BF 2

• A financial statement is an official document of the firm, which explores the entire financial information.
• The main aim of the financial statement is to provide information and understand the financial aspects of the firm. 
• Income statement

  Also called as profit and loss account.
• INCOME STATEMENT Reflects the operational position of the firm during a particular period. Normally it consists of one accounting year.
• Income statement:

  • Also called as profit and loss account
  • Reflects the operational position of the firm during a particular period
  • Determines the entire operational performance of the concern like total revenue generated and expenses incurred for earning that revenue
• Position statement:

  • Helps to ascertain and understand the total assets, liabilities, and capital of the firm
  • One can understand the strengths and weakness of the concern with the help of the position statement
• Statement of Changes in Owner’s Equity:

  • Also known as the Statement of Retained Earnings
  • Shows how a company’s owner’s equity has changed over time, specifically how retained earnings have been used in the business
• Statement of Changes in Financial Position:

  • Helps to understand the changes in financial position from one period to another period
  • Income statement and position statement show only about the position of the finance hence it can’t measure the actual position of the financial statement
• External Analysis:

  • Conducted by individuals or organizations outside the business, like investors, creditors, government agencies, and credit agencies
• Internal Analysis:

  • Helps to take decisions regarding achieving the goals of the business concern
  • Used to understand the operational performances of each and every department and unit of the business concern
• Horizontal Analysis:

  • Also known as dynamic analysis
  • Financial statements are compared over several years to make decisions
• Vertical Analysis:

  • Also known as static analysis
  • Assesses the relationships between various items in financial statements for a specific period
• Tools and Techniques to Analyze a Financial Statement:

  • Financial statement analysis is interpreted mainly to determine the financial and operational performance of the business concern
  • Comparative statement analysis helps to understand the comparative position of financial and operational performance at different periods of time
• Ratio Analysis:

  • Quantitative method of gaining insight into company’s liquidity, operational efficiency, solvency, and profitability by studying financial statements
  • Helps to compare a company's performance over time and with others in the same industry
• Liquidity Ratio:

  • Helps to understand the liquidity in a business which is the potential ability to meet current obligations
• Current Ratio:

  • Also known as working capital ratio
  • Assesses the overall liquidity of a company by comparing current assets to current liabilities
• Quick Ratio:

  • Also known as acid test ratio
  • Quick Ratio = Current Asset - Inventory / Current Liabilities
• Solvency Ratio:

  • Also known as stability ratio
  • Measures an enterprise's ability to meet its debt obligations
• Profitability Ratio:

  • Indicates how efficiently a company generates profit and value for shareholders
• Gross Profit Margin:

  • A measure of a company’s profitability, calculated as the gross profit as a percentage of revenue
• Operating Profit Margin:

  • Computed by deducting operating expenses from the gross profit
• Net Profit Margin / Return of Sales:

  • Overall measure of profitability
• According to Myres, “Financial statement analysis 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.
• Tools and Techniques to Analyze a Financial Statement

  FINANCIAL STATEMENT ANALYSIS

  is interpreted mainly to determine the financial and operational performance of the business concern.
• COMPARATIVE STATEMENT ANALYSIS 

  >>> An analysis of financial statement at different period of time.
• COMPARATIVE STATEMENT ANALYSIS Formula :

  Absolute Change= Current Year - Prior Year

  Percentage Change= Absolute Change/ Prior Year × 100
•  

  COMPARATIVE BALANCE SHEET ANALYSIS

  >>> Concentrates only the balance sheet of the concern at different period of time.
• COMPARATIVE PROFIT AND LOSS ACCOUNT ANALYSIS

  Under this analysis, only profit and loss account is taken to compare with previous year’s figure or compare within the statement.
• TREND ANALYSIS

  >>> Also known as Horizontal Analysis. 

  >>>An analysis of the company's trend by comparing its financial statements to analyze the market trend
• COMMON SIZE ANALYSIS

  >>> Also known as Vertical analysis.

  >>> A method of analyzing financial data in which each item in a financial statement is represented as a percentage of a base amount for the same time period.
• FUNDS FLOW STATEMENT

  Also called as statement of sources and uses of funds.

  It shows the increase or decrease in working capital or movement of funds. 
• 3 PARTS OF FUNDS FLOW STATEMENT

   

  Statement of Changes in Working Capital

  Statement of Fund from Operation

  Fund Flow Statement
• Cash Flow Statement

   is the summarized statement of cash receipts and cash payments of the firm between two or more financial periods.
• Cash: Cash in hand and demand deposits with the bank. (Cash in hand and cash at bank)
• Cash equivalent: Short-term highly liquid investments readily convertible into cash.
• Cash flows from Operating Activities

  Includes all activities that are reported on the income statement under operating income or expenses.
• Cash flows from Investing Activities

  Includes all cash transactions used to buy or sell long-term assets. Think of these as the company investing in itself.
• Cash flows from Financing Activities

  Includes all cash transactions that affect long-term liabilities and equity.
• RATIO ANALYSIS 

  Quantitative method of gaining insight into company’s liquidity.
• LIQUID RATIO

  • This ratio helps to understand the liquidity in a business which is the potential ability to meet current obligations