CH-1 FINANCIAL STATEMENTS OF A COMPANY

NOTES-
Financial Statements are the end products of accounting process and are prepared at end of the accounting
period to reveal the financial position of the enterprise at a particular date and the result of its business
operations preparing an accounting period.

As per Section 2(40) of the Companies Act, 2013 Financial Statements includes:

1. Balance Sheet or Position Statement

2. Statement of Profit and Loss or Income Statement
3. Notes to Accounts.
4. Cash Flow Statement.

Annual reports are the summarized record of the financial position and all the events in the company’s
previous financial year.
contents of an annual report

1.A report by the Board of Directors

containing:sec 134 of co.act 2. Auditors` Report to the
2013,Directors responsibility shareholders.
statement,corporate Governance..

4.Notes to accounts-
3.financial statements. Accounting policies,Explanatory
notes explaining significant
transaction..
Proforma of Balance Sheet (As per Revised Schedule VI)
Q. State under which major headings and sub-headings will the following items be presented in the
Balance
 Sheet of a company as per Schedule-Ill, Part-I of the Companies Act, 2013. (CBSE Delhi 2019)
(i) Prepaid Insurance
(ii) Investment in Debentures
(iii) Calls-in-arrears
(iv) Unpaid dividend
(v) Capital Reserve
(vi) Loose Tools
(vii) Capital work-in-progress
(viii) Patents being developed by the company.
Answer:

Items Major heads Sub-heads

1. Prepaid insurance Current Assets Other curretn Assets

2. Investment in
Non-current Assets Non-current investment
debenture

3. Calls in Arrears Shareholders Fund Subscribed capital (less from subscribe but not fully paid)

4. Unpaid dividend Current liabilities Other current liabilities

5. Capital Reserve Shareholder Fund Reserve and Surplus

6. Loose tools Current Assets Inventories

7. Capital work in
Non-current Assets Fixed Assets (Capital work in progress)
progress

8. Patent being

developed by the Non-current Assets Fixed Assets (intangible asset under development

company

CH-2 FINANCIAL STATEMENTS ANALYSIS

NOTES
1. Financial Statement Analysis
It is the systematic numerical representation of the relationship of one financial fact with the other
to measure the profitability, operational efficiency, solvency and the growth potential of the
business.
2. Tools of Financial Statements Analysis:-
The most common used techniques of financial analysis are:
1. Comparative financial statements:
Comparative Financial Statements Statements used to compare the items of income statement i.e.
profit and loss account and position statement i.e. balance sheet for ascertaining the trend of the
performance and profitability of an enterprise are known as comparative financial statements.
2. Common size statements:
Common Size Statement The statement wherein figures reported are converted into percentage to
some common base is known as common size statement. Each percentage shows the relation of the
individual item to its respective total.
3. Ratio analysis
Ratio Analysis The mathematical expression that shows the relationships between various groups
of items contained in the financial statements is known as ratio analysis.
4. Cash flow statements
Cash Flow Statement It shows the inflows and outflows of cash and cash equivalents of an
enterprise by classifying cash flows into operating, investing and financing activities during a
 particular period and analysing the reasons for changes in balance of cash between the two balance
sheets dates.
Objectives or Purposes of Financial Statement Analysis:-
1 To measure the Profitability or Earning Capacity of the business -analysis helps in measuring the
profits and earning capacity of business. it helps in judging whether the profits are accurate or not.
2 To measure the Financial Strength of the business – analysis helps in understanding the financial postion
of the company. it helps in judging the financial health of the business.
3 To make Comparative Study within the firm (intra – firm) and with other firms (inter – firm)- analysis
helps in comparisons of financial statements. There are two types of comparisons-
1) intra firm- it is the comparison within the business ie previous year and current year or from one
department to another. it is also known as trend analysis.

2) inter firm- it is the comparison of one business to another ie comparing one company to another. it is
known as cross sectional analysis.

3) To judge the Efficiency of Management- profits and assets of the business helps in judging the
efficiency of the business ie whether the business is utilising its resources in an efficient manner or not.
4) To provide Useful Information’s to the Management- analysis helps the management to get useful
insight of the business which helps them in taking many managerical decisions.
5) To find out the Capability for payment of interest, dividend etc.- profitability of the business helps in
judging whether the business will be able to pay interest and dividend. analysis helps in judging the
capability of the business of paymnet of interest and dividend.
6) To measure the Short-term and Long-term Solvency of the business- analysis helps in judging whether
the business will be able to pay its short term and long term dues.

Limitation of Financial Statement Analysis

1. Based on basic financial statement which themselves suffer from certain limitations- financial
accounting has certain disadvantages itself which becomes the limitation of its analysis for example
financial accounting records only historical cost which becomes the limitation of its analysis.

2. Ignores changes in price level.- financial accounting analysis does not take in to consideration the
current changes in the prices in the economy.

3. Affected by the personal ability and bias of the analyst.- since analysis is done by the accountant
he or she applies their on personal judgement while using the tools of analysis which affect the
analysis.

4. Lack of qualitative analysis as only those transaction and events are recorded which can be
measured in terms of money.- only those transactions in financial statements can be analysed which
can be measured in money.

5. When different accounting policies are followed by the two firms then comparison between their
financial statement becomes unreliable.- since accounting is dependent upon personal judgement
of the accountant sometimes different policies adopted by accountant makes it difficult to compare
the financial statements

6. Analysis of single year’s financial statement have limited use- single year financial statements are
of limited use as they cannot be used for inter firm and intra firm comparisons.
 7. Also affected by the Window dressing- if the values of different assets and liabilities are not shown
at fair value the analysis will not give a fair picture of the business.

Types of Financial Statement Analysis:-

Horizontal Analysis: In this type of analysis, figure in the financial statements for two or more years are
compared and analyzed. It helps in knowing the trends of the business over a period of time. It is also known
as Time series analysis or Dynamic Analysis. Comparative statements and cash flow statements are
example of horizontal analysis.It is also known as intra firm analysis
Vertical Analysis: In this type of analysis, figures in the financial statement for a single year are analysed.
It involves the study of relationship between various items of Balance Sheet or statement of Profit & Loss
of a single year or period. It is also known as Static Analysis. Common size statements and ratio analysis
relating to a particular accounting period are examples of this type of analysis.It is also called inter firm
analysis.
Uses of financial Statements:

a. Securities Analysis: it is a process by which the investor comes to know whether the firm is
fulfilling his expectations with regard to payment of dividend, capital appreciation and security of
money.
b. Credit Analysis
c. Debt Analysis
d. Dividend Analysis
e. General Business Analysis

Parties Interested in Financial Statement Analysis and their Areas of Interest