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Analysis and Interpretation of

Financial Statements
Dr. Ashutosh Kolte
PUMBA, University of Pune
Classification of Accounting
Accounting
Management Accounting Cost Accounting Financial Accounting
Types of Financial Statements
Profit and Loss Account
Balance Sheet
Fundamental Accounting Assumptions
Going Concern
Consistency
Accrual
Accounting Concepts and Conventions
Business Entity Concept
Conservatism
Materiality
Historical Cost Concept
Accounting Policies
Depreciation
Valuation of Inventories
Treatment of Goodwill
Recognition of Profit on Long Term contracts.
Treatment of Retirement Benefits.

Accounting Standards
Issued by ICAI
Mandatory
Represents ideal practice of Accounting
Consistency in presentation of Financial
Statements.
Ensures comparability of Accounts.
Disclosure of Accounting Policies.
International Accounting Standards
Importance
Globalization of the economy Indian
Companies going Global.
Appreciation by the Foreign Investors for
Accounts following IAS norms.



Contents of Annual Reports
Financial Statements
Notes to Accounts
Statement of Significant Accounting
Policies
Auditors Report
Directors Report
EVA at a Glance


Financial Analysis & control
Important tools in the hands of
management
Ratio Analysis
Fund Flow Statement
Cash Flow Statement
Horizontal and Vertical analysis
Trend Analysis
Common size statements
Duo Pont Analysis
Trading, P&L A/C
Particulars Rs. Particulars Rs.
To O/P Stock XXX By Sales XXX
To Purchases XXX By C/L Stock XXX
To Gross Profit c/f XXX
XXX XXX

To Expenses / depreciation /
interest / administrative
expenses, etc..
XXX
By Gross Profit b/d XXX
By income from
investment XXX
To Provision for tax XXX
To Net Profit c/f XXX
XXX XXX
P&L Appropriation A/C
Particulars Rs. Particulars Rs.
To Proposed Dividend XXX To Net Profit b/d XXX
To Transfer to General
Reserve XXX
To Net Profit transferred to
Balance sheet XXX
XXX XXX
Balance Sheet As On..
Liabilities Assets
Equity Share
Capital
XXX
Goodwill
XXX
Preference Share
Capital
XXX
Fixed Assets
XXX
Reserves &
surplus
XXX
Investments
XXX
Secured Loans
XXX
Current Assets
XXX
Unsecured Loans
XXX
Miscellaneous
Expenses (To
The Extent
Not Written Off)
XXX
Current Liabilities
& Provisions
XXX
Financial Ratio Analysis

Liquidity ratios
Profitability or Efficiency ratios.
Ownership ratios
* Earnings ratios
* Dividend ratios
* Leverage ratios
-- Capital structure ratios
-- Coverage ratios
Turnover Ratios

Liquidity ratios
Current ratio
Current Assets
Current Liabilities

Quick ratio (Acid-test ratio)

Quick Assets
Current Liabilities

* Quick assets =
Current Assets Inventories Prepaid Expenses
Taxes paid in advance.

Cash Ratio / Super Quick Ratio =

Cash + Marketable Securities
Current liabilities
Profitability or Efficiency ratios
Profitability ratios measure a firms overall
efficiency and effectiveness in generating profit.
before interest and tax (PBIT)
Margin
Net sales
after tax (PAT)
margin
Net sales
PBIT
return on investment
Net assets
Profit after tax
on equity
Equity (net worth)
Profit
Profit
Net
Before tax
Return

Gross Profit Margin Ratio (GPM)



Gross Profit
Net Sales
* Net Sales = Sales Excise Duty

Net Profit Margin Ratio (NPM)

Net Profit
Net Sales

Cost of Goods Sold Ratio =
Cost of Goods Sold / Net Sales

Operating Expenses Ratio =
(Administrative Exp +Selling Exp)
Net Sales
Operating Ratio =
Cost of Goods Sold + Operating Expenses
Net Sales

Particular Expenses Ratio =
Particular Expenses / Net Sales.
Ownership ratios
Equity-related ratios measure the shareholders
return and value.





Profit after tax
EPS
Number of ordinary shares
DPS
Number of ordinary shares
DPS
ratio
EPS Pr after tax
DPS
yield
Market value per share
Dividends
Dividends
Payout
ofit
Dividend

EPS
Earnings yield
value per share
value per share
P / E ratio =
EPS
Net worth
value per share
Number of ordinary shares
value per share
M Bvalue
Book value per share
Mar
'
Market
Market
Book
Market
Tobin s q

ket value of assets


Economic value of assets
Solvency Ratios / Leverage ratios

Also called as Capital structure ratios
Solvency ratios measure the dependence of a
firm on borrowed funds.

Debt
Debt-equity ratio
Equity (Net Worth)
Debt
ratio
Debt Equity employed
Earnings before interest and tax
coverage
Interest
Debt
Debt
Capital
Interest

Debt-assets ratio = Debt


Assets

*Coverage ratios

Interest coverage ratio

gives the relationship between the
financial charges of a firm and its ability
to service them.

. EBIT .
Interest expense

Debt service coverage ratio

PAT+ Depreciation+ other non-cash
charges + Interest on term loan
Interest on term loan + Repayment of
the term loan
Turnover ratios
Accounts receivable/ Debtors turnover ratio

= Net credit sales
Average accounts receivable

Average collection period

= 360
Av. accounts receivable turnover

= Av.accounts receivable
Av. daily sales
Asset turnover ratio =
Cost of Goods Sold
Av. Assets

Inventory turnover ratio =
Cost of goods sold
Av. Inventory

Debtors Turnover Ratio =
Total Credit Sales
Average Debtors + Average Bills Receivable
Income Statement
Sales XXX
Less Variable Cost XXX
Contribution XXX
Less Fixed Cost XXX
Operating Profit XXX
(Earning Before Interest & Tax)
Less Interest on debt XXX
Earning Before Tax XXX
Less Tax XXX
Profit After Tax XXX
Less Preference Dividend XXX
Profit Available to
equity Share holder XXX
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