meaningful and useful to
executives, owners etc. They should be analyzed in such a way
that one item can be compared with another item. Ratio analysis
is one of the tools available to financial analysts for the analysis
of financial statements.
Meaning of Ratio Analysis

Ratio analysis is the technique of the calculation of a number
of accounting ratios from the data or figures found in the
financial statements, the comparison of the
accounting ratios with those of the previous years or with those
of other concerns engaged in similar line of activities or with
those of standard or ideal ratios, and the interpretation of the
comparison.
According to Wixom, kell and bed foed, “A ratio
is an expression of the quantitative relationship
between two numbers”.
A ratio can be defined as “The indicated

quotient of two mathematical expression,” & as
“the relationship between two or more things”.
Expression
Accounting ratios can be expressed in various ways such as:

 A pure ratio, for example, a ratio of current assets to
current liabilities is 2:1
 A rate, for example, current assets are two times or current
liabilities.
 A percentage, for example, current assets is 200% of current
liabilities.
Classification of Ratios:
Ratios can be broadly classified into three categories. They

are as under:
I. Liquidity Ratios
II. Leverage or Capital Structure Ratios

III. Profitability Ratios
I. Liquidity ratios
Liquidity Ratios or short- term ratios are those ratios,

which are intended to measure the liquidity or short- term
solvency of the firm.
Liquidity ratios indicate whether it will be possible for an
enterprise to meet its short-term obligations or
liabilities out of its short-term resources or assets. Further they
indicate whether an organization has sufficient working capital to
carry on its day-to-day operations. They also indicate whether
there is any over trading or under trading.
The various ratios that indicate the liquidity of a firm are:
1). Current ratio
Current Ratio is a ratio which expresses the relationship

between the current assets and current liabilities. Current assets
refer to all those assets, which can be converted into cash within
one year. Current liabilities are those liabilities, which are to be
paid within one year.
Current Ratio = Current Assets
Current Liabilities
Interpretation

The actual current ratio, ascertained with the help of the relevant
financial, has to be compared with standard or ideal current ratio
of 2:1 (in the standard or ideal current ratio, the current assets
are fixed at two times the current liabilities. The idea behind this
fixation is to leave a margin of safety to cover come any fall in
the value of the current assets and also to leave sufficient
working capital after the payments of the current liabilities).
2) Absolute Liquid Ratio
Absolute Liquid Ratio is the best indicator of the liquidity

of the concern. Absolute liquid ratio is a ratio,
which expresses the relationship between the absolute liquid
assets and quick liabilities. Absolute liquid assets refer to cash
and near cash assets. Quick liabilities refer to all current
liabilities except cash credit and bank overdraft.
Absolute Liquid Ratio = Absolute liquid Assets
Quick Liabilities
Interpretation
The actual absolute liquid ratio is compared with the standard or
ideal absolute liquid ratio of 1:2 (The standard absolute liquid
ratio is fixed at 1:2, because for the payment of the quick
liabilities, besides the 100% cash available from the absolute
liquid assets, good amount of cash may also come from other
current assets like bills receivable, sundry debtors).
3) Quick Ratio
Quick Ratio is the ratio, which expresses the relationship

between the quick assets and quick liabilities.

Quick assets refer to those current assets, which can be
converted into cash quickly, within a very short period. Quick
liabilities refer to all those liabilities which are to be paid within
one year. They include all current liabilities except cash credit
and bank overdraft.
Quick Ratio = Quick assets
Quick Liabilities
Interpretation
The actual quick ratio has to be compared with the standard or
ideal quick ratio of 1:1 (In the standard quick ratio of 1:1 the
quick assets are fixed at the same level as the quick liabilities,
and no cushion or margin is provided, because the quick assets
can be realized quickly without much loss).
II. Leverage Ratios or Capital Structure Ratios
Capital structure ratios portray the long-term solvency of a

concern. They help the management in the proper administration
of the capital. They are useful to the long-term creditors to
determine the stake they undertake in investing funds in an
enterprise. They are helpful to the owners in ascertaining their
interests and control in the enterprise. They are useful to the
management in proper administration of capital, as they indicate
to the executives as to what extent the practice of trading on
equity can be carried on safely.
The principal capital structure ratios are:
1) Debt-Equity Ratio

Debt-Equity Ratio measures the long-term solvency of the
concern. The debt-equity ratio refers to the ratio which expresses
the relationship between debt and equity. Debt refers to the long-
term liabilities of the concern. Equity refers to the equity or the
owner’s funds.
Debt-Equity Ratio = Debt
Equity
Interpretation
The standard or ideal debt-equity ratio is 2:1.As such , if the
debt is less than two times the equity, the logical conclusion is
the financial structure of the concern is the sound, and so, the
stake or risk of the long-term creditors is relatively less.
2) Proprietary Ratio or Net Worth Ratio

Proprietary Ratio is the ratio which expresses the
relationship between the net worth or equity and total assets. Net
worth or equity means the owners or proprietors funds. Total
assets refer to all realizable assets which can be realized.
Proprietary Ratio = Net Worth
Total Assets
Interpretation
Once can say that higher the proprietary ratios, the stronger is the
financial position of the concern, and lower the proprietary
ratios, the weaker is the financial position of the enterprise.
Generally , a ratio of 5:1 is the considered ideal.

3) Fixed Assets to Net worth Ratio
Fixed Assets to Net worth Ratio is the ratio which
expresses the relationship between fixed assets and
net worth. Fixed assets refer to assets like land and
building, machinery, vehicles etc., which are there in the concern
permanently.
Fixed Assets Ratio = Net Fixed Assets
Net Worth
Interpretation
The standard or ideal fixed assets to net worth ratios for an
industrial undertaking is 2\3 or 67%. That is the fixed assets
should not constitute more than 2\3 or 67% of the proprietors
funds. As such, if the fixed assets constitute more than 67% of
the proprietors’ funds are mostly sunk in the fixed assets,
constitute more than 67% of the proprietors funds the indication
is that the proprietors funds are mostly sunk in the fixed assets.
4) Solvency Ratio
Solvency Ratio is a ratio between the total assets and

liabilities of a concern.
Solvency Ratio = Total Assets
Total Liabilities
Interpretation
Thought no standard or ideal solvency ratios has been
established, one can say that higher the solvency ratios of a

concern, the stronger is its financial position, and lower the
solvency ratio, the weaker is its financial position.
5) Current Assets to Net Worth Ratio

Current Assets to Net worth Ratio is the ratio between
current assets and net worth.
Current Assets to Net Worth Ratio=Current Assets
Net Worth
Interpretation
The standard or ideal current assets to net worth ratio. Thought
there is no standard current assets to net worth ratio, one can say
that, if this ratio is high, the financial strength of the concern is
good, and if this ratio is low, the financial position of the
concern is weak.
6) Current Liabilities to Net Worth

Current Liabilities to Net worth Ratio is the ratio between
current liabilities and net worth.
Current Liabilities to Net Worth Ratio
= Current Liabilities
Net Worth
Interpretation
The desirables level set for this ratios is 1/3 or 33 1/3. So, if the
actual ratio is very high, it would mean that the liability base of
the concern will not provide an adequate cover for long-term

creditors. That means, it would be difficult for the concern to
obtain long-term funds.
7) Capital Gearing Ratio

Capital Gearing Ratio is the ratio which expresses the
relationship between equity capital and fixed interest bearing
securities and fixed dividend-bearing
shares. Fixed interest bearing securities refer to long-term loans,
debentures and long-term fixed deposits.
Capital Gearing Ratio=Fixed interest bearing long-

term
loans and deposits, fixed interests-
bearing debentures and preference
share capital
Equity Share Holders Funds
Interpretation
If the fixed interest-bearing long term loans, deposits and
debentures and fixed divided-bearing preference share capital are
more than the equity shareholder funds , the company is said to
be highly geared. If the equity shareholders funds are equal to
the fixed interest-bearing loans, deposit and debentures and fixed
dividend-bearing preference share capital, the company is said to
be evenly geared.
8) Fixed Assets Ratio

Fixed Assets Ratio is the ratio between fixed assets and
capital employed. Capital employed refers to the owner’s funds
plus long-term loans and deposits and debentures.
Fixed Assets Ratio = Fixed Assets
Capital Employed
Interpretation
The fixed assets ratio should not be more than 1. It should be
less than 1. The ideal ratio is 67. This would mean that not only
all the fixed assets, but also a part of working capital are
financed by long-term funds.
This is desirable because a part of the working capital, popularly
known as core working capital, should be met out of long-term
funds.
Profitability Ratios
Profitability Ratios measure the profitability of a concern.

They reveal the total effect of the business transactions on the
profit position of an enterprise and indicate how far the
enterprise has been successful in its aim. Some of the important
Profitability Ratios are as under
1) Credit Deposit Ratio
The Credit Deposit Ratio is the ratio which expresses the

share of credit in the deposits of the bank. The credit refers to
the advances lend by the bank. Deposits refer to the deposits
accepted by the bank from the public.
Credit Deposit Ratio = Credit X 100
Deposit
Interpretation

The standard or ideal credit to deposit ratio. Thought there is no
standard current assets to net worth ratio, one can say that, if this
ratio is high, the financial strength of the concern is good, and if
this ratio is low, the financial position of the concern is weak
2) Current Deposits to Total Deposit Ratio
Current Deposit to total Deposits Ratio is the ratio which

expresses the relationship between the current deposits and total
deposits. Current Deposits are no cost deposits on which the
interest is not paid. Current deposits are deposits maintained by
business people.
Current Deposits to Total deposits Ratio
= Current DepositsX100
Total Deposit
Interpretation
The standard or ideal current deposit to total deposits. Thought
concern is weak
3) Savings Deposit to Total Deposit Ratio
Savings Deposits to Total Deposits Ratio is the

ratio which expresses the share of savings deposits in
the total deposits. Savings Deposits are low cost
deposits as the interest paid on them is very less.
Savings Deposits to Total Deposits Ratio

= Savings Deposits X 100
Total Deposits
Interpretation
The standard or ideal savings deposits to total deposits. Thought
concern is weak
4) Term Deposits to Total Deposit Ratio
Term Deposits to Total Deposits Ratio is the ratio which

expresses the share of the term deposits in the total deposits.
Term deposits are high cost deposits as the interest paid on these
deposits is high.
Term Deposits to Total Deposits
= Term Deposits X 100
Total Deposits
Interpretation
The standard or term deposit to total deposit. Thought there is
no standard current assets to net worth ratio, one can say that, if
this ratio is high, the financial strength of the concern is good,

and if this ratio is low, the financial position of the concern is
weak
5) Interest Income to Working funds Ratio
Interest Income to Working Funds Ratio is the ratio between

the interest earned and the funds invested. Interest income refers
to the income earned by the way of interest. Working funds refer
to the total of capital, reserves and surplus, deposits and other
liabilities.
Interest Income to Working Funds Ratio
= Interest Income X 100
Working Funds
Interpretation
The standard or ideal interest income to working funds. Thought
concern is weak
6) Non-Interest Income to Working Funds Ratio
Non-Interest Income to Working Funds Ratio is the ratio

between no-interest income and working funds. Non-Interest
income is the income earned by the non-fund business such as
commission and brokerage.
Non-Interest Income to Working Funds Ratio

= Non-Interest Income X 100

Working Funds
Interpretation
The standard or ideal non-interest income to working funds
ratio. Thought there is no standard current assets to net worth
ratio, one can say that, if this ratio is high, the financial strength
of the concern is good, and if this ratio is low, the financial
position of the concern is weak
7) Total Income to Working Funds Ratio
Total Income to Working Funds Ratio is the ratio between

the total income and working funds.
Total Income to Working Funds Ratio

= Total Income x 100
Working Funds
Interpretation
The standard or ideal total income to working funds ratio.
Thought there is no standard current assets to net worth ratio, one
can say that, if this ratio is high, the financial strength of the
concern is good, and if this ratio is low, the financial position of
the concern is weak
8) Non-Interest Income to Total Income
Non-Interest Income to Total Income refers to the ratio

which expresses the share of non-interest income in the total
income.
Non-interest Income to Total Income Ratio
= Non Interest Income x 100
Total Income
Interpretation

The standard or ideal Non Interest Income to Total Income ratio.
the concern is weak
9) Operating Expenses to Working Funds
Operating Expenses to Working Funds Ratio is the ratio

which expresses the relationship between the operating expenses
and working funds. Operating expenses refer to the expenses
such as rent, taxes and lighting, printing and stationery,
advertisement and publicity.
Operating Expenses to Working Funds Ratio
= Operating Expenses x 100
Working Funds
Interpretation
The standard or ideal Operating Expenses to Working Funds.
the concern is weak
10) Operating Profit to Working Funds

Operating profit to working fund ratio is the ratio which
expresses the operating profit earned on the funds invested.
Operating Profit to Working Funds Ratio
= Operating Profit x 100
Working Funds
Interpretation

The standard or ideal operation profit to working funds. Thought
concern is weak
11) Net Profit to Working Funds
Net profit to working funds ratio is the ratio which

expresses the relationship between the net profit and working
funds.
Net Profit to Working Funds Ratio = Net Profit x 100
Working funds
Interpretation
The standard or ideal net profit to working funds. Thought there
is no standard current assets to net worth ratio, one can say that,
if this ratio is high, the financial strength of the concern is good,
and if this ratio is low, the financial position of the concern is
weak
12) Net Profit to Net Worth

Net Profit to net worth ratio is the ratio between the net
profit and net worth.
Net Profit to Net Worth Ratio = Net Profit x 100
Net Worth
Interpretation
The standard or net profit to net worth ratio. Thought there is no
standard current assets to net worth ratio, one can say that, if this

ratio is high, the financial strength of the concern is good, and if
this ratio is low, the financial position of the concern is weak
Importance of Ratio Analysis
Ratio analysis stands for the process of

determining and presenting the relationship of items
and group of items in the financial statements. It is an
important technique of financial analysis. It is a way
by which financial stability and wealth of a concern
can be judged .As a tool of financial analysis, they are
of crucial significance. The importance of ratio
analysis lies in the fact that it presents facts on a
comparative basis and enables the drawing of
inferences regarding the performance of a firm. Ratio
analysis is relevant in assessing the performance of a
firm in respect of the following aspects:
1) Liquidity Position:
With the help of ratio analysis, conclusions can be drawn
regarding the liquidity position of a firm. The liquidity position
of a firm would be satisfactory if it is able to meet its current
obligations when they become due. A firm can be said to have
the ability to meet its short-term liabilities if it has sufficient
liquid funds to pay the interest on its short-maturating debt
usually within a year as well as the principal. This ability is
reflected in the liquidity ratios of a firm. The liquidity ratios are

particularly useful in credit analysis by banks and other supplies
of short-term loans.
2) Long-term Solvency:
Ratio analysis is equally useful for assessing the long-term
financial viability of a firm. This aspect of the financial position
of a borrower is of concern to the long-term creditors, security
analysts and the present and potential owners of a business. The
long-term solvency is measured by the leverage or capital
structure and profitability ratios, which focus on earning power
and operating efficiency. Ratio analysis reveals the strengths
and weaknesses of a firm in this respect. The leverage
ratios will indicate whether a firm has reasonable proportion of
various sources of finance or whether it is heavily loaded with
debt in which case its solvency is exposed to serious strain. The
profitability ratios, on the there hand, reveal whether or not the
firm is able to offer adequate return consistent with the risk
involved.
3) Operation Efficiency:
Yet another dimension of the usefulness of the ratio
analysis, relevant from the viewpoint of management is that it
throws light on the degree of efficiency in the management and
utilization of its assets. The various activity ratios measure the
operating efficiency.
4) Overall Profitability:
The management is constantly concerned about the overall
profitability of the enterprise. They are concerned about the
ability of the firm to meet its short-term as well as long-term
obligations, to ensure a reasonable return and secure the optimum
utilization of the assets of a firm. Profitability ratios measure
the profitability of a concern and reveal the total effect of the

business transactions on the profit position of an enterprise &
indicate how far the enterprise has been successful in its ai
5) Forecasting purpose:
If the accounting ratios are calculated for a number of years, then
a trend is established. This trend helps in setting up future plans
and forecasting.
6) Comparison of performance:
Accounting ratios assist in comparing between one
department of a firm with another of the same firm in order to
evaluate the performance of various departments in a firm.
Limitations of Ratio Analysis:

Ratio analysis, is no doubt, useful in many respects. Yet it has
various limitations. The operational implication of using ratios is
that the conclusions should not be taken at their face value.
Some of the characteristic limitations of ratio analysis are:
Difficulty in comparison:
One serious limitation of ratio analysis arises out of the

difficulty of comparing them to draw inferences. The technique
such as inter-firm comparison is vitiated by different procedures
adopted by various firms. Apart from different accounting
procedures, companies may have different accounting periods and
there may be differences in comparison of assets.
In another basis of comparison of industry average, the
information regarding the various ratios for each industry group

may not be available and the utility of ratio analysis would be
limited.
Impact of inflation:
Ratio analysis does not consider price level changes. It is

based on historical cists. The implication is that the assets
acquired at different periods are, in effect, shown at different
prices in the balance sheet, as they are not adjusted for changes
in price level. As a result, ratio analysis will not yield strictly
comparable and, therefore, dependable results.
Conceptual diversity:
There is scope for diversity of opinion as to what

constitutes shareholders equity, debt, assets, and profits and so
on. Different firms may use different terms in different senses or
the same firm may use them to mean different things at different
times. Reliance on a single ratio for a particular purpose may not
be a conclusive indicator.
False results:
Ratio analysis can be correct only when the data on which

they are based are correct. In some cases, where the information
given in the financial statements is affected by window dressing,

the conclusions or the analysis drawn on that information will
always be fair.
So the analyst must always be on the lookout for signs of
window dressing, if any.
STATEMENT OF THE PROBLEM
The topic selected for the study is, “A STUDY ON THE

LIQUIDITY, PROFITABILITY AND LEVERAGE RATIOS OF
BANK OF INDIA”. The main theme of the project is the analysis
and interpretation of financial statements using Ratio Analysis
and interpretation of financial statements using Ratio Analysis as
a tool.
For the purpose of analysis of financial position of the bank
concerning the liquidity, long-term & profitability position, the
bank calculates ratios every year as per the guidelines of the
Reserve Bank of India. To know whether the bank is performing
well or not; whether it is competitive or not, ratio analysis is
usefull to know the performance of the bank and to know about
its competitiveness by the analysis and interpretation of the
financial statement.
SCOPE OF THE STUDY

The scope of the study “A STUDY ON THE LIQUIDITY
PROFITABILITY AND LEVERAGE RATIOS OF BANK OF
INDIA” comprises of the analysis and interpretation of
the financial statements, viz., Balance Sheet and Profit

and Loss A/C. The analysis is done for the current year
2006. For the purpose of analyzing and comparison
the data is taken from three years i.e., 2004, 2005, &
2006.
The analysis includes ratio analysis from the point of view
of liquidity position, long-term solvency & profitability of the
concern.
The ratios are calculated by comparing to the standards,
wherever the norms are set & by comparing with the previous
years performance wherever there is no norm set. The analysis is
done as per the basis of comparison and the interpretation is
given based on the same. The interpretations are given for each
ratio and for the position of the bank as whole.
OBJECTIVES OF THE STUDY
The objectives of the study are as under:
1) To determine of the liquidity position of the bank
2) To determine the long-term solvency of the bank
3) To determine the profitability of the bank
OPERATIONAL DEFINATIONS OF THE CONCEPTS

RATIO ANALYSIS
One of the techniques of analysis of financial statements is
to calculate ratios.
Definition
A ratio is defined as the “numerical or arithmetical
relationship between two figures”. It is expressed when one

figure is divided by another. Ratios used for the purpose of
analysis
Liquidity ratios
1) Current Ratio
One of the important liquidity ratios is the current ratio.

Current ratio is the ratio, which expresses the relationship
between the current assets and current liabilities. It is calculated
by dividing current assets by current liabilities. It is expressed
as under:
Current ratio = Current Assets
Current Liabilities
2) Absolute liquid ratio or Cash position ratio
Absolute liquid ratio is the best ratio, which indicates the

liquidity of a concern. It is the ratio, which expresses the
relationship between absolute liquid assets and quick liabilities.
It is expressed as under:
Absolute liquid ratio = Absolute liquid assets
Quick liabilities
1) Fixed Assets to Net worth Ratio
Fixed Assets to Net worth Ratio is the ratio that expresses

the relationship between fixed assets and net worth.
The fixed asset to net worth ratio is expressed as under:
Fixed Assets to Net Worth Ratio = Net Fixed Assets
Net Worth

2) Current Assets to Net worth Ratio
Current Assets to Net worth Ratio is the ratio between the

current assets and net Worth.
The current asset to net worth ratio is expressed as under:
Current Assets to Net Worth Ratio = Current Assets
Net Worth
Profitability Ratios
1) Credit Deposit Ratio
Credit Deposit Ratio is the ratio between credit and deposits

in the bank.
The credit deposit ratio is expressed as under:
Credit Deposit Ratio = Credit X 100
Deposit
2) Current Deposits to Total Deposits Ratio
Current Deposits to total deposits ratio is the ratio, which

indicates the share of current deposits in the total deposits.
The Current Deposits to Total Deposits Ratio is expressed as
under:
Current Deposits to Total Deposits Ratio

= Current Deposits X 100
Total Deposits

3) Savings Deposit to Total Deposits Ratio
Savings Deposits to Total Deposits is the ratio which
indicates the share of savings deposits in the total deposits.
The Savings Deposits to Total Deposits is expressed as
under:
Savings Deposits to Total Deposits Ratio
= Savings Deposits X 100

Total Deposits
4) Term Deposits to Total Deposits Ratio
Term Deposits to Total Deposits is the ratio which indicates

the share of term deposits in the total deposits.
The Term Deposits to Total Deposits Ratio is expressed as
under:
Term Deposits to Total Deposits Ratio
=Term Deposits X100
Total Deposits
5) Interest Income to Working Funds Ratio

Interest Income to Working Funds Ratio refers to the ratio
which indicates the relationship between the interest
income and working funds. It indicates the yield on the funds
used through interest earned.
The Interest Income to Working Funds Ratio is express as
under:
Interest Income to Working Funds Ratio

= Interest Income X 100
Working Funds

6) Non-Interest Income to Working Funds Ratio
The Non-Interest Income to Working Funds Ratio refers to
the ratio between the non-interest income and working funds. The
Non-Interest Income to Working Funds ratio is express as under:
Non-Interest Income to Working Funds Ratio
Working Funds
7) Total Income to Working Funds Ratio

Total Income to working Funds Ratio is the ratio between
the total income and working funds. It indicates the income
earned on the funds employed.
Total Income to working Funds Ratio
= Total Income X 100
Working Funds
8) Non-Interest Income to Total Income Ratio

Non-Interest Income to Total Income Ratio is the
ratio between the non-interest income and total income. It
highlights the share of non-interest income in the total income of
the bankThe Non-Interest Income to Total Income ratio is express
as under:
Non-Interest Income to Total Income Ratio
Total Income
9) Operating Expenses to Working funds Ratio

Operating Expenses to Working Funds Ratio is the ratio
between operating expenses and working funds.
The Operating Expenses to Working Funds Ratio is
expressed as under:

Operating Expenses to Working Funds Ratio
= Operating Expenses x 100
Working Funds
10) Operating Profit to Working Funds Ratio

Operating Profit to Working Funds Ratio is the ratio
between operating profit to working funds.The operating profit to
working funds ratio is expressed as under
Operating Profit to Working Funds Ratio
= Operating Profit x 100
Working Funds
11) Net Profit to Working Funds Ratio
The Net Profit to Working Funds Ratio is the ratio which

indicates the relationship between the net profit and working
funds. It shows the return on funds employed.
The Net Profit to Working Funds Ratio is expressed as
under:
Net Profit to Working Funds Ratio = Net Profit x 100
Working Funds

METHODOLOGY
The Ratio Analysis is done with the help of annual reports,

manuals, charts etc. The information was collected by the
annexure prepared by the bank. Clarifications were made with
the Chief Manager of Planning Economic Research and
Development
TOOLS FOR DATA COLLECTION
The analysis is made with the help of the information

obtained from the financial statements viz., the Balance Sheet and
Profit and Loss a/c. The information is also taken from the
annual reports and website of the Bank of India and various
charts, manuals, annexure etc. Assistance is also taken by the
staff members for the necessary information required for the
study.
PLAN OF ANALYSIS
The data was collected from various sources such as Balance

Sheet, Profit and Loss a/c, Annual Reports etc.; a detail study
was done keeping in mind the basis of analysis and interpretation.
With the available data and information the calculation of
ratios has been done and interpreted on the basis of standards and
previous year’s performance.
LIMITATIONS OF THE STUDY
1) The Study is confined to the relevant aspects pertaining to

the bank

2) Time Factor
3) The study does not provide information about the
functioning of the bank
OVER VIEW OF THE CHAPTER SCHEME
CHAPTER – I
Introduction to the study:
This chapter gives a briefing about the various aspects

necessary for the sturdy and the theoretical background of the
study. It consists of meaning and
information about the various aspects used in the study.
CHAPTER –II
Design of the study
This chapter includes the scope of the study, the

methodology involved, the objectives of the study, the tools of
data collection and the limitations of the study.
CHAPTER III
Profile of the bank:
This chapter provides the insight about the past and present
standing of the bank and also gives us a view about the
achievements of the bank.

CHAPTER IV
Analysis of the data:
This chapter involves thorough analysis and interpretation

of the data collected. It also includes graphs showing the trend
in the past and present financial status of the bank.
CHAPTER V
Findings, Suggestions and Conclusion:
This chapter highlights the findings and suggestions

given and also the conclusion about the based on the analysis and
interpretation.
INTRODUCTION ABOUT BANKING INSTITUTIONS
Parentage of BANK
According to economists the word “bank” has been derived
from the German word “BANC” which means a joint stock firm.
While others say that it has been derived from the Italian word
“BANCO” which means a “heap or mount”. As a matter of fact, at
the time of establishment of bank of Venice in 1157, the Germans
were influential and perhaps the word “BANC” or “BANCO” was
used by Italians to denote the accumulation of securities or
money with a joint stock firm, which later on with the passage of
time came to be known as “BANK”.

Definition of the terms “Bank” and “Banking”
The Indian Banking Regulation Act of 1949 defines the term

“banking company” as “any company which transacts the business
of banking in India.
Sec 5(B) of the Banking Regulation Act of 1949 defines
“banking” as “accepting, for the purpose of lending or
investment, of deposits of money from public, repayable on
demand or otherwise, and withdrawal by cheque, draft, order or
otherwise”.
The role of banking institutions
The role of banking institutions in economic development is

quite unique. Its functions cannot be divorced from the socio
political framework in which the economy functions. In the plan
development process,
the banking system is assigned the specific function and
responsibility to help economic enterprises in the fulfillment of
their targets. The targets being creating larger employment
opportunities, increasing the income, assets and wealth, so that a
larger section of people improve their standard of living. Banks
play a significant role in the economic development of a country.
By mobilizing the small and ideal savings of the people, they aid
the process of capital formation and utilize them for productive
purposes.
Bank background:

Banking system, in present days has become a part of our
lives. Banking system has grown to become an indispensable part
of our modern economy.
Indian banking system came into existence in a small way

during 19th century with the establishment of a few banks by some
industrialists. In 1969, 14 noted banks were nationalized to
extend the services not only to higher class of the society but also
for villagers, farmers and backward category, this way the
banking industry in India saw a remarkable change.
After independence, the Indian banking system under went

major changes. The government (both central and state) with both
central bank and state bank came up with development plans,
particularly for agriculturists and weaker section of the society
for implementing the planned economic action for improvement of
the society.
The government of India enacted the Banking Regulation

Act in 1949 with a view to foster and promote better banking
system in India. Since the nationalization of commercial banks in
India, there has been a great surge of banking industry through
the world with the growing number of banking offices.
With the growth in trade and commerce, banks are also

modernizing operations with a view to satisfy modern customers.
The main aim of modernizing banking system is to improve bank
operations with a view to maintain high standard banking in
offering a greater variety of services nationally and
internationally.

The banking industry has seen diversification in recent
years. The diversification process is in view of severe
competition that the commercial and urban banks in India are
facing from non-banking sectors. In order to meet the challenges,
banking industry has taken up diversification in field of merchant
banking, mutual funds, housing finance, consumer credit, and
venture capital scheme.
HISTORY OF THE BANK

Origin of Bank of India:
Bank of India was founded on 7th September 1906 by a

group of eminent businessmen from Mumbai. The Bank was under
private ownership and control till July 1969 when it was
nationalized along with 13 other banks. The Bank came out with
its maiden public issue in 1997. Total number of shareholders as
on 31/3/2004 is 4,03,225
The Bank's association with the capital market goes back to

1921 when it entered into an agreement with the Bombay Stock
Exchange (BSE) to manage the BSE Clearing House. It is an
association that has blossomed into a joint venture with BSE,
called the BOI Shareholding Ltd. to extend depository services to
the stock broking community.
Bank of India was the first Indian Bank to open a branch

outside the country, at London, in 1946, and also the first to open
a branch in Europe, Paris in 1974. The Bank has sizable presence
abroad, with a network of 19 branches at key banking and
financial centers viz. London, Newyork, Paris, Tokyo, Hong-Kong
and Singapore. The international business accounts for around
22% of Bank's total business.

GROWTH AND DEVELOPMENT OF THE
BANK OF INDIA
Beginning with one office in Mumbai, with a paid-up capital

of Rs.50 lakhs and 50 employees, the Bank has made a rapid
growth over the years and blossomed into a mighty institution
with a strong national presence and sizable international
operations. In business volume, the Bank occupies a premier
position among the nationalized banks.
While firmly adhering to a policy of prudence and caution,

the Bank has been in the forefront of introducing various
innovative services and systems. Business has been conducted
with the successful blend of traditional values and ethics and the
most modern infrastructure.
The bank has been the first among the nationalized banks to
establish a fully computerized branch and ATM facility at the
Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also
a Founder Member of SWIFT in India. It pioneered the
introduction of the Health Code System in 1982, for evaluating/
rating its credit portfolio.
The Bank has a strong position in financing foreign trade.

Over 270 branches provide export credit. The expertise in this
area has enabled the Bank to achieve a leading position in
providing export credit in certain areas like diamond export. The
Bank has identified specialized
target groups to develop core advantage for future growth.

Branches of the bank
The Bank has 2528 branches in India spread over all states/
union territories including 93 specialized branches. These
branches are controlled through 47 Zonal Offices (HEAD OFFICE
Mumbai). There are 19 branches/ offices (including one
representative office at Jakarta, Indonesia) abroad located in 10
countries.
The Bank, as on March 2006, had 93 specialized branches
comprising
Corporate Banking Branches (to undertake very large

credit business):
1) Ahmedabad
2) Bangalore
3) Kolkata
4) Chennai
5) Mumbai
6) Nagpur
7) New Delhi
8) Pune
9) Andheri
Overseas Branches (specializing in Foreign Exchange Business):

1) Kolkata
2) Chennai
3) Jalandhar
4) Mumbai
5) New Delhi
6) Pune
7) Vishakhapatnam
8) Hyderabad

NRI Branches
1) Ahmedabad
2) Bhuj
3) Ernakulam
4) Mumbai
5) New Delhi
NRI Centers (which specially cater to the requirements of Non-

Resident Indians):
1) Pahgwara NRI Centre
2) Mapuca NRI Centre
3) Margao NRI Centre
4) Navsari NRI Centre
5) Janpath NRI Centre
6) R.N.Marg NRI Centre
7) Jamnagar NRI Centre
8) Porbandar NRI Centre
9) Pune NRI Centre
10) Surat NRI Centre
11) Vadodara NRI Centre
Capital Market Branches (which undertake all activities relating

to capital market such as collection of applications, processing of
refund orders, Merchant Banking etc.)
1) Ahmedabad
2) Kolkata
3) Mumbai
4) New Delhi

Commercial & Personal Banking Branches (cater to the
requirements of high net worth customers):
1) Mumbai
2) Kolkata
3) Chennai
4) Delhi
5) Bangalore
6) Pune
7) Hyderabad
Apart from this, the Bank also has specialized Branches for
Asset Recovery, Small Scale Industries, Hi-tech Agriculture
Finance, Lease Finance [Mumbai] and Treasury.
PRESENT STATUS OF THE BANK

To effectively meet the ever-growing challenges and
competition, the Bank has made a good headway in bringing about
technological upgradation. MIS and critical functions of
controlling offices have been computerized.
At present, the operations at about 793 branches are totally
computerized. Another 1111 branches operate in partially
computerized mode.
New facilities such as, Telebanking, ATM & Signature
Retrieval Systems have been introduced in a progressing manner
to add value to services. Telebanking facilities with Fax on
Demand facility, Remote Access Terminals for Corporate
Customers are now available at many branches.
The Bank has installed ATMs in Mumbai and other centres
in the country. The Bank is a member of the RBI's VSAT Network
and has installed 39 VSATs linking strategic branches/offices.
The Bank is making a paradigm shift from branch automation to

bank automation and is in the process of implementing a Multi-
Branch Banking Project, that facilitates City-wise Connectivity of
Computerized Branches.
As on March 2006 the connectivity has been done in 5 cities
DELHI, MUMBAI, HYDERABAD, BANGALORE, and PUNE. The
Bank is in the process of installing BOINET, a Wide Area
Network for providing a inter- and
intra-city connectivity, as a part of enhancing its decision support
system.
SERVICES OF BANK OF INDIA

Collection of outstation cheques / bills:
Bank of India has introduced "Jetclear" system, faster

collection of upcountry cheques for around 500 bigger branches
covering 85% of the upcountry collection business of the bank
with the intention of faster credit for upcountry cheques within
seven days without additional charges.
Delegation of powers:
The bank gives authorities at various levels which will be

empowered with adequate powers to take prompt decisions with
regard to sanctioning of loans and advances, issuance of
guarantees, settlement of claims of deceased depositors, issuance
of duplicate demand drafts, deposit receipts, other claims and
administrative matters concerning customer service.
Reorganization:
In order to facilitate quick decision-making and to suit the

changing requirements, the organizational structure will be

revamped. More specialized branches like Personal Banking
Branches, Corporate Branches, Small Scale Industries Branches,
Hitech Agricultural Finance Branches, Housing Finance Branches,
Lesing and
Hire Purchase Branches, Capital Market Branches, Overseas and

NRI Branches will be opened at other important centres.
Transparency and secrecy:
There is transparency in all business operations at all

stages. Customers will be educated about the various products and
facilities available. A common strategy will always be adopted to
eliminate any possibility of discrimination on caste, creed and
religion or economic status of the clients. Secrecy norms will be
simultaneously observed to protect the interest of the customers.
Surveys by outside agencies:
Steps are being taken by the bank to improve Customer

Service and enhance customer satisfaction. Services will be
evaluated through an outside reputed marketing agency every year
with a view to assessing the quality of services extended at the
branches.
Grievance redressal:
The goal of the bank is to provide complaint-free services.

In case of any deficiency in service, the customer will have the
opportunity to get the grievance redressed through well set up
machinery within the Bank.

Implementation of plans:
1) Computerization of 2070 branches out of its 2532 branches.

2) Networked 275 branches in 9 cities in a record time
of 12 months, with very low budget providing
anywhere banking.
3) First Bank to totally outsource ATM facilities at a very
economical cost. 100 ATMs installed so far under this scheme.
4) About 90% of Bank's business captured on computers.
5) Computerized almost 95% of the Government business
handled.
6) Forex business in major branches
7) Computerized banking.
8) Cash Management Service in about 44 cities - for
same day clearing of cheques and remittances.
9) Introduced E-Purse: a store value Smart Card as a pilot project
in Pune.
10) I n t e r n e t B a n k i n g p r o v i d e d f o r N R I c u s t o m e r s .
Plans in the process:
1) Bank of India will be the first bank to introduce Mobile

ATMs
2) Bank of India will be the first bank to introduce SMS
Banking.
3) Tele Banking services with single number for all clients.
4) Internet Banking for all clients.
5) Debit Cards as an extension of ATM Cards.
6) Acceptability of VISA/ MASTER Cards on our ATMs.
7) Solar powered ATMs at selected centres.
8) Solar Computing at our branch in the new ‘State of the Art’
Building at Bandra-Kurla Complex.
9) Networking of additional 450 branches in 21 cities.
10) Installation of additional 150 ATMs.
11) Wireless networking of remote and rural branches.
12) Future plans:

1) Information Kiosks on pilot basis in 2/3 branches with
passbook printing facility.
2) Corporate E-mail facility with 4000 mail boxes/
3) Video conference facility at new Corporate Office Building at
Bandra-Kurla Complex.
4) Offering IT solutions to smaller banks at 'cost only' basis.
5) Offering IT training to staff of other banks at our new
Management Development Institute at Belapur, Navi Mumbai.

MISSION:
"To provide superior, proactive banking services to niche

markets globally, while providing cost-effective, responsive
services to others in our role as a development bank, and in so
doing, meet the requirements of our stakeholders”
VISION:
"To become the bank of choice for corporates, medium

businesses and up market retail customers and to provide cost
effective developmental banking for small business, mass market
and rural markets".

ORGANISATIONAL STRUCTURE
Organisation Chart
Board of Directors
Managing Director
Assistants General
Chief Managers
Managers
Senior Officers
Officers
Assistants
S uRbS – S t a f f
BOARD OF DIRECTO

Shri M. Balachandran Chairman and
Managing
Dir
ector
S h r i K . R. K a m a t Executive
Director
Shri Sudesh Kumar Govt .Nominee
Director
Shri A. K. Khound RBI Nominee
Director
Shri Deepak P. Patil Workmen
Employee
Dir
ector Shri V. Eswaran Non-
Workmen Employee
Dir
ector
Shri Kamal K. Gupta Part-time Non-
Official
Dir
ector
Dr.(Smt.) Prabha K.Taviad Part-time Non-
Official
Dir
ector
Dr. Shantaben Chavda Part-time Non-
Official

Di
rector
Dr. V.B. Kaujalgi S h a r e h o l d er
Director
Shri M.N. Gopinath Shareholder
Director
Dr. P. Kotaiah Shareholder
Director
Shri Tarun Sheth S h a r e h o l d er
Director

DATA ANALYSIS & INTREPRETATION
This chapter contains a comprehensive study on the

different ratios which highlight the liquidity, long term solvency
& profitability of the bank. For the purpose of analysis and
interpretation, the ratios have been broadly classified into 3
categories, namely:
1. Liquidity Ratios
2. Leverage Ratios
3. Profitability Ratios
BASIS OF COMPARISION
Ratios are relative figures reflecting the relationship

between the variables. They enable to draw conclusions regarding
the financial operations of the bank. The comparison is made on
the basis of the standards or norms set for the ratios. For the
ratios without standards or norms set, the comparison is made
based on the previous year’s performance of the bank with respect
to the respective ratios. The data has been collected from the
Balance Sheet & Profit & Loss Account & the Annual Report.
Liquidity Ratios
1. Current Ratio
Expression : Current Assets
Current Liabilities
Standard : 2:1
Uses of Current Ratio :

 It indicates the short term solvency of the
concern.

 It is the measure of the working capital
available in
a concern.
Components of Current Assets
 Cash & Balances with RBI

 Balances with Banks & Money at call & Short Notice
 Advances
 Non- Banking Assets
Components of Current Liabilities

 Demand Deposits
 Other Liabilities
2009
Current Assets = 1,70,36,26,533
Current liabilities = 2,02,51,98,695
Current Ratio = 1,70,36,26,533 / 2,02,51,98,695
Current Ratio = 0.84
2008
Current Liabilities = 1,61,06,81,377
Current Ratio =1,34,60,10,339/1,61,06,81,377
2007
Current Liabilities = 1,29,30,07,891
Current Ratio =1,05,53,49,341 / 1,29,30,07,891

TABLE- 1
C u r r e n t R at i o
Current Ratio
2007 : 0.81
2008 : 0.83
2009 : 0.84

GRAPH-1
INTERPRETATION
The standard or ideal current ratio is 2:1 that means, the

current assets should be twice the current liabilities, so that there
is a margin of safety to cover any fall in the value of current

assets and also to leave sufficient working capital after the
payment of current liabilities.
During the year 2009 the current ratios fall at 0.84:1 when
compared to 0.83: 1 in the year 2008 & 0.81: 1 in the year 2007.
The current ratio has been increasing year by year, the

current ratio is above the standard & this shows that the working
capital is sufficient.
The increase in the current ratio every year is because of

the following reasons:
 Decrease in Bank & Money at call
Decrease in demand deposits & bills payable
2. Absolute Liquid Ratio
Expression : Absolute Liquid Assets

Quick Liabilities
Standard : 1:2
Uses of Absolute Liquid Ratio :

 It reveals whether a concern in liquid or not.
 It measures the short term solvency of a concern
Components of Absolute Liquid Assets

 Cash & Balances with RBI
 Balances with Banks & Money at call & short
notice
Components of Quick Liabilities

 Demand Deposits
 Other Liabilities
2009
Absolute Liquid Assets =8,91,52,845+12,84,59,711
Absolute Liquid Assets = 21,76,12,556
Quick Liabilities = 1,89,70,84,797+12,81,13,898
Quick Liabilities = 2,02,51,98,695
Absolute Liquid Ratio = 21,76,12,556/ 2,02,51,98,695
Absolute Liquid Ratio = 0.107
2008
Absolute Liquid Assets = 11,74,18,505+5,97,55,389
Quick Liabilities = 1,50,01,19,812+11,05,61,565
Absolute Liquid Ratio = 17,71,73,894 / 1,61,06,81,377

2007
Absolute Liquid Assets = 7,19,68,894+10,20,86,456
Quick Liabilities
=1,19,88,17,362+9,41,90,529
Absolute Liquid Ratio = 17,40,55,350 /
1,29,30,07,891

TABLE-2
Absolute Liquid Ratio
Absolute
Liquid Ratio
2007 : 0.134:2
2008 : 0.109:2
2009 :
0.107:2
G R AP H – 2
INTERPRETATION
The actual absolute liquid ratio is compared with standard
or ideal absolute liquid ratio of 1 : 2. That means Re.1 worth of
absolute liquid assets are sufficient for Rs.2 worth of Current
Liabilities.

II . LEVERAGE RATIO
1. Fixed Assets to Net Worth ratio
Expression : Net Fixed Assets
Net Worth
Standard : 67 %
Uses of Fixed Assets to Net Worth Ratio

 It indicates the proportion of fixed assets financed by
the proprietors
Components of Fixed Assets

 Premises
 Other Fixed Assets
Components of Net Worth

 Capital
 Reserves & Surplus
2009
Net Fixed Assets = 2,13,44,522 + 28,70,284
= 2,42,14,806
Net Worth = 52,59,146 + 12,96,90,067
= 13,49,49,213
Fixed Assets to
Net Worth Ratio = 2,42,14,806 / 13,49,49,213
= 18%

2008
Net Fixed Assets = 2,16,51,792 + 23,39,723
= 2,39,91,515
Net Worth = 52,59,146 + 10,06,34,764
= 10,58,93,910
Fixed Assets to
Net Worth Ratio = 2,39,91,515 / 10,58,93,910
= 22%
2007
Net Fixed Assets = 55,30,977 + 22,47,861
= 77,78,838
Net Worth = 48,81,420 + 5,40,72,333
= 5,89,53,753
Fixed Assets to
Net Worth Ratio = 77,78,838 / 5,89,53,753
= 13%

TABLE-3
Fixed Assets To Net Worth Ratio
Fixed Assets to
Net Worth Ratio
2007 :
13%
2008 : 22%
2009 :
18%
GRAPH-3

INTERPRETATION
The standard or an ideal fixed asset to Net Worth ratio is 67
%. That means the fixed assets should not constitute more than 67
% of the proprietors funds.
The fixed assets to net worth ratio was 18% of net worth in
the year 2009 when compared to 22% in the year 2008 and 13% in
the year 2007.
There was a decrease in the proportion of fixed assets in the
year 2009 as against 2008. The actual Fixed Assets to Net Worth
Ratio was 18% when compared to standard ratio of 67 %. This
shows that the bank has financed not only the fixed assets but
also a good portion of current assets. That means, the capital is
not locked up in fixed assets. The inference is that the financial
position of the bank is strong.

2 . C U R R E N T AS S E T S T O N E T W O R T H R A T I O
Expression : Current Assets
Net Worth
Standard : No Standard
Use of Current Assets to Net Worth Ratio

 This ratio indicates the proportion of current assets financed
by the owners.
2009
Net Worth = 13,49,49,213
Current Assets to
net worth ratio = 1,70,36,26,533 /13,49,49,213
= 12.62
2008
Net Worth = 10,58,93,910
Current Assets to
net worth ratio = 1,34,60,10,339 / 10,58,93,910
= 12.71
2007
Net Worth = 5,89,53,753

Current Assets to
net worth ratio = 1,05,53,49,341 /5,89,53,753
= 17.90

TABLE-4
C u r r e n t A s s e t s T o N e t W o rt h R a t i o
Current Assets to
Net Worth Ratio
2007 :
17.90
2008 :
12.71
2009 :
12.62
G R AP H – 4

INTERPRETATION
There is no standard set for the current assets to net worth
ratio. However, if the ratio is high, the financial strength of the
concern is good & if the ratio is low, the financial position of the
concern is weak.
The current assets to net worth ratio fall at 12.62 in the year 2009
as compared to 12.71 in the year 2008 & 17.90 in the year 2007

I I I P R O F I T A B L E R AT I O
1. Credit Deposit Ratio
Expression : Credit X 100
Deposit
Use of Credit Deposit Ratio

 It indicates the share of credit (advances) in the total deposits
of the bank.
2009
Credit = 1,42,90,93,738
Deposit = 1,89,70,84,797
Credit Deposit Ratio = 1,42,90,93,738 /1,89,70,84,797* 100
= 75.33%
2008
Credit = 1,13,47,63,264
Deposit = 1,50,01,19,812
Credit Deposit Ratio = 1,13,47,63,264 /1,50,01,19,812* 100
= 75.64%
2007
Credit = 85,11,58,944
Deposit = 1,19,88,17,362
Credit Deposit Ratio =85,11,58,944 /1,19,88,17,362* 100
= 71%

TABLE-5
C r e d i t D e p o s i t R at i o
Credit Deposit Ratio
2007 : 71%
2008 :
75.64%
2009 :
75.33%
G R AP H – 5

INTERPRETATION
Credit Deposit Ratio is one of the important ratios. There is no
standard for the credit deposit ratio. Its impact on banks
profitability depends on the yield on advances. The better the
yield on advances the better the profitability of the bank.
Though there is no standard for this ratio, the implication is
that higher the credit deposit ratio, it is better for the banks.
The Credit Deposit Ratio was 75.33%for the year 2009 as
against 75.64% for the year 2008 & 71% for the year 2007.It is
observed that there has been an increase in 2008 & 0.31%
decrease in 2009. This shows a substantial improvement in the
ratio.

2. Current Deposit to Total
Deposits Ratio
Expression : Current Deposits X 100

Total Deposits
Uses of Current Deposit to Total Deposits Ratio

 This ratio indicates the share of current deposits in
the total deposits.
 It indicates the impact on overall Cost of Deposits
2009
Current Deposits = 27,70,617+12,30,44,827
= 12,58,15,444
Total Deposits = 1,89,70,84,797
Current Deposit to
Total Deposits Ratio
=12,58,15,444/1,89,70,84,797*100
= 6.63%
2008
= 12,47,28,703
Current Deposit to
Total Deposits Ratio =12,47,28,703
/1,50,01,19,812 *100
=8.31%

2007
= 9,36,58,648
Current Deposit to
=9,36,58,648/1,19,88,17,362*100
=7.81%

TABLE-6
Current Deposits To Total Deposits Ratio
Current Deposits to
2007 : 7.81%
2008 : 8.31%
2009 : 6.63%
G R AP H – 6

INTERPRETATION
There is no standard or norms set for the Current Deposits

to Total Deposits Ratio. Current deposits are no cost deposits.
That is because the interest is not paid on these deposits. The
higher the ratio of current deposits to total deposits, the banks
overall cost of deposits will be lower & this subsequently helps
to improve the banks profitability. So, higher the ratio,
better for the bank.
The Current Deposits to Total Deposits Ratio was

6.63% in the year 2009 as compared to 8.31% in the
year 2008 & 7.81% in the year 2007.There has been a
decrease in the ratio by 0.32% in the year 2009. But
there has been an increase of 0.50% in the year 2008.
The implication is that the share of Current Deposits in
total deposits has increased in the year 2008 when
compared to 2009.

3) Savings Deposits to Total Deposit Ratio
Expression : Savings Deposits X 100
Total Deposits
Uses of Savings Deposits to Total Deposit Ratio
 It indicates the share of savings deposit in total deposits

 It also shows the savings bank deposits portfolio, i.e., no of
clients
2009
Savings Deposits = 38,19,36,910
Savings Deposits to
Total Deposit Ratio = 38,19,36,910 /1,89,70,84,797 * 100
= 20.13%
2008
Savings Deposits to
Total Deposit Ratio = 33,43,87,684/1,50,01,19,812 *100
= 22.30%
2007

Savings Deposits to
Total Deposit Ratio = 29,25,46,784 /1,19,88,17,362 *100
= 24.40%
TABLE-7
Savings Deposits Total Deposit Ratio
Savings Deposits to
Total Deposit Ratio
2007 : 24.40%
2008 : 22.30%
2009 : 20.13%
G R AP H – 7

INTERPRETATION
Savings deposit to total deposit ratio indicates the share of
savings deposits in the total deposits. They are low cost deposits,
the interest paid on these deposits are very less. Hence the higher
the ratio of savings deposit, the bank’s overall cost of deposits
will be less and consequently it will help to improve the bank’s
profitability. Savings deposit to total deposit ratio was 20.13% in
2009 as against 22.30% in 2008 & 20.40% in 2007. It is observed
that there is an decrease of 0.17% in the year 2009 and there is a
decrease of 0.10% in the year 2008. This shows that the share of
savings deposits to total deposits has decreased when compared to
the previous year.

4.Term Deposits to Total Deposit Ratio
Expression : Term Deposits X 100
Total Deposits
Uses of Term Deposits to Total Deposit Ratio

 It indicates the share of term deposits in the total
deposits in the bank.
 It indicates the state of risk undertaken by the bank.
2009
Term Deposits = 1,38,93,32,443
Term Deposits to
Total Deposit Ratio = 1,38,93,32,443 /1,89,70,84,797 * 100
= 73.23%
2008
Term Deposits = 1,04,10,03,425
Savings Deposits to
Total Deposit Ratio = 1,04,10,03,425 /1,50,01,19,812 * 100
= 69.40%
2007
Term Deposits = 81,26,11,930
Term Deposits to
Total Deposit Ratio = 81,26,11,930/ 1,19,88,17,362* 100
= 67.78%

TABLE-8
Term Deposits To Total Deposit Ratio
Term Deposits to Total
Deposit Ratio
2007 : 67.78%
2008 : 69.40%
2009: 73.23%
G R AP H – 8

INTERPRETATION
These are high cost deposits as the interest paid on these

deposits are high. The higher the ratio of term deposits to total
deposits, the higher the bank’s overall cost of deposits and as a
result it will have the adverse effect on the banks profitability.
The Term deposits to Total Deposits was 73.23%in the year 2009
when compared to 69.40% in the year 2008 & 67.78% in the year
2007.It is observed that there is an increase of 0.52% in the year
2008 and 0.83% in the year 2009. This shows that share of term
deposits in total deposits has increased in the year 2009and also
in 2008. This implies that there will be a increase in the overall
cost of deposits, which is healthy for the bank’s profitability.

5)Interest Income to Working Funds Ratio
Expression : Interest Income X 100
Working Funds
Uses of Interest Income to Working Funds Ratio

 It indicates the overall yield on the bank’s funds.
 It indicates the yield on the bank’s investments.
2009
Interest Income = 16,34,73,579
Working Funds = 52,60,71,791
Interest Income to
Working Funds Ratio = 16,34,73,579 /52,60,71,791* 100
=31.07%
2008
Interest Income to
Working Funds Ratio = 12,35,52,212/41,80,28,767 * 100
= 29.55%
2007
Interest Income to
Working Funds Ratio = 8,93,62,832 / 35,49,27,618* 100
=25.17%

TABLE-9
Interest Income To Working Funds Ratio
I n t er e s t I n c o m e t o
Working Funds Ratio
2007 :
25.17%
2008 :
29.55%
2009 :
31.07%

G R AP H – 9
INTERPRETATION
Interest Income to Working Funds Ratio is an important

ratio which indicates the overall yield on the bank’s funds.
Though there is no norm set for this ratio, the interpretation will
be higher the ratio better the yield to the bank.Interest Income to
Working Funds Ratio was 31.07% in the year 2009 as against
29.55% in 2008 & 25.17% in the year 2007.This shows that there
was an increase of 1.52% in the year 2009, there is the increase

of 4.38% in the year 2008. This shows that the yield on bank’s
funds has increased in the year 2009

6)Non - Interest Income to Working Funds Ratio
Expression : Non -Interest Income X 100
Working Funds
Uses of Non -Interest Income to Working Funds Ratio

 It indicates the operating profit position of the
bank.
Components of Non - Interest Income
 Commission, exchange & brokerage.
 Profit on sale of investments.
2009
Non -Interest Income = 3,05,18,627
Non - Interest Income to
Working Funds Ratio = 3,05,18,627 /52,60,71,791 * 100
= 5.80%
2008
Working Funds Ratio = 2,11,69,261/ 41,80,28,767* 100
= 5.06%
2007
Non - Interest Income = 1,56,29,533
Working Funds Ratio = 1,56,29,533 /35,49,27,618 *100
= 4.40%

TABLE-10
N o n - I n t e r e s t I n c o m e T o W o r k i n g F u n d s R at i o
Non - I n t e r e s t In c o m e t o
Working Funds Ratio
2007 : 4.40%
2008 : 5.06%
2009 : 5.80%
GRAPH – 10

INTERPRETATION
There is no standard for Non Interest Income to Working

Funds Ratio. However, the implication is that the higher the
non-interest income, the higher will be the banks operating
profit. The higher this ratio, it is better for the bank.
The Non Interest Income to Working Funds Ratio was 5.80%

in the year 2009 as compared to5.06%in the year 2008 & 4.40%
in the year 2006.
This shows that there was an increase of 0.66% in the year

2008 & 0.74% in the year 2009. This shows a substantial
improvement in the ratio. This implies that the banks operating
profit has improved.

7 ) T o t a l I n c o m e t o W o r k i n g F u n d s R at i o
Expression : Total Income X 100
Working Funds
Uses of Total Income to Working Funds Ratio

 It indicates the income earned on the funds invested.
 It indicates the operating profit position of the
bank.
2009
Total Income = 19,39,92,206
Total Income to
Working Funds Ratio =19,39,92,206 /52,60,71,791 * 100
= 36.87%
2008
Total Income to
Working Funds
Ratio = 14,47,21,473 /41,80,28,767 *100
= 34.61%
2007
Total Income to
Working Funds Ratio = 10,49,92,365/35,49,27,618 * 100
= 29.58%

TABLE-11
T o t a l I n c o m e T o W o r k i n g F u n d s R at i o
T o t a l In c o m e t o
Working Funds Ratio
2007 : 29.58%
2008 : 34.61%
2009 : 36.87%
GRAPH – 11

INTERPRETATION
There is no standard for this ratio, however, the higher the

ratio of Total Income to working funds, the better will be the
bank’s operating profit.
The Total Income to Working Funds Ratio was 36.81% in

the year 2009 as against 34.61% in the year 2008 & 29.58% in
the year 2007
It is observed that there is an increase of 7.23% in the year

2009 and there is a increase of 5.03% in the year 2008. This
shows that there is a increase in the total income when compared
to previous years, in the light of working funds.
8 ) N o n - I n t e r e s t I n c o m e t o T o t a l I n c o m e R at i o
Expression : Non -Interest Income X 100

Total Income
Uses of Non -Interest Income to Total Income Ratio

 It indicates the amount of income earned on the
non-fund based business.
2009
Total Income Ratio = 3,05,18,627/19,39,92,206 * 100
= 15.73%
2008
Total Income Ratio =2,11,69,261 /14,47,21,473 * 100
= 14.62%
2007
Total Income Ratio = 1,56,29,533/ 10,49,92,365* 100
= 14.88%

TABLE-12
Non – Interest Income To Total Income Ratio
Total Income Ratio
2007 :
14.88%
2008 :
14.62%
2009 :
15.73%
GRAPH – 12

INTERPRETATION
Non Interest Income to Total Income Ratio emphasizes on

the return on the banks non-fund based business. Higher the ratio
of Non Interest Income to Total Income, higher will be the
profitability of the bank.
Non Interest Income to Total Income Ratio was at 15.73% in

the year 2009 as against 14.62% in the year 2008 & 14.88% in the
year 2007.
There was a increase in the ratio of 1.11% in the year 2009.

But in the year 2008 there is an decrease of 0.26% as compared to
2007. This shows that the non-interest income has increased in
the year 2009 which is good for the bank’s profitability.

9)Operating Expenses to Working Funds Ratio
Expression : Operating Expenses X 100
Working Funds
Uses of Operating Expenses to Working Funds Ratio

 It indicates to what extent the bank is spending to
service its working funds.
 It indicates the amount of operating expenses
increased by the bank.
2009
Operating Expenses = 3,09,39,633
Operating Expenses to
Working Funds Ratio = 3,09,39,633/52,60,71,791 *100
= 5.88%
2008
Working Funds Ratio =2,64,49,874 /41,80,28,767 *100
= 6.32%
2007
= 7.34%

TABLE-13
Operating Expenses To Working Funds Ratio
Working Funds Ratio
2007 : 7.34%
2008 : 6.32%
2009 : 5.88%

GRAPH-13
INTERPRETATION
Operating Expenses to Working Funds Ratio indicates to

what extent the bank is spending to service its working fund. The
lower the ratio of Operating Expenses to Working Funds, the
higher will be the banks operating profit.

The Operating Expenses to Working Funds Ratio was 5.88%
in the year 2009 as compared to 6.32% in 2008 & 7.34% in the
year 2006.
It is observed that there was an decrease of 0.44% in the

year 2009 and also there is a decrease of 1.02% in the year 2008.
This shows that there is a decrease in the Operating Expenses in
the year 2009.

10)Operating Profit to Working Funds Ratio
Expression : Operating Profit X 100
Working Funds
Uses of Operating Profit to Working Funds Ratio

 It indicates the trends in the bank’s profitability.
2009
Operating Profit = 1,38,00,843
Operating Profit to
= 2.62%
2008
Operating Profit =67,91,311
Operating Profit to
Working Funds Ratio =67,91,311 /41,80,28,767 * 100
= 1.62%
2007
Operating Profit =46,13,730

Operating Profit to
Working Funds Ratio =46,13,730 /35,49,27,618 * 100
= 1.30%

TABLE-14
O p e r a t i n g P r of i t T o W o r k i n g F u n d s R at i o
Operating Profit to
Working Funds Ratio
2007 : 1.30%
2008 : 1.62%
2009 : 2.62%
GRAPH –14

INTERPRETATION
Higher the ratio of Operating Profit to Working Funds the

more will be the profitability of the bank.
The Operating Profit to Working Funds ratio was at 2.62%

in the year 2009 when compared to 1.62% in 2008 & 1.30% in the
year 2007.
It is observed that there was an increase of 1% in 2009 and

an increase of 0.32% in 2008. This shows that the bank’s
Operating Profits has increased which is good for the bank’s
profitability.

1 1 ) N e t P r o f i t t o W o r k i n g F u n d s R at i o
Expression : Net Profit X 100
Working Funds
Uses of Net Profit to Working Funds Ratio

 It indicates the financial position of the bank.
 It indicates the profitability of the bank.
2009
Net Profit = 3,00,73,463
Net Profit to
= 5.71%
2008
Net Profit = 2,00,94,026
Net Profit to
Working Funds Ratio = 2,00,94,026 / 41,80,28,767* 100
= 4.80%
2007
Net Profit = 1,12,31,690
Net Profit to
= 3.16%

TABLE-15
N e t P r o f i t T o W o r k i n g F u n d s R at i o
Net Profit to
Working Funds
Ratio
2007 :
3.16%
2008 :
4.80%
2009 :
5.71%
GRAPH – 15

INTERPRETATION
Higher the Net Profit to Working Funds Ratio the better will
be the banks financial position.
The Net Profit to Working Funds Ratio was at 5.71% in the

year 2009 as compared to 4.80% in the year 2008 & 3.16% in the
year 2007.
This shows a substantial increase in the profits of the bank.

There was an increase of 0.91% in 2009 and an increase of 1.64%
in 2008. This implies that the banks financial position has
improved.

FINDINGS
1) As far as the bank’s liquidity position is concerned

there has been an improvement by the way of
increase in the current ratio, with sufficient working
capital. The bank is liquid.
2) There has been an increase in the advances of the
bank every year which is good for the bank.
3) The net profit has increased over the period, this is
due to the increase in advances of the bank.
4) The percentage of non-interest income to working
funds has increased over the period, which is good
for the bank and profitability.
5) The interest income to working funds ratio has
increased in the current year compared to the
previous year.
6) The operating expenses have decreased over the
period which is good for the bank’s profitability.
7) The operating profit of the bank has increased
every year which is good for the bank’s
profitability.
SUGGESTIONS
Savings bank deposits to be given more

importance than term deposits for a better client
portfolio, this way the bank can also render its
services to the clients in need and increase its non-
interest income for the services rendered.

1) The equity capital of bank was same in the year 2009
and 2008. Issue of additional equity or mobilization of funds from
the government has been made in the year 2009 and 2008 so that it
equity capital can be utilized for the bank .
2) The ratio of debt equity should increase over the period
of 5 years. The rapid change of debt equity ratio was in the year
2009. The equity ratio should be increased
3) The maintenance of reserves for meeting uncertainty
have been increasing it was just 54.07Crores in the year 2007 and
it was increased to 129.6 Crores in the year 2009. Maintenance
the liquidity position.
4) In the year 2009 the borrowings of the bank was 94.8
Crores which was the highest borrowing comparing to the previous
years.
5) The interest burden of the borrowed fund should
decrease due to large amount of debt.
6) Investment of the bank in the year 2009 was 526.07
Crores. It was just 354.9 Crores in 2007. Investment of the bank
should increasing over the period of 6 years.
7) Advances of bank was 851.1 Crores in the year 2007
and it went up to 1134.7 Crores in 2008, further it should up to
1429.09 Crores in the year 2009.

8) Interest income ratio of the bank should be fluctuating
9) .Other income of the bank should increase; it was 2.1 in
the year 2008 and went up to 3.05 in 2009.
10) Interest expended ratio of the bank is not fluctuating
should be fluctuating
11) Net profit ratio of the bank is 1.123 in the year 2007
and should up to 3.007 in the year 2009. Therefore the net profit
ratio of the bank should increased
12) Expenses ratio of the bank must reduce to 7.34 to
5.88%
13) Deposits should be increased compared to 2008
14) Operating expenses of the bank was just 2.60 crores in
the year 2007 and it was 30.9 crores in the year 2009.The
operation expenses level should be statutory.

CONCLUSION
The analysis is done based on the historical costs. The

required data and information has been taken from balance sheet
and profit and loss a/c. The bank has taken into consideration all
the accounting conventions. The analysis is done by calculating
ratios which are relevant to the bank.
The analysis is done for the current year 2009. The bank’s
liquidity position, capital structure and profitability is good.
There has been an improvement in all the sectors.

BIBLIOGRAPHY
S. P. JAIN & K. NARANG COST & MANAGEMENT

ACCOUNTING
M . Y . K HA N & P . K . J A I N MANAGEMENT
ACCOUNTING
VASANTH DEWSAI BANKING & FIANCIAL

SYSTEM
B.S. Raman Financial
Management
Website
www.bankofindia.com


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INTRODUCTION TO FINANCIAL

Accounting is the service activity. One of its functions is

Seshadripuram College, Bangalore-20 Page 1

Meaning of Financial Statements

Financial Statements refer to at least two statements, which

“Money is an arm or a leg, you either use it or lose it”. It

Nature of Financial Statements

Financial Statements are prepared for the purpose of

Seshadripuram College, Bangalore-20 Page 2

• Financial Statements are the reports of summarized reviews

• They are prepared at the end of accounting period.

• The reliability of financial statements depends upon the

• The figures in financial statements are a combination of

• The figures recorded in financial statements are historical

• These statements are prepared as per accounting concepts

• Financial Statements are prepared by accountants and are

Characteristic Financial Statement

Seshadripuram College, Bangalore-20 Page 3

2. Accuracy and Freedom from Basis. Financial

3. Comparability. Comparison if the foundation of

4. Analytical presentation. Financial statement should

5. Promptness. Financial statement should be prepared

Seshadripuram College, Bangalore-20 Page 4

6. Generally Accepted Principles. Financial statements

7. Consistency. Financial statement must be prepared on

8. Authenticity. Financial statements prepared must be

Importance of Financial Statements

Seshadripuram College, Bangalore-20 Page 5

Financial statements reflect earnings for a particular period,

Limitations of Financial Statements

Interim & not final reports:

Financial statements do not depict the exact position and

Seshadripuram College, Bangalore-20 Page 6

Financial statements may not be realistic because they are

Lack of objective judgment:

Financial statements are influenced by the personal

Financial statements are historical in nature & have nothing

These statements do not give a real & correct report about

Seshadripuram College, Bangalore-20 Page 7

These statements are sometimes prepared according to the

Meaning of analysis of Financial Statements

Analysis is the process of critically examining in

Seshadripuram College, Bangalore-20 Page 8

Objectives or uses of analysis of Financial Statements

Financial statements analysis is helpful in assessing the

 The present and future earnings capacity or profitability of the

 The operational efficiency of the concern as a whole and of its

 The short-term and long-term solvency of the concern for the

 The comparative study in regard to one firm with another firm

Seshadripuram College, Bangalore-20 Page 9

 The financial stability of a business concern.

 The long-term liquidity of its funds.

Techniques or tools used for analysis and interpretation of

The following techniques can be used in analysis &

A. Comparative Financial Statement (or analysis)

B. Common Measurement Statement (or analysis)

C. Trend percentage analysis

D. Fund Flow Statement (or analysis)

E. Net Working Capital Analysis

F. Cash Flow Statements (or analysis)

Seshadripuram College, Bangalore-20 Page 10

One of the techniques of analysis of financial statements is