Presentation on theme: " The term financial consideration is known as analysis and interpretation of financial statements. It refers to the process of determining financial."— Presentation transcript:
The term financial consideration is known as analysis and interpretation of financial statements. It refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of balance sheet, profit and loss account and other operative data.
ACCORDING TO :- Metcalf and Titard “ Financial consideration is a process of evaluating the relationship between components parts of a financial statement to obtain a better understanding of a firm’s position and performance.” Thus, the financial consideration refers to the process of obtaining relevant economic information about a project in order to established its financial viability. It is undertaken as one of the feasibility analyses in project formulation.
1. To assess the present and future earning capacity or profitability of the concern. 2. To assess the financial soundness and stability of business concern. 3. To assess the operational efficiency of the concern as a whole and its various departments. 4. To assess the short term and long term solvency of the concern for the benefits of the debentureholders and trade creditors. 5. To assess the possibility of developments in the future by making forecasts and preparing budgets.
6. To assess the long – term liquidity of the funds. 7. To undertake comparative study in regard to one firm with another firm or one department with another department.
a) TRADE CREDITORS:- Trade creditors are interested in firm’s ability to meet their claims over a very short period of time. They are interested in evaluating the firm’s liquidity position. b) SUPPLIERS OF LONG TERM DEBT :- The providers of long term debt are concerned with firm’s long term solvency and survival. They are interested in analysing the firm’s profitability over a period of time. They are equally concerned with the ability of the firm to generate cash to pay interest and principal amount to them on the stipulated period.
c) INVESTORS :- Investors who have invested their money in the company’s shares are very much concerned about the firm’s earnings. They always prefer steady growth in earnings and they concentrate on the analysis of the firm’s present and future profitability. d) MANAGEMENT OF THE FIRM:- Management of the firm is very much interested in the financial analysis. It is because the financial analysis indicates as to how the resources of the firm are used most effectively and efficiently. It is also possible to assess the financial soundness and stability of the company which is highly useful for managerial decision making.
The following procedure is adopted for the consideration of financial statements : i. The analyst should acquaint himself with the principles and postulates of accounting. He should know the plans and policies of the management so that he may be able to find out whether these plans are properly executed or not. ii. The extent of analysis should be determined so that the sphere of work may be decided.
iii. The data given in the financial statements should be reorganised and rearranged.it involves the grouping of similar data under same heads and breaking down of individual components of statements according to their nature. iv. A relationship is established among financial statements with the help of tools and techniques of analysis such as ratios, trends, common- size, funds flow, etc. v. The information is interpreted in a simple and understandable way. vi. The conclusions drawn from interpretation are presented to the management in the form of reports.
TYPES NATURE OF THE ANALYST OBJECTIVE MODUS OPERANDI OF THE ANALYSIS
EXTERNAL ANALYSIS THIS IS MADE BY THOSE PERSONS WHO ARE NOT CONNECTED WITH THE ENTERPRISE. EXAMPLES:- INVESTORS, CREDIT AGENCIES, GOVERNMENTAL AGENCIES AND RESEARCH SCHOLARS. INTERNAL ANALYSIS THIS IS DONE BY THOSE PERSONS WHO HAVE ACCESS TO YHE BOOKS OF ACCOUNTS. THEY ARE MEMBERS OF THE ORGANISATION.
a) LONG TERM ANALYSIS – This analysis is made to study the long term financial position, profitability and earning capacity of a business concern. It helps the management in the long term financial planning of the business concern. b) SHORT TERM ANALYSIS – This analysis helps in assessing the short term solvency, stability and liquidity and earning capacity of the business. It helps to know whether the firm meets its short term financial requirements or not.
a) HORIZONTAL ANALYSIS – This analysis reviews and analyses financial statement of number of years. Hence, it is useful for long term trend analysis and planning. For eg – comparative financial statement. b) VERTICAL ANALYSIS – This analysis reviews and analyses the financial statements of one particular year only. For eg – ratio analysis.
1. COMPARATIVE STATEMENTS:- The comparative financial statements show the financial position at different periods of time. These are design to show : i)absolute fig. ii)change in absolute figures ( increase or decrease in absolute figures ) iii) change in terms of percentage.
The comparative statement can be prepared for both income statement and balance sheet. (a)COMPARATIVE INCOME It gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentage can be determined to analyses the profitability of the business. This statement has four columns. While the first two columns give figures of various items for two years, last two columns show increase or decrease in figures in absolute amounts and percentages respectively.
31 st march 2005 - 2006 Rs.(‘000 ) Rs.(‘000) Increase (+) Decrease (-) Amount Rs. (‘000) Net Sales Less: cost of goods sold Administrative Expenses selling exp. Total Operating exp. Operating profit (---- ) Insterest paid Increase (-) Decreas (-) Percentages Gross profit Operating expenses: Net profit before tax Less (-) Income tax Net profit after tax
b) COMPARATIVE BALANCE SHEET :- the comparative balance sheet facilitates the study of the trend of the same items, group of items in two or more balance sheets of the same firm on different dates. It has two columns for the data of original balance sheet. Third column is used to show increase or decrease in figures. The fourth is used for giving the % of increase or decrease.
Items Year ending 30 th june 2005-2006 Increase/decrease (amount) Assets:Current Ass. Cash and bank Bills Receives Sunday debtors Stocks debtors Stock Prepaired expenses Total Fixed Assets Land and building Plant and machinery Furniture Other Fixed Assets Total Fixed Assets Fixed assets Increase/ decrease percentage Total asset
Liabilities and Capital Current Liabilities Bills payable Sundry creditors Other current liabilities Total Current Liabilities Debentures Long Term loans on Mortgage Total Liabilities Equity share capital Reserves and Surplus Total
This statements indicates the relationship of various items with some common items (expressed as percentage of common items ). (a) common-size income statement – in this sales figure is taken as base and all other figures are expressed as % of sales.
A statement in which balance sheet items are expressed as the ratio of each assets to total assets the ratio of each liability is expressed as a ratio of total liabilities is called common balance sheet.
Current assets Share capital reserves CO. CO. Assets Fixed assets Amount (Rs) % % Total fixed assets Total assets Total capital reserves Long term loans Current liabilities Total of liability side Total current liabilities
Trend analysis is a technique with the help of which the financial statements can be analysed by computing trends for a series of information.
The sales have increased continuously in all the years The figures of stock have also increased from 2000 to 2004.the increase in stock is more in 2003 and 2004 when compared to earlier years. The profit before tax has also increased.
This statement is prepared in order to reveal clearly the various sources where from the funds are procured to financed the activities of a business a concern during an accounting period. It also brings to highlight the uses to which these funds are put during the said period.
This statement is prepared to know clearly the various sources of cash inflows and cash outflows. It is helpful in valuating the current liquidity of a business concern. Thus,it is useful in short term financial analysis. It also helps the executives in the efficient cash management and internal financial management.
The technique helps in the development of meaningful relationship between individual items or group of items usually shown in the periodical financial statements. An accounting ratio shows the relationship between the two interrelated accounting figures.
1. Historical nature of financial statement 2. No substitute for judgment 3. Reliability of figures 4. Single year analysis is not much useful 5. Different interpretations 6. Choice of tool of analysis