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Process of Analysis and Interpretation of Financial

Statement

Analysis Interpretation

Types of Analysis and Interpretation of Financial statements

Ratio analysis
Common size
statement analysis
Comparative financial Fund flow analysis
statement analysis
Trend analysis Cash flow analysis

Comparative Analysis of Financial Statement.

1. Comparative Income statement analysis
2. Comparative Balance sheet analysis

Format of comparative Income statement Analysis

Particulars P Y C Y Amt. (inc. or dec.) Inc or dec in %
Sales
Less: cost of goods sold
Gross profit
Less: operating expenses
Office expenses
Selling expenses
Distribution expenses
Net operating profit (GP – OE )
Less: Net operating expenses
Add: Net operating Income
Net Profit Before Tax (EBT)
Less: Tax
Net Profit After Tax (PAT)

CHANDAN G.B
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Format of Comparative Balance Sheet Analysis

Particulars P Y C Y Inc or dec. in Amt. Inc or dec in %
Liabilities :
a) Share capital :
Equity share capital
Preference share capital
Total (a)
b) Reserves and surplus :
Reserves
Surplus
Total (b)
C) Long term borrowing :
8% Debentures
Long term borrowing
Secured loans
Un-secured loans
Mortgage loans
Security deposit
Short term borrowings
Total (c)
d) Current Liabilities :
Creditors
Bills payable
Bank overdraft
Total (d)
Total liabilities (a+b+c+d)
Assets :
a) Fixed assets
Total (a)
b) Current assets
Total (b)
Total (a+b)

CHANDAN G.B
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Common size financial Statement Analysis

1. Common size income statement
2. Common size Balance sheet

Format of common size income statement

Particulars PY % CA %
Sales
Less: cost of goods sold
Gross profit
Less: operating expenses
Office expenses
Selling expenses
Distribution expenses
Net operating profit (GP – OE )
Less: Net operating expenses
Add: Net operating Income
Net Profit Before Tax (EBT)
Less: Tax
Net Profit After Tax (PAT)

Common Size Balance Sheet

Particulars PY % CY %
Share capital
Reserves and surplus
Proprietors fund (a)
Liabilities :
8% debenture
long term bank borrowing
creditors
Bills payable
Bank overdraft
Total liabilities (b)
Total (a+b)
Assets
Total assets (a)
Current assets
Cash
Debtors
Cash
Total current assets (b)
Total (a+b)

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A) Liquidity Ratio or Short term solvency Ratio

1) Current ratio = Ideal Ratio = 2:1
2) Acid Test Ratio or Quick or Liquid Ratio
Acid Test Ratio =
Ideal or standard quick ratio, which is generally expected, is 1:1.
It mean`s foe every quick liability there should be at least once quick asset.
Quick Assets = Current Assets – (stock +prepaid expenses)
3) Absolute Liquid Ratio or Pure liquid Ratio
Absolute Liquid Ratio =

B) Capital Structure Ratio or leverage Ratio

1) Debt-equity ratio =
2) Net-worth ratio =
3) Fixed Assets to Net worth ratio =
Net fixed assets = Gross Fixed assets-Depreciation
Net worth = Equity and equity related item`s
4) Current Assets to Net worth ratio =
5) Capital Gearing ratio
CGR=
Fixed interest dividend bearing securities = Debentures +Long term loans+
Public deposits + preference share capital
Equity Fund = Equity Capital + Reserves.
6) Solvency Ratio =

C) Turnover Ratio or Activity Ratio

1) Stock turnover Ratio =
Cost of goods sold = Sales – Gross profit
Opening stock + purchases +direct expenses – Closing Stock
Average Stock = Opg. stock + Clg.Stock/2
2) Debtor turnover Ratio =
Net Annual credit sales = Total sales – cash sales
(NOTE: Total sales mean`s net sales i.e., after deducting sales return’s)
Average trade debts= opg. Debtors + Closing Debtors/2
Debtors for this purpose includes, Gross debtors + Bills receivables

3) Creditor`s Turnover ratio =

Net annual credit purchase = Total purchases – cash purchases.
(NOTE: total purchases means net purchases after purchase returns)
CHANDAN G.B
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Average trade creditors = opg.Creditors +Clg.Creditors/2

Debt collection period:
Debt collection period =
Debt payment period:
Debt payment period =
4) Working capital Turnover Ratio =
Net sales = Total sales – sales returns
Working capital = Current assets – current liabilities
5) Fixed Assets Turnover Ratio =
6) Current Assets turnover ratio =
Net sales = Total sales – sales returns
Current Assets = Debtors + Stock + Bills receivable + cash in hand
+ Cash at bank + short term investments.

D) Profitability Ratio’s
1) Gross profit Ratio =
Gross profit = Net sales – cost of goods sold or
Opg.stock + purchase +Direct expenses – (Net sales + clg.stock)
2) Net profit Ratio`s =
Net profit = GP + non-operating incomes – operating and non-Operating
expenses.
Net sales = Total sales- sales Return
3) Operating Ratio =
Operating cost = cost of goods sold + operating expenses
4) Expenses ratio =
5) Operating Profit ratio =
Operating profit = (net profit + non-operating expenses) – non-Operating incomes
6) Return on Capital Employed =
Return on capital employed = Operating profit or earnings before the Interest &
taxes.
Capital employed = Owner`s fund + long term borrowings – (Goodwill and
fictitious assets)
7) Earnings per share ratio
EPSR= Earnings available to equity share holders/Number of share holders
Earnings available to shareholders means net profit after tax
& distribution of dividend to preference shareholders.
Number of shareholders = Total equity capital/Face value per share
8) Price – Earnings ratio = market price per equity share/Earning per Equity share.

CHANDAN G.B
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Fund flow statement

Steps involved in preparation of Fund flow statements
The procedure or the steps involved in the preparation of fund flow Statement as follows:
Step 1: preparation of the schedule of changes in working capital.
Step 2: preparation of adjusted profit and loss account.
Step 3: preparation of ledger accounts to bring out the hidden information
Step 4: preparation of Fund flow statement.
Format of the schedules of change in working capital.
Particulars PY CY Change in W C
Inc Dec
A. Current Assets
Cash
Bank
Debtors
Bills receivable
Inventories
Prepaid Expenses
Short term loans and
Advances
Total CA (A)
B. Current liabilities
Sundry Creditors
Bills payable
Banks overdraft
Outstanding expenses
Total CL (B)
C. Working Capital (A-B)
D. Inc or dec in WC
Dr. Preparation of adjusted profit & loss Account Cr.
Particulars Amt Particulars Amt
To Depreciation A/c By Balance b/d
To preliminary expenses Written off A/c (Opening balance of P&L A/c)
To Contribution to debenture redemption By profit on sale of Assets
fund A/c By non-operating incomes
To Goodwill written off By Funds from operation
To Transfer to general reserve A/c (balance figure)
To Provision for taxation
To proposed dividend
To loss on sale of assets
To Balance c/d(closing stock of P/L A/c)
To Fund operation (balance figure)
XXX XXX

CHANDAN G.B
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Dr. Preparation of ledger Account Cr.

Particulars Amt Particulars Amt
To Balance b/d xxx By Balance c/d xxx
To Cash A/c xxx
XXX XXX

Dr. Provision for Taxation A/c Cr.

Particulars Amt Particulars Amt
To Cash A/c (income tax paid) xxx By Balance b/d xxx
To Balance C/d xxx By Adjusted P/L a/c
(provision)
XXX XXX

Preparation of Fund flow statement

Statement of Sources and Application of funds
Sources
1) Issue of share capital
2) Issue if debentures
3) Long loans and advances
4) Sale of fixed assets
5) Trading income
6) Funds from operation
7) Decrease in working capital
Amt Application Amt
1) Increase in working capital
2) Redemption of shares
3) Redemption of debentures
4) Repayments of loans
5) Payment of dividend
6) Purchase of investments
7) Purchase of fixed assets
8) Non-trading expense
9) Funds to operation
XXX XXX

CHANDAN G.B
9964322171