Financial Projection

FINANCIAL STATEMENT ANALYSIS

Financial statements are the result of the accounting process which begins with recording with recording of transaction. The accounting process involves recording, classifying, and summarizing business transaction in a systematic way. Financial statements relate to the third process viz. summarizing.

The term financial statement is also known as analysis and interpretation of financial statements. It refers to the process of determining the financial strengths and weakness of a firm by establishing strategic relationship between the items of the balance sheet, profit &loss account and other operative dataThe purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm.

DEFINITION - it is a process of evaluating the relationship between component parts of a financial statements to obtain a better understanding of a firms position and performance

OBJECTIVES

To estimate the earning capacity of a firm

To estimate the financial position and financial performance of a firm.

To determine the long term liquidity as well as solvency of a firm.

To determine the debt capacity of a business.

To decide about the future prospects of a firm.

METHODS
A number of financial statements are prepared for financial analysis. The following statements of financial analysis are generally for evaluating project report: Comparative statements

Trends analysis

Common size statements

Funds flow analysis

Cash flow analysis

Ratio analysis

Cost Volume Profit analysis

LIMITATIONS
The figure drawn from one year statements have limited use and value. it is dangerous and risky to depend solely upon them.

The basic nature of financial statements are historic. Past can never be the perfect representative of the future.Hence,further course of business action should be represented keeping in a view the nature of the past.

It is only a study of interim reports.

Financial analysis ignored.

is based upon only monetary information and non monetary items are completely

It does not consider change in prices levels.

Analysis is only a means and not an end in itself. The analysis has to make interpretation and draw his own conclusion. Different people may interpret the same analysis in different ways.

The condition and circumstances of one firm can never identical with that of another firm. Hence ,the figures of one firm are seldom fully comparable with another. analysis ignores the difference in the nature of products, procedures in accounting , cost of plant and machinery and so on.

FUND FLOW STATEMENTS

MEANING

The term funds flow means a chance in financial resources' arising from changes in working capital items and from financing and investing activities of the enterprise which may involves only non current items. The funds flow statements analyses only the causes of change in the firms working capital position. The statements of changes in financial position prepared to determine only the sources and uses of working capital between two dates of balances sheets is knows as funds flow statements.

A fund flow statements is a report on movement of funds explaining where from working capital originate and where into the same goes durning an accounting period.

The statements consists of two parts:

Sources of funds

Application of funds

The difference between the two shows the net changes in the working capital during the period

The basic object of this statements is to find out increase or decrease in the working capital durning a period by showing sources and uses of working capital.

Various Statement Names

Statement of sources and application of funds Statements of funds supplied and applied

Where got and where gone statements

Statements of resources and disbursed statements,

Funds received and disbursed statements

Funds movement statements

Inflow-

outflow

of

fund

statements,

etc.

DEFINITION

A fund flow statement can be defined as - " A statement of sources and application of funds is technical device designed to analyze the financial condition of a business enterprises between two dates.

OBJECTIVES
It is a tool of managing working capital It shows a picture about changes in working capital

It shows the sources of funds like funds from operation,issues of shares, sale of fixed assets, investment, etc.

Its find out how the resources' have been obtained and uses

Its also reveals the uses of funds like redemption of debenture and shares, repayment of ,purchases of fixed assets etc.

loan

To find out the financial strength and weakness of the business, it is very useful

IMPORTANCE
Fund flow statements determine the financial consequences or business operation.It shows how the funds were obtained and used in the past .Financial manager can take corrective actions. The management can formulate its financial policies dividend, reserve etc.on the basis of the statements. Its serves as a control devices, when comparing with budgeted figure.

Its points out the sound and weak financial position of enterprise.

Its points out the causes for changes in working capital.

It enable the bankers,Creditors,or financial institution in assessing the degree of risk involved in granting credit to the business.

The management can rearrange the firm's financing more effectively on the basis of the statements.

It tells whether sources of funds are increasing, decreasing or constant.

LIMITATIONS OF FUND FLOW STATEMENTS

The statements lacks originality because it is only rearrangement of data appearing in accounts books. Its indicates only the past position and not future Its indicates fund flow in a summary form and it does not show various chances which take place continuously.

When both the aspects of a transaction are current, they are not considered.

When both the aspects of a transaction are non current ,even they are not included in this statement.

Its is not an ideal tool for financial analysis.

Generally the fund flow analysis requires the preparation of two statements

Statements of changes in working capital - A statements of working capital prepared to represent the changes in working capital. Working capital represents the excess of current assets over current liabilities.

Fund flow statements - Fund flow statements is a statements which indicates various sources from which (working capital) have been obtained durning a certain period and the uses or application to which this funds have been put during the period. Generally, this statement is prepared in two formats:

T form or an account form

Report form

STATEMENTS OF CHANGES IN WORKING CAPITAL

PARTICULAR Current assets:

PREVIOUS YEAR RS.

CURRENT YEAR RS.

INCREASE RS.

DECREASE RS.

Cash in hand bank Debtors Bills receivable inventories Prepaid expenses Investments Total current assets Current liabilities: Sundry creditors Outstanding expenses Bank overdrafts Bills payable investment

Total current liabilities

PRO FORMA OF FUND FLOW STATEMENT

SOURCES OF FUNDS
Funds from operation

RS.

APPLICATION OF FUNDS
Redemption of preferences shares Redemption of debentures Repayment of loans Purchases of fixed assets Payment of taxes Payment of dividend Increase in working capital

RS.

Issues of shares capital Issues of debentures Raising of long term loans Sale of fixed assets Non trading receipt Decrease in working capital

REPORT FORMAT
PARTICULAR SOURCES Issues of shares Issues of debentures Raising of long term loan Sale of investment and other fixed assets Fund from operation Non trading items,e.g,dividend received Decreases in working capital TOTAL APPLICATION Redemption of preferences shares Repayment of loans Redemption of debentures Purchases of investment and other fixed assets Payment of taxes Payment of dividend Operating losses RS.

CASH FLOW STATEMENT

Cash Flow Statement

a statement which summarizes the sources of cash inflows & uses of cash outflows of a firm during a particular period of time, say a month or a year. Such a statement can be prepared from the data made available from comparative balance sheets, profit & loss A/c & additional information.

Advantages
Shows the major sources & uses of cash

Helps to evaluate the current cash position of the firm

Helps in making short-term financial decisions related to liquidity

Helps in taking loan from banks & other financial institutions

Helps the management in planning loan repayments, replacement of assets, credit arrangements, etc.

Significant for capital budgeting decisions

Facilitates to prepare sound financial policies of the firm

Approximate the firms future cash position to plan & coordinate its financial operations properly

Explains the cause for poor cash position by focusing on various cash applications of the firm

Limitations
Cash balance revealed in cash flow statement may not portray the true liquid position Cash fund does not mean the net income of the business Funds flow statement presents a more complete picture than cash flow statement Unsuitable for judging the profitability of a firm as it neglects non-cash transactions

Report Form
Particulars
Opening cash/bank balance Add: Cash inflows Cash from operations Issue of shares/debentures Sale of fixed assets/investments Raising of loans Dividend receipts Less: Cash outflow Purchase of fixed assets/investments Repayment of loan Payment of taxes Payment of dividend Drawings Cash lost in operations Repayment of preference shares & debentures Cash balance at the end

Amount (Rs.)

Amount (Rs.)

DEBT SERVICE COVERAGE RATIO

Debt-Service Coverage Ratio

DSCR = PAT + Depreciation + Interest on term debt + Lease rentals amortization Repayment of term debt + Interest on term debt + Lease rentals

DSCR
Highlights long-term solvency of the firm Indicates measure of amount available in payment of installments of term loans & interest due Suggests whether the business earns sufficiently to service the long-term debt with interest on it

Used by banks to consider the firms term loan application

Ratio of 2:1 is satisfactory

Lower ratio is acceptable but not below 1.33:1