FIN807: FINANCIAL STATEMENT ANALYSIS

Financial statement analysis (or financial analysis) is the process of reviewing and
analyzing a company's financial statements to make better economic decisions. These
statements include the income statement, balance sheet, statement of cash flows, and a
statement of changes in equity.

Topic 1 Framework for Financial Statement Analysis

Learning Outcome The student shall be able to explain the need for financial statement
analysis and discuss the accounting regulation in preparation of financials.

Performance Criteria

After studying this topic, the students should be able to:

1. Explain why financial statement analysis is needed;

2. Briefly describe the principal financial statements: Statement of Financial position;
Statement of comprehensive Income, Statement of cash flows, statement of change in equity
and Disclosure notes;

Background - Business

• A business has one main motive – make profit

• Apart from that, it also has a lot of obligations to meet as well. Some of these are as
follows:
• Paying loans on time
• Meeting immediate cash expenses such as payroll, electricity, rent etc.
• Attracting more investors
• Follow accounting standards
• Ensure going concern concept is followed

Financial Statement Analysis

(Bansal, 2015) carried out a research on “A Comparative Analysis of the Financial

Performances of Selected Indian IT Companies During 2010 – 2014”. The aim of the analysis
was to carry out:

1. The financial ratio analysis to judge the earning capacity , financial soundness and
operating efficiency of a business organization.

2. To find out the use of ratio in accounting and financial management analysis helping the
management to know the profitability, financial position and operating efficiency of an
enterprise.

3. Its usefulness in business planning, forecasting and locating the weak spots in the business
even though the overall performance may be quite good.
4. Its usefulness as a measure of inter-firm and intra-firm comparison. Similarly, U (2015)
did “A Study on Financial Statement Analysis of Apollo Tyres Limited, Koch”. The aim of
the analysis was as follows: (shown on next slide)

1. The Evaluation of financial position of the Appollo tyres Ltd.

2. To evaluate liquidity position of Appollo tyres Ltd.

3. To determine resource utilization of Appollo tyres Ltd.

4. To determine the long- term solvency of Appollo tyres Ltd Thus, above are some of the
reasons why financial statement analysis is needed.

Usefulness of Financial Analysis

Similar to Purposes of Financial Statements Analysis

 Facilitate comparisons
 Used to highlight weaknesses and strengths
 Solvency Evaluation (Short-range and Long- range)
 Changes in Company Value (Owner’s net worth)
 Earnings and quality of earnings trends
 Management efficiency
 Utilization and control of organization resources (Assets)
 Cash generation efficiency of organisation
 Risk assessment

Principal of financial statements

1. Statement of financial position (also known as balance sheet)

2. Statement of comprehensive income (also known as income statement or profit and
loss statement)
3. Statement of cash flow
4. Statement of changes in equity
5. Disclosure notes

Topic 3 Analysis of Cash Flows

Learning Outcome

The student shall be able to analyze cash flow statement and examine a firms liquidity
position.

Performance Criteria

After studying this topic, the students should be able to:

1. Describe the three component of a cash flow statement;

2. Distinguish between direct and indirect method cash flow statements.
3. Understand how classification rules and accounting policies can affect the components of
the cash flow statement.

Cash Flow Statement

• Follows IAS 7 — Statement of Cash Flows

• Shows how changes in balance sheet accounts and income statements affect cash and cash
equivalents;
• Breaks the analysis down to

1. Operating
2. Investing and;
3. Financing activities

Operating Activities

Cash Inflows Cash Outflows

• From sale of goods or services
• From cash advances and loans made by
financial institutions relating to the entity’s
main revenue producing activities
• To suppliers for goods
• To employees for services
• To other persons/ entities for expenses
• To lenders for interest and other
borrowing costs
• To government for income tax, GST and
other fees and charges
• To other persons/ entities for materials
and contracts

Investing Activities

Cash Inflows Cash Outflows

• From sale of property, plant and • To purchase property, plant and
equipment equipment
• From sale of shares and debentures of • To purchase shares and debentures of
other entities other entities
• From repayment of advances and loans to • To lend money to other entities
other entities
• From interest received (or operating
activity)
• From dividends received (or operating activity)

Financing Activities

Cash Inflows
• From issue of shares Cash Outflows
• From issuing debentures, notes • To shareholders for share buy-backs and
• From borrowings (loans, mortgages) redemption of preference shares
• From grants
• To owners for dividends paid (or • To debenture holders for redemption
operating activity) or cash drawings
of debt
• To lenders to repay borrowings