1.

INTRODUCTION:

Financial statement are the instrument panel

of the business enterprise, prepared for

decision making. They constitute a report on

managerial performance. Attesting to

managerial success or failure & flashing

warning signals familiar impending difficulties.

To a reader with a knowledge of accounting, a

set of financial statement & tells a great deal

about a business enterprise.

NEEDLY FINANCIAL STATEMENT ANALYSIS:

Financial statements are needed to be analyzed &

interpreted to set clear information about business

operation & financial position.

Financial statement analysis is a process of

identifying the financial strengths and weaknesses

of the firm by properly establishing relationship

blow the items of the B/S and P&C A/C.

TOOLS OF FINANCIAL STATEMENTS ANALYSIS:

Different types of techniques are used in financial

statement analysis. These includes comparative

statements, schedule of changing in warking

capital, common size percentages, fund analysis,

trend analysis and ratio analysis.

Ratio analysis is the power ful tool in the financial

statment analysis.

RATIO:

It is simple mathematical expression of the

relationship of one item to another. It shows the

relationship b/w statistical data.

RATIO ANALYSIS

INTRODUCTION:

Ratio analysis is a widely used tool of financial

analysis. It is defined as the “systematic use of

ratio to interpret the financial statements so that

the strengths & weaknesses of a firm, as well as

its historical performance & warrant financial

condition, can be determined.

Ratios make the related information comparable. A

single figure by itself has no meaning, but we

expressed in terms of a related figure. It yields

significant inferences. The ratio are relative

figures reflecting the relationship between related

variables. Their use, as tools of financial

analysis, in Volvos their comparison as single

ratios like absolute figures are not of much use.

Three types of comparisons are generally

involved; viz.

i. Trend Analysis

ii. Inter firm comparison and

iii. Comparison with standards/industry

average.

Trend ratios involve comparison of ratios of a firm

over a period of time, i.e., present same firm. The

comparison of the profitability of a firm, say, year

1 to year 5, is an illustration of a trend ratio.

Trend ratios indicate the direction of change in the

performance improvement, deterioration or

constancy over the years.

Inter firm comparison involves comparing the

ratios of a firm with those of others in the same

live of business, or for the industry as a whole.

This, it reflects the firm’s performance in relation

to its competitors.

Other types of comparison may relate to the

comparison of items within a single year’s

financial statement of a firm, and comparison with

standards or plans.

3. IMPORTANCE OF A/CING RATIOS:

The importance of accounting ratios, that is,

relationships worked out among various

accounting data which are mutually interdependent

& which influence each other in a significant

manner arises from the fact that often absolute

figures standing alone convey no meaning. They

become significant only when considered along

with other figures. A firm earns a profit of Rs.

1,00,000. This information is meaingress unless

their the figure of capital employed to earn it or of

sales affected is available. Even if an a obsolete

figure is considered significant, one may be

subconsciously aware of the other relevant

figures. When we say that so and so is fat, what

we are trying to say is that considering the age

and height of the person, he is over weight. Ratio

may be expressed as a rational figure or as a

percentage. For example the ratio of 3,00,000 to

2,00,000 may be expressed as 1.5 or 150%.

For purposes of analysis , accounting ratios are

indispensable. Suppose, sales have increased but

profit has fallen. One may be vaguely aware of the

causes, but for precise knowledge it will be

necessary to analysis all the figures competely.

For example, will have to ascertain the

contribution to higher sales by change in prices

and by increased or lower sales volume, the

consumption of materials with also be analysed

both for changes in prices and in quantities

consumed. Such analysis is greatly facilitated by

accounting ratios. In fact, a meaning ful analysis

of the financial situation and performance is the

first great advantage of a / ing ratios. This

requires ratios and their comparison which may

be:

i. For the same firm over a period for years

of

ii. For one firm against another or

iii. For one firm against the industry as a

whole or against predetermined standards

or,

iv. For one division or department of a firm

against other division for departments of

the same firm.

Inter firm comparison and intra firm comparison

are, this, both possible on the basis of accounting

ratios, this can also be attempted in other ways

but accounting ratios are in dispensalbe in this

respect. For example to judge which firm has the

best overall efficiency, one should compare the

rate of profit on capital employed for the firms

concerned the size of the profit as such is not

relevant.

Accounting ratios not only indicate the present

position, they also indicate the causes leading up

to the position to a large extent. Best results are

obtained when rtios for a number of years are put

in a tabular form so that the figures for one year

can be easily compared with those of other years.

A/cing ratios tabulated for a number of years

indicate the trend of the change. This helps in

ascertaining other figures if on figure is available.

5. ADVANTAGES OF RATIO ANALYSIS:

1. Simplifies financial statement: It

simplifies the comprehension of

financial statements . ratios tell the

whole story of changes in the

financial condition of the business.

2. Facilitates inter firm comparison: It

provides data for inter firm comparison

ratios highlight the factors associated

with successful and unsuccessful firm.

They also reved strong firms and weak

firms, over valved and under valved firms.

3. Helps in planning: It helps in planning

and fore casting. Ratios can assist

management in its basic functions of for e

casting, planning, co-ordination, control

and communication.

4. Makes inter firm comparison possible:

Ratio analysis also makes possible

comparison of the performance of

 differend divisions of the firm. The ratios

are helpful in deciding about their

efficiency or otherwise in the past and

likely performance in the future.

5. Helps in investment decisions: It helps in

investment decisions in the case of

investors and leading decisions the case

of bankers etc.

• Financial Management by khan and Jain.

• Advanced A/Cs 1992 M.C Shula and T.S.

grewal

• Advanced A/Cs by M.A. Ghani.

6. USES & APPLICATION OF RATIO ANALYSIS:

probably the most widely used financial analysis

techinque is ratio analysis. The analysis of

relationship between two or more line items of the

financial statement.

Fore example, a commonly used financial ratio, is

the current ratio which is the relationship between

current assets and current liabilities. Generally

financial ratio are calculated for the purpose of

evaluating four aspect of company’s operations:

ACCOUNTING RATIOS:

Item, e.g., stock turnover ratio, or the ratio of total

assets to sales. The most commonly used inter

statement ratios are given in the chart exhibiting

traditional classification or statement ratios.

(B) Classification according to Function or Tests.

Robert N. antony suggested that ratios may be

grouped on the basis of certain tests which satisfy

needs of the parties having financial interest in

the business concer. These tests are (I) Test of

Liquidity, (ii) Test of Profitability, (iii) Test of

Solvency etc. Under this classification ratios are

grouped as follows:
 CLASSIFICATION ACCORDING TO TESTS

Liquidity Ratio Long Solvency and Activity ratios a) in relation to

Leverage Ratios 1. Inventory sales
Financial Turnover 1. Gross
A) 1. Current
Operating Ratio Profit
Ratio
Composite 2. Debtors Ratio.
2. Liquid
1. Debt equity turnover 2. Operating
(Acid
Ratio ratio. Ratio.
Test or
Quick) 2. Debt to total 3. Fixed 3. Operating
capital ratio. Assets turn Profit ratio.
3. Absolute
3. Interest over Ratio. 4. Net Profit
Liquid
Ratio. coverage 4. Total Assets Ratio
ratio turnover 5. Expense
B) 1. Debtors
ratio.
Turn over 4. Cash flow Ratio.
Ratio. debt service 5. Working b) in relation to
ratio capital Investment
2. Creditors
turnover
Turn over 5. Capital 6 Return on
gearing Ratio.
Ratio. investment
6. Payable .
3. Inventory
turnover
Turn over 7 Return on
ratio
Ratio. capital
7. Capital employed.
employed
turnover 8 Return on
ratio. equity
capital.
9 Return on
total
resources.
10 Earnings
per share.
11 Price
earning
ratio
(a) Liquidity Ratios. These are the ratios which

measure the short term solvency or financial

position of a firm. These ratios are calculated to

comment upon the short term paying capacity of a

concern or the firm’s ability to meet its current

obligations. The various liquidity ratios and

absolute liquidity ratios are: current ratio, liquid

ratio and absolute liquid ratio.

(b) Long term Solvency and Leverage patios.

Long term solvency rations convey a firm’s ability

to meet the interest costs and repayment

schedules of its long term obligations, e.g., debt

Equity Ratio and interest coverage Ratio.

Leverage Ration show

1. Liquidity (m.a. Geni)

2. Activity or turnover of assets.

3. Leverage

4. Profitability (further defail M.A Gani)

1. Liquidity Ratio

It helps to user to assess the company’s

ability to meet currently maturing or shart

term obligations.

2. Activity or Turnover Ratio

it is useful for avaluating the

effectiveness with which the company

uses its assets.

3. Leverage Ratios

It provide information about the

company’s ability to meet both current

and long term obligations.

4. Profitability Ratios

It helpful for evaluating management’s

success in senerating returns for those who

provides capital to the company.

Each of these types of financial ratios in

discussed thus applicable in business life.

USES AND OF ACCOUNT RATIOS:

• The impartance of a/c ratios, that is ,

relationship worked out among various

a/c data. Lwhich are mutually

interdependent and which influence each

other in a significant manner arises from

the fact aht aften absolute figure standing

alone convey no meaning. They become

significant only when consider along with

the other figures. Ratio may express as a

rational figure or as a percentage figure

e.g. the ratios of 300000 to 200000 may

be expressed as 1.5 or 150%.

• For the purpose of analysis the a/c ratios

are indispensiable. Suppase sales has

inereased along profit has fallen. One

may vasuely aware of the causes. But for

precise knowledge it is better to analysis

all the figure completely. So ratios are

helpful to make comparison.

• Infact the meaningful analysis of the

financial situation and the performance in

the first great advantage of financial

ratios. Our comparison may be.

i. For the same firm over a period of

year

ii. For one firm against another

iii. For one firm against the industry as

a whole or against predetermined

standards.

iv. For one division or department of

firm with other division or department

of firm.

• Inter firm comparison or intra firm

comparison thus both possible with ratio

analysis e.g. to judge the efficiency of

two firm one should compare the rate of

profit on the capital employed for the firm

concerned.
• A/c ratios not only indicate the present

position .They also indicate the causes

leading to the position to a large extent

e.g. a/c ratios may indicate not only that

financial position is precarions but also

the past policies which have caused it.

• Best results are obtained when ratios for

a number of years are put in a tabular

form so that the figures of one year can

be easily compared with thase of the

other year.

• A/c ratios tabulated for a number of years

indicate the trend of changes. This helps

preparation of estimates for the futures.

• Ratio also help ascertaining other figures

if one figure in reliable suppase it is

known that ratio of wages to sales is 15%

it is than easy to calculate the amount to

be spent on wages if the amount of

 expected sales is known.

• Ratio can be used to produce faceast

statement e.g. one would make direct

statemnt of all the items on the balance

sheet by progecting financial ratios into

the future and than making estimate on

the basis of these ratios.

• Financial ratios may be computed for

analysis of the statement. Jthese ratios

and the raw figures can be compared with

those of the present and past financial

statements using this infarmation the

financial manager can analyze the

direction of changes in the financial

condition and performance of the firm

over the past, the present, and the future.

ADVANTAGES OF RATIO ANALYSIS:

Ratio Analysis is an important and age ord

technique of financial analysis.

The following are the show of the advantages of

ratio analysis.

1. SIMPLIFIES FINANCIAL STATEMENTS:

It simplifies the comprrohension of financial

statements . ratio tells whole story of charges

in financial comditions of the business.

2. FACILITATES INTER FIRM COMPARISON

it provides the data for inter firm comparison.

Ratios highhights the factors associated with

successful firm, they also reveal strong firms

and weak gfirms over valved and under valved

firms.

3. HELPS IN PLANNING:

it helps in planning and fore casfing, ratio can

sassist managemnt. In its basic finctions of

forecasting, planning, co-ordination, contror

and communications.

4. MAKES INTER FIRM COMPARISON

POSSIBLE:

ratio analysis also makes possible comparison

of the performance of different divisions of

the firm. Lthe ratios are helpful in deciding

about their efficierly, other wise in the past

and likely performance in The FUTURE.

5. HELPS IN INVESTMENT DECISIONS:

it helps in investment clecisions in the case of

investors and rending decision in the case of

bankers etc.
BIBLIOGRAPHY:

Name of Books

1)

2)

3) Fundamentals of Financial management

James c.

Van
Horne.

4) Advance accounting M.A.

Gani

1. INTRODUCTION

2. NEEDS FOR FINANCIAL STATEMENT

ANALYSIS

3. TYPES OF FINANCIAL STATEMENT

ANALYSIS

4. RATIO DEFINTION

5. IMPORTANCE OF ACCOUNTING RATIOS

6. ADVANLAGES OF RATIO ANALYSIS

7. APPLICATION AND USES OF RATIO

ANALYSIS

8. CONCLUSION