Comparative, common size and trend analysis.

By: Ankush Gupta Vaibhav Srivastava Ankesh.j. Dave Abhinav Upadhyay Mohit jain Vivek Gupta

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A financial statement is an organized collection of data according to logical and consistent accounting proceedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment of time as in a case of a balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement.

Techniques of financial statement analysis

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Trend analysis Common size statement analysis Funds flow analysis Cash flow analysis Ratio analysis Value added analysis Comparative statement analysis

Trend analysis
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Trend analysis seeks out and examines systematic historical patterns in financial statements or other quantitative data. Such analysis of data over time can vary from primarily descriptive techniques to more complex cause-and-effect methods. Here we minimizes discussion of cause-and-effect analysis and focuses on the descriptive methods of trend analysis

Trend analysis usually involves choosing one fiscal period as a base period and then expressing subsequent quantities as a percentage of the data associated with this base period. In the case of an income statement, changes in all items could be assessed in relation to the base period. Note that trend analysis can be performed to determine changes in the number of physical units as well as of amounts.

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These techniques generally compare the entity to itself. However, it is also possible to compare the entity to external points of reference through cross sectional analysis. This type of analysis compares the data being audited to an external norm or data generated by a similar external entity. However, examining data over time is generally not part of crosssectional analysis. Trend analysis as described here is related to a broader discipline called time series analysis. Time-series analysis may involve more advanced analysis techniques such as: ARIMA, which aids in detecting seasonal patterns and fluctuations Fourier, which reduces time-series information into underlying wave forms Time-lagged correlation, when a time lag exists between the predictor and dependent variables -- for example, between advertising and sales

Trend analysis is valuable when one wants to use historical data to predict future values or to calculate expected values for comparison to actual current values. Trend analysis is also useful for identifying unexpected variances that may indicate strategic or operational changes or entity weaknesses worthy of additional exploration and analysis.
The following is an example of a simple trend analysis: 1990 1991 1992 1993 Fund Equity 335,398 366,044 361,704 234,666 % Change -8.37% -1.20% -54.14% 1994 192,921 -21.64%

See more example at pg no 385 ( Ravi M. Kishore)

Advantages
Trend analysis can: ` reveal potentially fruitful areas of audit investigation ` detect significant variations over time ` be easily understood and communicated ` be readily accepted due to its widespread use

Disadvantages
Trend analysis can: ` provide little insight into the root causes of variations ` fail to indicate what the entitys normal or benchmark position is ` be undermined by frequent changes in financial reporting formats ` be heavily influenced by the choice of the base fiscal period

Common size statement analysis

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A company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company. While most firms don't report their statements in common size, it is beneficial to compute if you want to analyze two or more companies of differing size against each other. Common-size statements analysis expresses balance sheet components as a percentage of total assets and income statement components as a percentage of total revenue. This approach facilitates identifying deviations in the components of statements by focusing on relative differences through time.

Figures shown in financial statements- P&L account and balance sheet, income statement are converted to percentages so as to establish each element to the total figure of the statement. This statement will also assist in analyzing the performance over years and also with the figures of competitive firm in the industry for making analysis of relative efficiency. Common size ratio = item of interest
Reference item

Example

See more example at pg no 383 ( Ravi M. Kishore)

Comaparative statement analysis

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In brief, comparative study of financial statements is the comparison of the financial statements of the business with the previous years financial statements. It enables identification of weak points and applying corrective measures. Practically, two financial statements (balance sheet and income statement) are prepared in comparative form for analysis purposes.

The comparative balance sheet shows the different assets and liabilities of the firm on different dates to make comparison of balances from one date to another. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show change (increase/decrease) in figures. The fourth column may be added for giving percentages of increase or decrease.

While interpreting comparative Balance sheet the interpreter is expected to study the following aspects : (i) Current financial position andLiquidity position (ii) Long-term financial position (iii) Profitability of the concern

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Interpretation
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The comparative income statement given above shows that there has been an increase in net sales of 14.65%. The cost of goods sold has increased by 11%. This has resulted in increase of gross profit by 19.4%. Operating expenses have increased by 8%. The increase in gross profit is sufficient to cover the operating expenses. There is also an increase in net profit after tax of Rs 38000 i.e. 42.22%. It is concluded from the above analysis that there is sufficient progress in the performance of the company and the overall profitability of the company is good.
See more example at pg no 380 ( Ravi M. Kishore)

Thank u.