MANAGEMENT ACCOUNTING PRESENTED BY M.PITCHAIMANI, M.Com;M.Phil;M.B.A.

Financial Statement Analysis The term ‘financial statements' refer to a package of statements such as balance sheets,income statements,statement of retained earnings,fund flow statements & cash flow statements. The balance sheet & income statement are traditional financial statements. Other statements are prepared to supplement them. Financial Statement Analysis The term ‘financial statements' refer to a package of statements such as balance sheets,income statements,statement of retained earnings,fund flow statements & cash flow statements. The balance sheet & income statement are traditional financial statements. Other statements are prepared to supplement them.

Definition According to the American Institute of Certified Public Accounts,(AICPA). “Financial statements reflect a combination of recorded facts,accounting principles and personal judgements.”

Objectives: 1.To estimate the earning capacity of the undertaking. 2.To judge the financial ( Both liquidity and Solvency ) position and financial performance of the concern. 3.To determine the debt capacity of the concern. 4.To decide about the future prospect of the concern.

Nature of financial statements 1.Recorded facts: Recorded facts refers to the data taken out from accounting records.Facts which have not been recorded in the financial books are not depicted in the financial statements,however important they might be. EX : Fixed assets value - cost price only recorded irrespective of the market price (or) replacement price. Nature of financial statements 1.Recorded facts: Recorded facts refers to the data taken out from accounting records.Facts which have not been recorded in the financial books are not depicted in the financial statements,however important they might be. EX : Fixed assets value - cost price only recorded irrespective of the market price (or) replacement price.

2.Accounting principles: Certain accounting principles,concepts and conventions are followed in the preparation of financial statements. EX : A. Stock valuation principle. Cost price (or) Market price whichever is lower. B.Asset valuation principle. Cost price less Depreciation. 3.Personal judgements: Personal judgements have an important bearing on the financial statements. EX : The selection of a method of Depreciation, Stock valuation depends on Personal judgements of the accountant.

Analysis and Interpretation Analysis and Interpretation of financial statements is the most important step in accounting.To have a very clear understanding of the profitability and financial statements have to be analysed and interpreted. Analysis and Interpretation Analysis and Interpretation of financial statements is the most important step in accounting.To have a very clear understanding of the profitability and financial statements have to be analysed and interpreted.

‘Analysis’ refers to he methodical classification of the data given in the financial statement. ‘Interpretation’ means explaining the meaning and significance of the data so arranged.It is the study of relationship between profit & capital employed,current assets & current liabilities,sales & gross profit have to be explained.

Further to make Interpretation more meaningful,comparisons have to be made. Analysis and Interpretation are closely related.Interpretation is not possible without analysis and without interpretation analysis has no value.Hence the term analysis is widely used to refer both analysis and interpretation.

Analysis & Interpretation of financial statement analysisrequire: 1.Methodical classification of the data given in the financial statements. 2.Explaining the meaning and significance of the relationship between various financial factors. 3.Comparison of these relationships.

Limitations: 1.It is a interim report only, they do not present exact final report.It can be known only at the time of business closed. 2.Many items in the financial statements are based on personal judgment of the accountant.This affects the validity financial statements. 3.In balance sheet the assets are valued at original cost.Replacement value (or)Realisable value are ignored.It will not reveal the true position of the business. Limitations: 1.It is a interim report only, they do not present exact final report.It can be known only at the time of business closed. 2.Many items in the financial statements are based on personal judgment of the accountant.This affects the validity financial statements. 3.In balance sheet the assets are valued at original cost.Replacement value (or)Realisable value are ignored.It will not reveal the true position of the business.

4.Non monetary factors such as credit worthiness,reputation of the management, influence of the financial position of the concern.But the financial statements do not take into account of these. 5.Financial statements ignore the changes in price level. Hence their use is limited during inflation stage. 6.Financial statements are records the past events only.past can never be a perfect representative of future.

7.Financial statements are prepared on the basis of certain accounting concepts and conventions.any change in the method (or) procedure of accounting limits the utility of financial statements. 8.The balance sheet fails to show how working capital was raised and used during the year.This is the serious limitation as changes in working capital are important to assess the financial health of the company.

Comparative statements Financial statements are presented as on a particular date (or)for a particular period. But a financial analyst is interested in knowing whether the business is moving in a favourable (or) un favourable direction.For this purpose,figures of the current year have to be compared with those of the previous year(s). Comparative financial statements provide information to assess the direction of change in the business. Comparative statements Financial statements are presented as on a particular date (or)for a particular period. But a financial analyst is interested in knowing whether the business is moving in a favourable (or) un favourable direction.For this purpose,figures of the current year have to be compared with those of the previous year(s). Comparative financial statements provide information to assess the direction of change in the business.

In these statements figures for two (or) more periods are placed side by side to facilitate comparison. Any financial statement can be prepared in a comparative form.But in,practice balance sheet and income statement are alone prepared in a comparative form.Under the Companies Act 1956,companies are required to show values for the previous year together with current year values in their profit and loss account and balance sheet.

Comparative Balance sheet The single balance sheet shows the assets and liabilities on a certain date. The comprehensive balance sheet shows the value of assets and liabilities as on different dates. A comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increase or decrease in figures. A fourth column may be added for giving percentages of increase or decrease.

Thus while in a single balance sheet, the emphasis is on status, in the comparative balance sheet it is on change. Comparative balance sheet indicates whether the business is moving in a favourable or unfavourable direction. It is very useful for studying the trends in an enterprises.

Comparative Income Statement An income statement shows the operating results(net profit or loss of a business for a designated period of time. A comparative income statement shows the operating results for number of accounting periods so as to facilitate comparison. It gives an idea of the progress of a business over a period of time. It gives an idea about the improvement in sales, profit and other expenses over the previous year(s).

A comparative income statement has two columns for the figures of the original income statements. A third column is used to show increase or decrease in figures. A fourth may be added for giving percentage of increase or decrease.

Calculation of comparative income statement Sales Less: Cost of goods sold Gross profit Less: Operating expenses: General expenses Office expenses Selling & Distribution expenses Operating profit Add: Miscellaneous income Less: Non operating exp Interest paid & Income tax Other expenses (or) Deductions

Comparative income statement Particulars 2003 (Rs) (Rs) Increas e (Or) Decrea se (Rs) % Increase (Or) Decreas e (Rs) SALES COST OF GOODS SOLD GROSS PROFIT TOTAL OPERATING EXPENSES OPERATING PROFIT

Total operating expenses Particulars 2003 (Rs) 2004 (Rs) Increase (Or) Decreas e (Rs) % Increas e (Or) Decrea se (Rs) General expenses---- Office expenses20 -- Selling expenses Distribution expenses---- TOT. OPE.EXP

Calculation of % of Increase or Decrease Increase or Decrease Base Year or First Year

Specimen Comparative Balance sheet Assets 2003 Rs Rs. Inc / Dec Rs. % Inc / Dec Fixed assets Land Plant Furniture Building Machinery---- Fittings---- Total Fixed Assets

Assets 2003 Rs Rs. Inc / Dec Rs. % Inc / Dec Current assets Cash in Hand Cash at Bank---- Stock Sundry Debtors Bills Receivables---- Pre Paid Expenses---- Total Current Assets TOTAL ASSETS -FA -CA TOTAL

Liabilities 2003 Rs Rs. Inc / Dec Rs. % Inc / Dec Long term Liabilities Equity Share capital Preference Share Capital Reserves and Surplus Debentures Bank loan---- Total Long term Liabilities

Liabilities 2003 Rs Rs. Inc / Dec Rs. % Inc / Dec Current Liabilities Sundry Creditors Bills Payable Out Standing expenses ---- Tax Payable Dividend Payable---- Total Current Liabilities LTL CL TOTAL

Common size Statement Financial Statements present absolute figures. A comparison of absolute figures could be misleading. Ex:Cost of sales in absolute figures might have gone up but as a percentage of sales it might have come down. Common size Statement Financial Statements present absolute figures. A comparison of absolute figures could be misleading. Ex:Cost of sales in absolute figures might have gone up but as a percentage of sales it might have come down.