MODULE 1: Financial Statements Analysis

• They provide a summary of the accounting of a business enterprise, the balance-sheet reflecting the assets, liabilities and capital as on a certain data and the income statement showing the results of operations during a certain period.

  Financial Statements
• It is also called as profit and loss account, which reflects the operational position of the firm during a particular period.

  Income Statement
• It is also called as balance sheet, which reflects the financial position of the firm at the end of the financial year.

  Statement of Financial Position
• It helps to ascertain and understand the total assets, liabilities and capital of the firm.

  Statement of Financial Position
• It is also called as statement of retained earnings. This statement provides information about the changes or position of owner’s equity in the company.

  Statement of Changes in Owner’s Equity
• It helps to understand the changes in financial position from one period to another period.

  Statement of Changes in Financial Position
• It involves two important areas such as fund flow statement which involves the changes in working capital position and cash flow statement which involves the changes in cash position.

  Statement of Changes in Financial Position
• It is largely a study of the relationship among the various financial factors in a business as disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements.

  Financial Statement Analysis
• It is a comparative evaluation of the financial statement for two or more period, to calculate absolute and relative variances for every line of item.

  Horizontal Financial Analysis
• It is a proportional evaluation of the financial statement wherein each item on the statement is expressed as a percentage of the total, in the respective section.

  Vertical Financial Analysis
• TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

  • Ratio Analysis
  • Comparative Financial Statements
  • Trend Analysis
  • Common Size Analysis
  • Funds Flow Statement
  • Cash Flow Statement
• It is an analysis of financial statement at different period of time. This statement helps to understand the comparative position of financial and operational performance at different period of time.

  Comparative Financial Statements
• This helps to understand the trend relationship with various items, which appear in the financial statements. These percentages may also be taken as index number showing relative changes in the financial information resulting with the various period of time. In this analysis, only major items are considered for calculating the trend percentage.

  Trend Analysis
• These figures reported which are converted into percentage tosome common base. In the balance sheet the total assets figures is assumed to be 100 and all figures are expressed as a percentage of this total. It is one of the simplest methods of financial statement analysis, which reflects the relationship of each and every item with the base value of 100%.

  Common Size Analysis
• It helps to understand the changes in the financial position of a business enterprise between the beginning and ending financial statement dates.

  Funds Flow Statement
• It is a statement which shows the sources of cash inflow and uses of cash out-flow of the business concern during a particular period of time.

  Cash Flow Statement
• It is a mathematical relationship between one number to another number.

  Ratio
• It is used as an index for evaluating the financial performance of the business concern.

  Ratio
• It shows the mathematical relationship between two figures, which have meaningful relation with each other.

  Accounting Ratio
• VARIOUS TYPES OF FINANCIAL RATIOS

  • Liquidity Ratio
  • Activity Ratio
  • Solvency Ratio
  • Profitability Ratio
• They are assets that can be easily converted into cash and cash equivalents.

  Current Assets
• EXAMPLES OF CURRENT ASSETS:

  • Cash
  • Cash equivalents
  • Short-term deposits
  • Accounts receivables
  • Inventory
  • Marketable securities
  • Office supplies
• They are assets that cannot be easily and readily converted into cash and cash equivalents.

  Fixed or Non-Current Assets
• EXAMPLES OF NON-CURRENT OR FIXED ASSETS:

  • Land
  • Building
  • Machinery
  • Equipment
  • Patents
  • Trademarks
• They refer to obligations due to within the next twelve months from the accounting date.

  Current Liabilities
• EXAMPLES OF CURRENT LIABILITIES:

  • Accounts Payable
  • Accrued Expenses
  • Short-term Debt
• The owed invoices to suppliers/vendors for products and services already received.

  Accounts Payable
• The payments owed to third parties for products and services that were already received, yet the invoice has not been received to date.

  Accrued Expenses
• The portion of the debt capital that is coming due within twelve months.

  Short-term Debt
• They refer to obligations due more than one year from accounting date.

  Non-Current Liabilities
• EXAMPLES OF NON-CURRENT LIABILITIES:

  • Long-term Debt
  • Deferred Revenue
  • Bonds Payable
  • Notes Payable
  • Pension Benefit Obligations
  • Product Warranties
  • Deferred Tax Liabilities
• The portion of a company's total debt with the maturity date beyond one year.

  Long-term Debt
• The payments received by customers for products or services not yet provided (i.e., unearned revenues).

  Deferred Revenue
• The amount of company owed to bondholders, assuming the bond's maturity is outside of the next year.

  Bonds Payable
• The amount the company owes to financiers for any money lent that is due outside of the next year.

  Notes Payable
• The payments associated with long-term pension plans offered to employees.

  Pension Benefit Obligations
• Obligations that the company expects to pay to customers for the replacement or repair of any goods sold.

  Product Warranties
• Taxes owed by a company that will be paid at some point in the future, but not in a current period.

  Deferred Tax Liabilities
• Provides information on a company's ability to meet its short-term, immediate obligations.

  Liquidity Ratio
• Provides information on the amount of income from each dollar of sales.

  Profitability Ratio