Financial analysis is the process of identifying financial strengths & weaknesses of the firm by establishing relationship between the

items of balance sheet and profit & loss account. The term financial analysis also known as Analysis and Interpretation of financial statements.

To assess the earning capacity or profitability of the firm To make inter firm comparison To help in decision making and control To provide proper information for granting credit To guide or determine the dividend action To assess the progress of the firm over a period of time

FOR FOR FOR FOR FOR FOR

MANAGEMENT CREDITORS INVESTORS THE GOVERNMENT THE STOCK EXCHANGE THE BANKERS

First and foremost need the information is to the owners of the business, without the information in a financial statement it would be very difficult to make any important business decision. It explains the facts relating to Creditability, Efficiency, Performance and Financial control. As the Management is able to decide the course of action taken in future.

 From

the analysis of Financial Statements, the creditors can ascertain the liquidity of business.They also get information regarding long-term financial soundness& Profitability.

The Investors includes Both longterm and Short term investors. They can analyse the financial position and earning capacity of business. With the help of financial analysis ,they can determine the rate of dividend in the previous year and can forecast future rate.

 The

Financial Statements are used to assess tax liability of business enterprises. These Statements enables the government to find out whether business is following various rules or regulations or not.

The Stock Exchanges deal in purchases and sale of securities of different companies. The Financial Statements enable the stock brokers to judge the financial position of different concerns. The fixation of prices for securities, etc., is also based on these statements.

The Banker is interested to see that the loan amount is secure or not. The banker analyses the balance sheet to determine financial strength of the concern. It is through the financial statements that banker can keep a watch on the business plans and performances.

Comparative

statement

THE COMPARATIVE FINANCIAL STATEMENTS ARE STATEMENTS OF THE FINANCIAL POSITION AT DIFFERENT PERIODS; OF TIME. THE ELEMENTS OF FINANCIAL POSITION ARE SHOWN IN A COMPARATIVE FORM SO AS TO GIVE AN IDEA OF FINANCIAL POSITION AT TWO OR MORE PERIODS. ANY STATEMENT PREPARED IN A COMPARATIVE FORM WILL BE COVERED IN COMAPARATIVE STATEMENTS

FROM PRACTICAL POINT OF VIEW , GENERALLY TWO FINANCIAL STATEMENTS ( BALANCE SHEET AND INCOME STATEMENT)ARE PREPARED COMPARATIVE FORM FOR FINANCIAL ANALYSIS PURPOSES.
NOT ONLY THE COMPARISON OF THE TWO FIGURES OF TWO PERIODS BUT ALSO BE RELATIONSHIP BETWEEN BALANCE- SHEET AND INCOME STATEMENT ENABLES AS IN DEPTH STUDY OF THE FINANCIAL POSITION AND OPERATIVE RESULTS.

COMPARATIVE STATEMENT MAY SHOW:

1.

2.

3. 4.

ABSOLUTE FIGURES (RUPEE AMOUNTS ) CHANGES IN ABSOLUTE FIGURES I.E. INCREASE OR DECREASE IN ABSOLUTE FIGURES ABSOLUTE DATA IN TERMS OF PERCENTAGES INCREASE OR DECREASE IN TERMS OF PERCENTAGES

Comparative size Statement

Comparative Balance-sheet

Comparative Incomestatement

COMPARATIVE BALANCE SHEET

A COMPARATIVE BALANCE SHEET SHOWS THE BALANCES OF ACCOUNTS (PERSONAL AND REAL) ON DIFFERENT DATES & ALSO THE EXTENT 0F THEIR INCREASE OR DECREASE BETWEEN THESE DATES THROWING LIGHT ON TREND & DIRECTION OF CHANGE IN THE POSITION OVER THE PERIOD. THIS ENABLES THE USER TO PREDICT THE FUTURE POSITION OF THE BUSINESS

WHEN DATA OF TRADING & PROFIT &LOSS ACCOUNT AND BALANCE SHEET FOR A DEFINITE NUMBER OF CONSECUTIVE YEARS ARE PUT IN ADJACENT COLOUMNS THEY ARE CALLED COMPARATIVE FINANCIAL STATEMENTS. IN PREPARING THESE STATEMENTS , THE ITEMS ARE PLACED IN ROWS AND YEARS OR FIRMS ARE EXHIBITED IN THE COLOUMNS

FORMAT

OF COMPARATIVE -BALANCE SHEET

PARTICULARS

PREVIOU S YEAR
--------------------------------------------

CURRENT INCREASE \DECREAS -YEAR

E
------------------------------------------------------------------------------------------------------------

%CHANGE (BASE 1ST YEAR )

-------------------------------------------------------

A.FIXED ASSETS B.INVESTMENTS C.WORKING CAPITAL(CURRENT ASSETS-CURRENT LIABILITIES ) D.CAPITAL EMPLOYED(A+B+C)

------------

----- ----- -----------------------------------------------------------------------

E.LESS LONG TERM DEBTS(DEBENTURES,BONDS ETC )

SHAREHOLDERS FUND(D-E)

REPRESENTED BY : 1. EQUITY SHARE CAPITAL 2. PREFERENCE SHARE CAPITAL NET RESERVE & SURPLUS(AFTER MISC.EXPENDITURE)

-------------------

FORMULA FOR :
PERCENTAGE OF CHANGE (INCREASE OR DECREASE)=

INCREASE / DECREASE FIGURES OF PREVIOUS YEARS

* 100

EXAMPLE: SUPPOSE IN PREVIOUS BUILDING IS RS.5,OO,OOO & IN CURRENT YEAR IT IS RS.600,000.THE INCREASE IS RS.100,000 %AGE OF INCREASE = 100,000 *100 500,000 =20%

PARTICULARS
LIABILITIES: SHARE CAPITAL RESERVE LONG TERM LOANS TOTAL ASSETS : FIXED ASSETS SUNDRY DEBTORS BANK BALANCE TOTAL

2009 RS
40,000 12,000 50,000 1,02,000 80,000 10,000 12,000 1,02,000

2010 RS
70,000 10,000 50,000 1,30,000 1,02,000 20,000 8,000 1,30,000

PARTICULARS

2009 RS 80,000

2010 RS 1,02,000

ABSOLUTE CHANGE 22,000

%AGE CHANGE 27.5

A.TOTAL FIXED ASSETS B.CURRENT ASSETS SUNDRY DEBTORS BANK BALANCE TOTAL CURRENT ASSETS C. TOTAL ASSETS ( A+B) D. LONG TERM LOANS E.SHAREHOLDERS FUND (C-D)

10,000 12,000 22,000 1,02,000 50,000 52,000

20,000 8,000 28,000 1,30,000 50,000 80,000

10,000 (-) 4,000 6,000 28,000 NIL 28,000

100 (-) 33 27.28 27.5 NIL 53.85

TOTAL (D + E )
REPRESENTED BY : SHARE CAPITAL RESERVE SHAREHOLDER FUND

1,02,000

1,30,000

28,000

27.5

40,000 12,000 52,000

70,000 10,000 80,000

30,000 (-) 2,000 28,000

75 (-)16.7 53.85

COMPARATIVE INCOME STATEMENT

THE INCOME STATEMENT SHOWS THE NET PROFIT OR NET LOSS DUE TO BUSINESS OPERATIONS. A COMPARATIVE INCOME STATEMENT SHOWS INCREASE OR DECREASE IN ABSOLUTE FIGURES OF THE INCOMES & EXPENSES. IT SHOWS THE OPERATING RESULTS FOR A NUMBER OF ACCOUNTING PERIODS SO THAT THE CHANGES IN ABSOLUTE DATA IN TERMS OF MONEY AND PERCENTAGE FROM ONE PERIOD TO OTHER MAY BE STUDIED AND ANALYZED.

WHILE STUDYING THE CHANGES SHOWN IN INCOME STATEMENT ,THE FOLLOWING FACTORS SHOULD BE CONSIDERED :-

1.

CAUSES OF CHANGE IN SALES :INCREASE / DECREASE IN QUANTITY OF GOODS SOLD CHANGE IN SELLING PRICE OF GOODS CHANGE IN QUANTITY SOLD AS WELL AS CHANGE IN COST OF GOODS SOLD
2. CAUSES CHANGE IN CHANGE IN CHANGE IN OF CHANGE IN COST OF GOODS SOLD :DIRECT EXPENSES DIRECT PURCHASES INVENTORY

3. CAUSES OF CHANGE IN GROSS PROFIT INCREASE / DECREASE IN SALES INCREASE / DECREASE IN DIRECT EXPENES INCREASE / DECREASE IN OPENING & CLOSING STOCK INCREASE / DECREASE IN PURCHASES

FORMAT OF COMPARATIVE INCOME STATEMENT

PARTICULARS

PREVIOUS YEAR RS --------------------

CURRENT YEAR RS

INCREASE/ DECREASE RS

%AGE

NET SALES (I.E.AFTER RETURNS) LESS : COST OF GOODS SOLD GROSS PROFIT (A)

--------- ---------- ------------ ---------- ------------ ---------- ----------

LESS : OPERATING EXPENSES OFFICE & ADMINISTRATION SELLING & DISTRIBUTION TOTAL OPERATING EXPENSES(B)
OPERATING PROFIT (A-B ) ADD: NON OPERATING PROFITS TOTAL PROFITS LESS: NON OPERATING EXPENSES NET PROFIT BEFORE TAX LESS: TAX

--------- -------- ----------------- ----------------- -

--------- --------- ---------- ---------------------------------------------------------------------------------

--------- --------- ------------------------------ ---------------- --------

OPENING STOCK ADD: PURCHASES LESS: RETURNS DIRECT EXPENSES LESS: CLOSING STOCK

COST OF GOODS SOLD MEANS :-

2.OPERATING EXPENSES INCLUDES RENT OF OFFICE , STATIONARY ,SALARIES TO STAFF , ADVERTISEMENT , SALESMAN , SALARIES & COMMISSION , DELIVERY VAN EXPENSES , BAD DEBTS ETC. 3. NON OPERATING INCOME INCLUDES INSURANCE CLAIM RECEIVED , PROFIT FROM SALE OF ASSETS , GOVERNMENT SUBSIDY , DIVIDEND ON SHARES , INTEREST ON SECURITIES 4.NON OPERATING EXPENSE INCLUDES LOSS ON SALE OF ASSETS , WRITING OFF GOODWILL , DISCOUNT ON SHARES & DEBENTURES WRITTEN OFF

PARTICULARS
SALES COST OF GOODS SOLD INDIRECT EXPENSES PROVISION FOR TAX

2009 RS
4,00,000 2,00,000 75,000 50,000

2010 RS
5,00,000 3,00,000 1,00,000 65,000

PARTICULARS
SALES LESS: COST OF GOODS SOLD GROSS PROFIT LESS:INDIRECT EXPENSES NET PROFIT BEFORE TAX LESS:PROVISION FOR TAX NET PROFIT AFTER TAX

2009 RS

2010 RS

ABSOLUTE CHANGE 1,00,000 1,00,000 NIL 25,000 (-)25000 15,000 (-)40,000

%AGE CHANGE 25 50 NIL 33.33 (-)20 30 53.33

4,00,000 5,00,000 2,00,000 3,00,000 2,00,000 2,00,000 75,000 1,00,000

1,25,000 1,00,000 50,000 75,000 65,000 35,000