FINANCIAL STATEMENT ANALYSIS.

There are six basic financial statements of special importance.

1.
2.
3.
4.
5.
6.

the income statement (or profit and loss Account)

position statement (or Balance sheet)
funds flow statement ( or the statement of source and application of fund)
the cash flow statement
the statement of retained earning
schedules

The income statement: there is no legal format for the profit & loss A/C therefore, it can be presented in the
tradintional T form, or vertically, in statemement form an example of the tow formals is given as under.
Particular
To opening stock
Raw materials
Work in progress
To purchase of raw material
Material
To manufacturing
Wages
To carriage inwards
To other factory
Expenses
To opening stock of finished goods
To Cost of finished goods
Good B/D
To Gross profit

To Gross B/D
To office and Administration
To provision for Income Tax
To Net Profit B/D
To General Reserve
To Dividend
To Balance C/F

Rs
xxx
xxx

Particular
By cost of Finished Good C/D
By closing Stock
Raw Material
Work in Progress

Rs
xxx
xxx
xxx

xxx
xxx
xxx
xxx
xxxx
xxx
xxx
xxx
xxx
xxxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx

By sales
By closing stock finished

xxxx
xxx
xxx

By Gross loss C/D

xxx
xxxx

By Gross profit B/D

By Miscellaneous Receipts

xxx
xxx

By Net Loss C/D

xxx

By Net Profit B/D

xxx
xxxx

Balance sheet : the companies Act 1956 stipulates that the balance sheet of joint stock company should
be prepared as per part I of Schedule VI of the Act however the statement form has been emphasized
upon by accountants for the purpose of analysis and interpretation. The permission of the central
government is necessary for adoption for statement form
It must be noted that the format used by Management accountant differs from the vertical form of
balance sheet. The format used is a flexible Statement, wherein necessary calculations can be clearly
presented for Example: Working capital can be Shown Separately as difference between current Assets
and current Liability. The purpose of the statement is to ensure that its user can grasp the essential
message quickly the Three forms in which Balance sheet can be presented are shown below.

Particular

Rs

Rs

ASSETS
CURRENT ASSETS
Cash and Bank balances
Debtors
stock
other current Assets
A
FIXED ASSETS
LESS : Depreciation
INVESTMENTS
B
TOTAL
A+B
LIABILITIES
Current liablity
Bills payable
creditors
other current liabilities
C
LONG TERM DEBT
Debentures
other long term debts
D
CAPITAL AND RESERVES
SHARE CAPITAL
RESERVE AND SURPLUS
E
TOTAL LONG TERM FUNDS
D+E
Total
C+D+E

Particular
ASSETS
CURRENT ASSETS
Cash and Bank balances
Debtors

xxx
xxx
xxx
xxx
XXX
xxx
xxx
xxx
XXX
XXXXX

xxx
xxx
xxx
xxxxx
xxxx
xxxx
xxxxx
XXX
XXX
xxxxx
xxxxx
xxxxx

Rs

Rs

134,70
0.00
38,70

LESS : Depreciation

0.00
91,50
0.00
1,68
0.00
266,5
80.00
97,60
0.00
13,78
5.00

INVESTMENTS

stock
other current Assets
A
FIXED ASSETS

B
TOTAL
A+B
LIABILITIES
Current liablity

83,8
15.00
350,3
95.00

Bills payable

creditors

42,20
0.00
12,25
0.00
54,4
50.00

Current liablity
PROVISION
C
LONG TERM DEBT
Debentures

UNSECURED LOAN
D
CAPITAL AND RESERVES
SHARE CAPITAL
RESERVE AND SURPLUS
E
TOTAL LONG
D+E
Total
C+D+E

TERM

FUNDS

15,70
0.00
15,7
00.00
245,00
0.00
35,24
5.00
280,2
45.00
295,94
5.00
366,09
5.00
(15,70

0.00)

Methods of financial statement Analysis:

The following methods of Analysis are generally used:
1.
2.
3.
4.
5.

comparative statements
Trend Analysis
Common size Analysis
Funds Flow Analysis
Ratio Analysis

Comparative statement Analysis: Analysis refers to comparison of financial statements pertaining to

two different periods by putting them side by side and finding out the changes in absolute and relative
changes.
Points to be noted:
1. The financial date that is to be compared should be properly defined. A particular account head
must have the same connotation for all the periods of comparison.
2. The accounting policies followed during the years of comparison should be uniform. If there are
any changes in any policy, the figures should be adjusted to ensure uniformity
3. It is preferable to present financial information in vertical of statement form
4. The comparative financial statement must reveal changes in both absolute and relative measures

Interpretation:
1. A changes in sales in meaningful only if it is compared with a change in cost of goods sold.
2. A change in operating expenses might be due to change in scale of operations or o account of
change in degree of managerial efficiency
3. A change in net profit is a good indicator of overall profitability of the organization.
4. A change in retained earnings can be on account of change in profitability, or on account of
change in dividend policy, capitalization of free reserves or change in amounts transferred to
various funds
5. A change in working capital is a good indicator of the change in current financial position, or
short term solvency of the business
6. A change in liquid assets is a better indicator of the short term solvency of the business
7. A change in fixed assets must be balance by a change in long term funds.
8. The nature of assets, which have increased or decreased, must be studied to understand its
implications in the future.
9. Relative measures provide a sharper picture than absolute measures

Particular
Sales

1,993
.00

1,994
.00

Absolute
change

%
Change
-12.41%

58,000.00

65,200.00

7,200.00

Sales return

2,000.00

1,200.00

(800.00)

40.00%

Net Sales

56,000.0
0

64,000.0
0

8,000.00

-14.29%

Cost of goods sold

47,600.00

49,200.00

1,600.00

-3.36%

Gross profit
Administrative
expenses

8,400.00

14,800.0
0

6,400.00

-76.19%

1,016.00

1,000.00

(16.00)

selling expenses
non-operating
expenses
non-operating
income

1,840.00

1,920.00

80.00

-4.35%

140.00

155.00

15.00

-10.71%

(96.00)

(644.00)

(548.00)

-570.83%

5,500.00

12,369.0
0

6,869.00

-124.89%

2,406.25

5,411.44

3,005.19

-124.89%

3,093.75

6,957.56

3,863.81

-124.89%

Net profit before

tax
Less tax
Net profit after
tax

Particular
Assets
Current Assets
Cash and Bank balances

31/03/1
993

16,000.0
0

1.57%

31/03/1 Absolute
994 change

2,000.00

(14,000.00)

%
Chan
ge

-88%

Debtors

131,400.
00

182,000.
00

50,600.00

investment (out of temporatary

surplus

20,000.0
0

(20,000.00)

prepaid expenses

3,200.00

3,600.00

400.00

13%

stock

204,800.
00

247,600.
00

42,800.00

21%

bills receivable

4,000.00

36,000.0
0

32,000.00

800%

379,400
(A) .00

471,200
.00

91,800.00

24%

Plant

184,800.
00

199,800.
00

15,000.00

Good will

50,000.0
0

(50,000.00)

234,800
(B) .00

199,800
.00

(35,000.00)

614,200
Total Assets(A+B) .00
LIABILITIES AND CAPTIAL
Current Liablities

671,000
.00

56,800.00

9%

Bank overdraft

7,800.00

7,800.00

0%

84,800.0
0

78,400.0
0

(6,400.00)

-8%

6,400.00

8,800.00

2,400.00

38%

91,200.
00

95,000.
00

3,800.00

4%

120,000
(D) .00

108,000
.00

(12,000.00)

211,200
(C+D) .00

203,000
.00

(8,200.00)

39%
-100%

Fixed Assets

Sundry Creditors
Londg term debt due for repayment
in 1 year

8%
-100%
-15%

LONG TERM LIABLITIES

-10%
-4%

CAPITAL
300,000.
EQUITY SHARE CAPTIAL 00

30,000.0
0

(270,000.00)

103,000.
RESERVES AND SURPLUS 00

168,000.
00

65,000.00

403,000
(E) .00

198,000
.00

(205,000.0
0)

-51%

614,200
.00

401,000
.00

(213,200.0
0)

-35%

Total liablilties and Capital

-90%

63%