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Analysis of Financial Statements Cash Flow Statements

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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

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