Unit 27 – Analysis of Financial Statements Financial statements Balance-sheet P&l a/c / income & expenditure a/c Auditors report Fund flow statement/cash flow - AS 3 std makes compulsory for listed/to above 50 cr cos. As-17 – segmentwise reporting. Banking co – formats of b/s and p&l prescribed by BR Act /Co Act for companies (no p&l prescribed)
Basic Concepts Used in Preparation of Financial Statements 1. Entity Concept 2. Money Measurement Concept 3. Stable Monetary Unit Concept 4. Going Concern Concept 5. Cost Concept 6. Conservatism Concept 7. Dual Aspect Concept 8. Accounting Period Concept 9. Accrual Concept 10. Realization Concept 11. Matching Concept
Horizontal form of B/S Liabilities Assets Share capital Fixed assets Res/surplus Investments Secured loans current assets Unsec. loans loans & adv Current liabilities misc exp./losses
Provisions Vertical Form of Balance Sheet : Sources of Funds 1. Shareholder’s funds (a) Share capital (b) Res. & surplus 2. Loan funds (a) Secured loans (b) Unsecured loans Application of Funds 1. Fixed assets 2. Investments 3. Current assets/loans & advances less: current liabilities/provisions Net current assets 4. Misc exp/losses As per IT act, B/S FY is Apr-Mar. But Co’s act does not prescribe. But max 15 months duration, 18 months with permission of ROC.
Profit & Loss Account 1. Gross and Net sales 2. Cost of goods sold 3. Gross profit 4. Operating expenses 5. Operating profit 6. Non-operating surplus/deficit 7. Profit before interest and tax 8. Interest 9. Profit before tax 10. Tax 11. Profit after tax (Net Profit)
Analysis of financial statements : 1. Asstt of fin position/performance 2. Projections of future performance 3. Warning signals Credit requirement assessment 4. Exam fund flow 5. Cross checking 6. Fund flow analysis : diversion idle funds 7. Trend analysis : trends/op.efficiency 8. Ratio analysis : profitability, liquidity, capital structure(der), ability to service debt/int, inventory/debtor turnover
Bankers mostly use three methods for analysis of financial statements. (a) Funds Flow Analysis (b) Trend Analysis (c) Ratio Analysis
While different users of financial statements are interested in different ratios, the ratios which interest a banker most, are the following: (a) Profitability Ratios (b) Liquidity Ratios (c) Capital Structure Ratios (d) Ratio Indicating Ability to Service Interest & Installments (e) Turnover Ratios (1) Inventory Turnover Ratio (2) Debtors’ Turnover Ratio