FINANCIAL STATEMENT

ANALYSIS
Is the use of analytical and financial tools to examine and
compare financial statements in order to make business decision
 Purposes of Financial Analysis

• Measuring the profitability

FSA helps in ascertaining whether adequate
profits are being earned on the capital
invested in the business or not. It also helps in
knowing the capacity to pay interest and
dividends
• Indicating the trend achievement

FS of the previous years are compared and

the trend regarding accounts ( expenses,
purchase, sales) can be ascertained. Value of
assets and liabilities can be compared and the
future prospects of the business are envisaged
• Assessing the growth potential of the
business

the trend and other analysis of the business

provides sufficient information indicating
the growth potential of the business
• Comparative position in relation to other
firms

to help the management make a

comparative study of the profitability of the
business from the various business engaged
in similar activities.
• Assess overall financial strength

Analysis of financial statement helps in

determining the strength of the business.
• Assess solvency of the firm

the different tools of analysis will tell

whether the firm has a sufficient funds to
meet its short term and long term liabilities
or not.
 TECHNIQUES OF FINANCIAL
STATEMENT ANALYSIS
• Cross Sectional Analysis
• Time Series Analysis
• Cross sectional cum time series analysis
 Cross Sectional Analysis
• also known as inter firm comparison. This
analysis helps in analyzing financial character
of a business with the characteristics of other
similar business in accounting period
 Time Series Analysis
also known as intra-firm comparison. The
relationship between different items in a
financial statement is established,
comparisons are made and results
obtained. It can be:
– Comparison of FS of different years of the
same business unit or department
– Comparison of FS of a particular years of
different business unit or department
Cross sectional cum time series
analysis

this analysis intended to compare the

financial characteristics of two or more
enterprise for a defined period of time. It’s
the most effective technique in analyzing of
financial statement.
TOOLS IN FINANCIAL STATEMENT
ANALYSIS

• Comparative Financial Statement- is the

comparison of financial statements of the
business with the previous year’s financial
statement.
• It enables identification of weak points and
applying corrective measures. Practically,
two financial statements are prepared in
comparative form of financial analysis.
 Comparative Balance Sheet
(Horizontal Analysis)

• Shows the different assets and liabilities of

the firm on different dates to make
comparison of balances from one date to
another.
The following are the Balance Sheets of Study
Hard Corporation for the year 2014 and
2015. Prepare the comparative Balance
Sheet and study the financial position of
the entity
 For the Year Ending December 31
2014 2015
ASSETS
Current Assets
Cash in Hand 20, 000 40, 000
Accounts Receivable 100,000 80,000
Sundry Debtors 200,000 250,000
Stock 250,000 350,000
Prepaid Expense - 2,000
Total Current Assets 570,000 722,000
Fixed Assets
Land and Building 270,000 170,000
Plant and Machinery 400,000 600,000
Furniture and Fixtures 20,000 25,000
Other Fixed Assets 25,000 30,000
Total Fixed Assets 715,000 825,000
TOTAL ASSETS 1,285,000 1,547,000

LIABILITIES
Current Liabilities
Accounts Payable 50,000 45,000
Sundry Creditors 100,000 120,000
Other Current Liabilities 5,000 10,000
Total Current Liabilities 155,000 175,000
Non-Current Liabilities
Debentures 200,000 300,000
Long Term Loan on Mortgage 100,000 150,000
Total Long term Liabilities 300,000 450,000
TOTAL LIABILITIES 455,000 625,000

EQUITY
Equity Share Capital 500,000 700,000
Reserved and Surplus 330,000 222,000
Total Owned Equities 830,000 922,000
TOTAL LIABILITIES AND 1,285,000 1,547,000
CAPITAL
 FINANCE MANAGER
• A person who deals finance related activities
 FUNCTIONS OF FINANCE MANAGERS

• Forecasting Financial Requirements

• Acquiring Necessary Capital
• Investment Decision
• Cash Management
• Interrelation with Other Departments
 OBJECTIVES OF FINANCIAL
MANAGEMENT
• PROFIT MAXIMIZATION
• WEALTH MAXIMIZATION
 PROFIT MAXIMIZATION
• Represents the process by which profits of the
business are increased. In simply words, all
the decision whether investments, financing
or dividends are focused to maximized the
profit to the optimum level.
• It is the traditional approach and the primary
objective of financial management –it means
that all the decisions relating to business is
evaluated by profit
 ADVANTAGES OF PROFIT
MAXIMIZATION
• Economic Survival – profit maximization
theory is based on the profits and profits are
must for survival.
• Measurement Standard – profits are the true
measurement of the success of the business.
Without profit the survival of the business are
in risk
 LIMITATIONS OF PROFIT
MAXAMIZATION
• The term profit is a vague term – vague means
no clear meaning. There is no clear definition of
what profits is being maximize if it is net profit,
gross profit or after tax profit.
• Ignores Time Value of Money –
TVM – the money available at the present
time is worth more than the same amount in the
future
• Ignores the Risk- A decision solely based on
profit maximization model would take decision in
favor of the profit
 WEALTH MAXIMIZATION
• It’s the modern approach to financial
management. The main objective of the
business is to maximize wealth

• WEALTH- is defined as the market price of the

capital invested by shareholders. The term
wealth means shareholders’ wealth or the
wealth of the persons involved in the business
concern
 ADVANTAGES OF WEALTH
MAXIMIZATION
• The wealth maximization is based on cash
flows and not in profit
– Unlike the profits, cash flows are exact and
definite.
• Wealth maximization considers the Time
Value of Money
• Considers the risk and uncertainty
– Unlike the profit maximization, wealth
maximizations consider the risk and uncertainty in
making decisions.
Basic Comparison Profit Maximization Wealth Maximization

Concept The main objective of the concern is to The main goal of the concern
earn a larger amount of profit is to improve the market value
of the shares

Emphasize on Achieving short terms objective Achieving long term objective

Consideration of No Yes
Risk

Time Value of Not Consider Consider

Money

Term Vague Exact and Definite