1. Analysis of Financial Statements Cash Flow Statements
-Ashwani Khurana
ALTTC, Ghaziabad

2. Contents Financial Statement Analysis Cash Flow Statement
ALTTC, Ghaziabad

3. Financial Statements - Meaning
The financial statements are nothing but the financial information presented in concise and capsule form, and the financial information is the information relating to the financial position of any firm.
Final Product of the Accounting Process.
Indicate the completion of the accounting work for the period.
ALTTC, Ghaziabad

4. Financial Statements - Meaning
Should comply with the format and rules laid down by an enactment concerning the enterprise.
Comprises of
Balance Sheet
Profit & Loss Account (Income Statement)
Cash Flow Statement
ALTTC, Ghaziabad

5. Proforma Balance Sheet As On ______________________
Capital and Liabilities
Amount
Assets
Share Capital
Reserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities
Provisions
XXX
Fixed Assets XXX
Less: Dep XXX
Investments
Current Assets
Loans & Advances
Miscellaneous Expenditures
ALTTC, Ghaziabad

6. Proforma Profit & Loss Account For the Year Ending ______________________
Particulars
Amount
Cost of Goods Sold
Operating Expenses
Non-Operating Expenses
Interest
Provision for Tax
Net Profit (Balancing Figure)
XXX
Net Sales
Other Income
ALTTC, Ghaziabad

7. Analysis of Financial Statements – Meaning and Necessity
A comparison of one figure with another is a process of analysis and is helpful in analyzing the situation and diagnosing the problem.
ALTTC, Ghaziabad

8. Analysis of Financial Statements – Meaning and Necessity
Financial Statement Analysis
Process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.
Involves making comparisons and establishing relationship among related items.
It is linked with the purpose and interest of the agency involved.
ALTTC, Ghaziabad

9. Analysis of Financial Statements – Purpose
Purpose may be to seek information relating to:
Profitability
Solvency
Liquidity
ALTTC, Ghaziabad

10. Analysis of Financial Statements – Agency/Users
Investors
Government Authorities
Creditors
Banker
Employees
Management
ALTTC, Ghaziabad

11. Analysis of Financial Statements – Different Ways
External and Internal
External
Internal
Dynamic and Static
Dynamic (Horizontal)
Static (Vertical)
ALTTC, Ghaziabad

12. Analysis of Financial Statements – Techniques / Tools
Comparative Financial Statements
Common-Size Financial Statements
Trend Percentages Analysis
Ratio Analysis
ALTTC, Ghaziabad

13. Ratio Analysis - Meaning
A ratio is a relationship expressed in mathematical terms between two individual or groups of figures connected with each other in some logical manner.
Form of Ratios:
As a pure ratio like 4:1
As a rate of times like 2.5 times
As a percentage like 20%
ALTTC, Ghaziabad

14. Ratio Analysis - Uses
Ratios – Useful by product of financial statements.
Ratios – Provide standardized measure of firm’s financial position, profitability and riskiness.
Ratios – Useful in analyzing the performance of a firm from different points of view.
ALTTC, Ghaziabad

15. Ratio Analysis - Uses Helps in Inter-Firm Comparison.
Helps in Intra-Firm Comparison.
To analyse the weak spots as well as strong points of the enterprise.
ALTTC, Ghaziabad

16. Ratio Analysis - Classification
Liquidity Ratios
Profitability Ratios
Turnover Ratios
Leverage Ratios
Valuation Ratios
ALTTC, Ghaziabad

17. ALTTC, Ghaziabad Ratios Liquidity Profitability Turnover Leverage
Valuation
Current Ratio
Quick
Ratio
GP Ratio
NP Ratio
ROA Ratio
ROCE
Debt Equity Ratio
Debt Ratio
Interest Coverage Ratio
Inventory Turn over Ratio
Debtors Turn Over Ratio
Creditors Turn over Ratio
Fixed Assets Turn over Ratio
Assets Turn over Ratio
Price – Earning Ratio MV
to BV Ratio
ALTTC, Ghaziabad

18. Liquidity Ratios Current Ratio = Current Assets Current Liabilities
Quick Ratio = Quick Assets
ALTTC, Ghaziabad

19. Profitability Ratios Gross Profit Ratio = Gross Profit *100 Net Sales
Net Profit Ratio = Net Profit *100
ALTTC, Ghaziabad

20. Profitability Ratios Return on Assets Ratio
= Net Profit *100
Average Total Assets
Return on Capital Employed Ratio
Average Capital Employed
ALTTC, Ghaziabad

21. Turnover Ratios Inventory Turnover Ratio Debtors Turnover Ratio
= Cost of Goods Sold
Average Inventory
Debtors Turnover Ratio
= Net Credit Sales
Average Debtors
ALTTC, Ghaziabad

22. Turnover Ratios Creditors Turnover Ratio Fixed Assets Turnover Ratio
= Net Credit Purchases
Average Creditors
Fixed Assets Turnover Ratio
= Net Sales _
Average Fixed Assets
ALTTC, Ghaziabad

23. Turnover Ratios Assets Turnover Ratio = Net Sales _ Average Assets
ALTTC, Ghaziabad

24. Leverage Ratios Debt Equity Ratio Debt Ratio = Long Term Debt _
Total Shareholders Funds
Debt Ratio
= Total Debts
Total Assets
ALTTC, Ghaziabad

25. Leverage Ratios Interest Coverage Ratio
= Earnings before Interest & Tax
Interest
ALTTC, Ghaziabad

26. Valuation Ratios Price-Earnings Ratio Market Value to Book Value Ratio
= Market Price Per Share
Earnings Per Share
Market Value to Book Value Ratio
Book Value Per Share
ALTTC, Ghaziabad

27. Ratio Analysis - Limitations
Ratios are meaningful only in conjunction with the firm’s past performance or other firms or industry average. Taken by itself, a ratio provides only a limited information.
Ratios are subject to misinterpretation. Eg. A higher Current Ratio is considered better but beyond a certain limit it may signify inefficient use of resources of firm.
ALTTC, Ghaziabad

28. Ratio Analysis - Limitations
Ratios are based on Accounting data based on historical cost concept.
Ratios are based on Accounting data that are based on diverse accounting practices and principles.
ALTTC, Ghaziabad

29. Statement of Changes in Financial Position
It deals with the flow of funds during the year.
It summarizes the sources from where the funds might have been arranged / produced by the firm and the uses for which the funds might have been used by the firm during the year
ALTTC, Ghaziabad

30. Statement of Changes in Financial Position
Based on the concept of fund, Statement of Changes in Financial Position can be prepared on:
Cash Basis: Cash Flow Statement
Net Working Capital Basis: Funds Flow Statement
Total Resources Basis: SCFP(Total Resources)
ALTTC, Ghaziabad

31. Cash Flow Statement
The Cash Flow Statement can be conceived as a compact version of a cash book in which the details are condensed and presented in broad and meaningful categories.
The CFS reconciles the difference between the opening and closing balance of cash by the net cash flow from a company’s operating, investment and financing activities during a period.
It provides important information that supplements the P & L A/c and B/S.
ALTTC, Ghaziabad

32. Cash Flow Statement AS-3 deals with the Cash Flow Statement.
‘Cash’ comprises cash on hand and demand deposit with banks.
‘Cash equivalents’ are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Eg. Treasury bills, commercial paper etc.
ALTTC, Ghaziabad

33. Cash Flow Statement
Classification of Cash Flows relating to a particular period:
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities.
ALTTC, Ghaziabad

34. Data required in preparation of CFS
Comparative Balance Sheets
Profit & Loss Account
Additional data
ALTTC, Ghaziabad

35. Cash Flow Statement
Two methods has been prescribed for its preparation:
Direct Method
Indirect Method
ALTTC, Ghaziabad

36. THANK YOU
ALTTC, Ghaziabad