Financial statement analysis

Financial statement analysis, analysis and interpretation, ratio analysis, fund flow statement, cash flow statement, Indian accounting standards,

1. FINANCIAL STATEMENT ANALYSIS DR.C.SAHILA ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE SRM INSTITUTE OF SCIENCE AND TECHNOLOGY CHENNAI

2. INTRODUCTION Financial statements are the end products of the accounting process, which reveals the financial results of the specified period and financial position as on particular date. It is the basic and formal annual report through which a business communicates financial information to its various user groups.

3. NATURE OF FINANCIAL STATEMENT 1. Recorded facts 2. Accounting conventions 3. Postulates(Assumptions) 4. Personal Judgements

4. OBJECTIVES To provide an accurate and reliable financial information To provide overall changes made in the financial information To provide an accurate and reliable financial information To provide financial information which helps the top management

5. FINANCIAL STATEMENT ANALYSIS Financial Statement Analysis means the process of systematic analysis of the financial information of the company for a particular period of time.

6. FSA consist of the Comparison of

7. ANALYSIS Analysis – To Analyse – to cut into pieces But only analyse – No – It means also Interpretation. Thus Financial Statement Analysis means “Analysis, comparisons and interpretation of Financial data to achieve the desired result”

8. Comparative Statement This helps to understand the comparative position of financial and operational performance at different period of time. Two major types of comparative : Comparative Balance Sheet Analysis Comparative Income Statement Analysis

9. Common Size Statements A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. Types of common size statements (1)Common Size Balance Sheet (2)Common Size Income Statement

10. Trend Analysis Trend analysis evaluates an organization’s financial information over a period of time. Periods may be measured in months, quarters, or years, depending on the circumstances.

11. Ratio analysis is a particular type of financial statement analysis where the relationship between two or more items from the financial statements is analyzed . A particular ratio might include information from various sources, including information not typically contained in the financial statements, such as market price of a stock.

12. FUND FLOW STATEMENT

13. LIST OF INDIAN ACCOUNTING STANDARDS

14. MCQ

15. Question Consolidated financial statements are prepared on the principle In form the companies are one entity, in substance they are separate. In form companies are separate, in substance they are one. In form and substance the companies are one entity. In form and substance the companies are separate. Answer c) In form and substance the companies are one entity.

16. Question Comparison of the financial statements of the current year with the performance of previous years of the same firm', is known as Trend analysis Horizontal analysis Intra firm comparison All the above Answer d) All the above

17. Question X' Ltd. has a liquid ratio of 2:1. If its stock is Rs. 40,000 and its current liabilities are of Rs. 1 Lakh, What will be the current ratio________. 1.4 times 2.4 times 1.2 times 3.4 times Answer b) 2.4 times Liquid Ratio = [Current Assets minus Stock]/ Current Liabilities             2      = [Current Assets -  40000 ]/  100000      200000  = Current Assets -  40000 Therefore, Current Assets =  Rs.240000 Now, Current Ratio = Current assets/Current liabilities                         =  240000/100000                          =  2.4  times

18. Question A company proposes to introduce a new product in the market. The company wants to maintain P/V Ratio at 25%. If variable cost of the product is Rs 300, what will be the selling price ? 100 200 300 400 Answer d) 400 P/V Ratio = contribution / sales ×100 let the sales is  x 25 % = x- 300 / x ×100 0.25 % = (x - 300 ) / x 0.75%x = 300 x =  300 / 0.75= 400 sales price = 400

19. Question Assertion (A): Accounting information refers to only events which are concerned with business firm. Reason (R): Accounting information is presented in financial statements. is correct, but (R) is wrong. Both (A) and (R) are correct. (A) is wrong, but (R) is correct. (D) Both (A) and (R) are wrong. Answer:   (b) Both (A) and (R) are correct.

20. Question The main objective of Accounting Standards is To prepare the accounting reports which is easily understood by common man. To comply with the legal formalities. To harmonise the diversified accounting practices. To comply with the requirements of the International Accounting Standards (IAS). Answer:   c) To harmonise the diversified accounting practices.

21. Question Given below are two statements: I. Activity ratios show where the company is going. II. Balance Sheet ratios show how the company stand. Codes: I is correct, but II is wrong. Both I and II are correct. I is wrong, but II is correct. Both I and II are wrong. Answer:   b) Both I and II are correct.

22. Question If the current ratio is 2: 1 and working capital is Rs. 60,000, what is the value of the Current Assets? Rs. 60,000 Rs. 1, 00,000 Rs. 1, 20,000 Rs. 1, 80,000 Answer:   ( c ) Rs. 1, 20,000 working capital = current assets - current liabilities. 1 = 2 – 1 (WC) 1 60,000 (CA) 2 Cross Multiply = 60,000 x 2 / 1 Current assets = 120000

23. Question The statement of cash flow clarifies cash flows according to a ) Operating and Non-operating Flows b ) Inflow and Outflow c ) Investing and Non-operating Flows d ) Operating, Investing, and Financing Activities Answer: d ) Operating, Investing, and Financing Activities

24. Question Which item comes under financial activities in cash flow? Redemption of Preference Share Issue of Preference Share Interest Paid All the above Answer: d) All the above

25. Question Match list I and list II a b c d A) iii iv ii i B) ii i iv iii C) ii iii i iv D) i ii iii iv Answer D) i ii iii iv List I List II a) Ind AS 16 i ) Property, land and equipments b) Ins AS 17 ii) Leasing c) Ind AS 12 iii) Income Tax d) Ind AS 38 iv) Intangible Assets

26. Question The funds available with a company after paying all claims including tax and dividend is called a ) Net Profit b ) Net Operating Profit c ) Capital Profit d ) Retained Earnings Answer d ) Retained Earnings

27. Question Which one of the following is not an example of ‘financing activities’ with reference to cash flow statement ? Repayment of bank loan Interest on debentures/Dividend paid Cash proceeds from public deposits Sale of fixed assets Answer d) Sale of fixed assets

28. Question When accounting standard board has been constitute a) 21 Feb 1977 b) 21 March 1977 c) 21 April 1977 d) 21 May 1977 Answer c) 21 April 1977

29. Question When equipment is sold for cash, the amount received is reflected as cash? a) Inflow in the operating section b) Inflow in the financing section c) Inflow in the investing section d) Outflow in the operating section Answer c) Inflow in the investing section

30. Question Which of the following cash flows results from an operating activity? a) Paying dividends to stockholders b) Repaying note payable c) Receiving interest on investment d) Purchasing equipment Answer c) Receiving interest on investment

31. Question Fund flow statement is based on the concept of… business entity accounting period going concern all of the above Answer c) going concern