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**Analysis of Financial Statements Cash Flow Statements**

-Ashwani Khurana ALTTC, Ghaziabad

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**Contents Financial Statement Analysis Cash Flow Statement**

ALTTC, Ghaziabad

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**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

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**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

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**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

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**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

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**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

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**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

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**Analysis of Financial Statements – Purpose**

Purpose may be to seek information relating to: Profitability Solvency Liquidity ALTTC, Ghaziabad

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**Analysis of Financial Statements – Agency/Users**

Investors Government Authorities Creditors Banker Employees Management ALTTC, Ghaziabad

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**Analysis of Financial Statements – Different Ways**

External and Internal External Internal Dynamic and Static Dynamic (Horizontal) Static (Vertical) ALTTC, Ghaziabad

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**Analysis of Financial Statements – Techniques / Tools**

Comparative Financial Statements Common-Size Financial Statements Trend Percentages Analysis Ratio Analysis ALTTC, Ghaziabad

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**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

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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

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**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

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**Ratio Analysis - Classification**

Liquidity Ratios Profitability Ratios Turnover Ratios Leverage Ratios Valuation Ratios ALTTC, Ghaziabad

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**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

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**Liquidity Ratios Current Ratio = Current Assets Current Liabilities**

Quick Ratio = Quick Assets ALTTC, Ghaziabad

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**Profitability Ratios Gross Profit Ratio = Gross Profit *100 Net Sales**

Net Profit Ratio = Net Profit *100 ALTTC, Ghaziabad

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**Profitability Ratios Return on Assets Ratio**

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

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**Turnover Ratios Inventory Turnover Ratio Debtors Turnover Ratio**

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

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**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

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**Turnover Ratios Assets Turnover Ratio = Net Sales _ Average Assets**

ALTTC, Ghaziabad

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**Leverage Ratios Debt Equity Ratio Debt Ratio = Long Term Debt _**

Total Shareholders Funds Debt Ratio = Total Debts Total Assets ALTTC, Ghaziabad

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**Leverage Ratios Interest Coverage Ratio**

= Earnings before Interest & Tax Interest ALTTC, Ghaziabad

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**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

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**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

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**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

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**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

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**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

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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

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**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

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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

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**Data required in preparation of CFS**

Comparative Balance Sheets Profit & Loss Account Additional data ALTTC, Ghaziabad

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

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THANK YOU ALTTC, Ghaziabad

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