FINANCIAL STATEMENT

ANALISIS
By
MATHEW JOSE
Financial Statements
 
Financial statements contain summarized
information about the financial affairs of a firm,
organized systematically as per the accounting
principles. These statements are used by investors,
creditors and analysts to examine the firm’s
performance
The major financial statements are:

Balance Sheet: It indicates the financial position of

the business at a particular moment of time. It
communicates information about the assets, liabilities
and owner’s equity for a business firm on a specific date.
Profit and Loss Account: It indicates the earning
capacity of the firm. It presents the summary of
revenues, expenses and net income (or loss) of a firm.
Net income is the amount by which the revenues
earned during a period exceed the expenses incurred
during the same period.
Financial Statement Analysis

Financial statement analysis helps in understanding

the information contained in the financial statements
in a better manner. It helps in knowing the strengths
and weaknesses of a firm, thereby enabling the firm in
decision-making as well as in forecasting aspects
related to future. The objectives of financial statement
analysis are:
To establish relationship between the various
components of financial statements and in finding
their relative importance.
To assess the profitability and operating efficiency of
the firm as well as the various divisions of the firm.
To provide useful information to different sections of
individuals. The parties usually interested in the
information revealed by financial statement analysis
are shareholders, creditors, financial institutions,
analysts and the management itself.
To help in comparing the performance of the firm over
a period of time. It also helps to compare the
performance of the firm with its competitors or with
industry standards.
NATURE OF FINANCIAL STATEMENT
1. BASED ON RECORDED FACTS
2. ACCOUNTING CONVENTIONS
3. POSTULATS
4. PERSONAL JUDGEMENT
FUNCTIONS/USES/IMPORTANCE OF FINAL
STATEMENT
 FOR MANAGEMENT
 FOR THE FINACIERS
 FOR THE CREDITERS
 FOR INVESTERS
 OWNERS
 FOR EMPOYEES
 FORCONSUMERS
 FOR STOCK EXCHANGERS
 FOR TAX AUTHORITIES
 FOR GOVERNMENT
 FOR TRADE ASSOCIATIONS ANDPROFESSIONSL
SOCIETIES
 FOR RESERCHERS AQND ACADEMICANS
 Tools for Analysing Financial Statements

Ratio Analysis: Ratios are quantities that establish

relationship between two variables. Ratio analysis helps in
studying various aspects like liquidity, efficiency, profitability
and solvency of the firm. Ratio analysis can be performed in
two ways:
- Comparative Analysis: It helps in analyzing whether the
ratios computed for the firm are within limits when compared
to certain standards or other firms in the industry. Ratios of the
firm can also be compared with the previous ratios, in order to
identify the existing trend.
- Du Pont Analysis: It helps in computing the profitability of
the firm in terms of net profit margin and asset turnover.
Funds Flow Analysis: Balance sheet and P&L
statement do not reflect the changes in the assets and
liabilities of the firm over a period of time. This
purpose is achieved by the Statement of Changes in
Financial Position, also referred to as the Funds Flow
Statement/Analysis. It summarizes the changes in
owner’s equity, firm’s assets, and liabilities resulting
from financial and investment transactions during the
period; and the way in which the firm used its
financial resources during the period.
Limitations of Financial Statement
Window-dressing: It refers to the practices at the year end that
make balance sheets look better than they otherwise would. In such
situations the whole process of analyzing the financial statement is
futile as the ratio would no longer reflect a correct picture.
Developing benchmarks for diversified companies: Diversified
companies often have divisions operating in significantly different
industries. The financial information that hey publish consolidates
the results of those different operations into one set of statements.
In such a situation it becomes difficult to find an appropriate
benchmark as there might be no company which is into similar
operations as the diversified firm.
Price-level changes: Inflation often distorts financial statements.
Real estate purchased years ago, will be carried on the balance sheet
at its original cost. During periods of rapid inflation, inventory, cost
of goods sold, and depreciation can badly distort the true results.
Discrepancies in accounting principles: Accounting principles
allow a great deal of latitude in reporting. Using different accounting
policies, similar companies might report the same thing differently. For
example, two companies that are similar in their operations might
account for depreciation in a different way. One company might follow
written down value method and the other might follow straight-line
depreciation. This in turn will affect the net income and the ratios that
are computed for the two firms.
Interpretation of results: Interpretation of ratios is not always clear.
For example, a low inventory turnover ratio indicates that the amount
of investment in inventories is less which might lead to stock-outs. But
at the same time a very high inventory turnover ratio is also not
desirable as it indicates that a large amount of cash that could have
been used for other profitable purposes is locked up in the form of
inventories.
Correlation among ratios: Existence of some amount of correlation
between the ratios might also lead to misinterpretation