Name : Muhammad Asad Siddiqui

Student ID : 59523

Subject : Corporate Finance

Class : MBA (Fall-2016 Evening)

Project Topic Name : “ANALYSIS OF FINANCIAL STATEMENTS”

INTRODUCTION TO ANALYSIS OF FINANCIAL STATEMENTS

Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.

The main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future.

Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot.

MEANING OF ANALYSIS OF FINANCIAL STATEMENTS

The process of critical evaluation of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm is called ‘Financial Statement Analysis.”

The term ‘financial analysis’ includes both ‘analysis and interpretation’.

The term analysis means simplification of financial data. Interpretation means explaining the meaning and significance of the data.

Analysis is useless without interpretation, and interpretation without analysis is difficult or even impossible.

NEED OF FINANCIAL STATEMENTS ANALYSIS

Prepare Financial

Statements

Analyze Financial

Statements

Gather Financial

Statements

Make Decisions

Implement

SIGNIFICANCE OF ANALYSIS OF FINANCIAL STATEMENTS

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of the balance sheet and the statement of profit and loss.

Financial analysis is useful and significant to different users in the following ways:

• Finance Manager.• Top Management.• Investors.• Employees.• Customers.• General Public.• Others

OBJECTIVES OF ANALYSIS OF FINANCIAL STATEMENTS

• To assess the current profitability and operational efficiency of the firm as to judge the financial health of the firm.

 • To ascertain the relative importance of different components of the financial position of the firm. • To identify the reasons for change in the profitability/financial position of the firm. • To judge the ability of the firm to repay its debt and assessing the short-term as well as the long-term liquidity position of the firm.

METHODS OF ANALYSIS OF FINANCIAL STATEMENTS

We have two methods here:

• Horizontal Analysis.• Vertical Analysis

TOOLS OF ANALYSIS OF FINANCIAL STATEMENTS

Here you have major tools mentioned below:

• Comparative Statements.• Common Size Statements.• Trend Analysis.• Ratio Analysis.

ANALYSIS OF COMPARATIVE STATEMENTS

Particulars 2013-2014 (Rs.) 2014-15 (Rs) Absolute Decrease or Increase

Percent (Increase or Decrease)

Revenue from operations 60,00,000 75,00,000 15,00,000 25.00

Add: Other incomes 150,000 120,000 (30,000) (20.00)

Total Revenue I+II 61,50,000 76,20,000 14,70,000 23.90

Less: Expenses 44,00,000 50,60,000 660,000 15.00

Profit before tax 17,50,000 25,60,000 810,000 46.29

Less: Tax 612,500 10,24,000 411,500 67.18

Profit after tax 11,37,500 15,36,000 398,500 35.03

ANALYSIS OF COMMON SIZE STATEMENTS

Particulars Absolutes Amounts

Absolutes Amounts

% of Net Sales % of Net Sales

2013-14 (Rs.) 2014-15 (Rs.)

2013-14 (%) 2014-15 (%)

Net Sales 25,00,000 18,00,000 100 100

(C.G.S) 12,00,000 10,00,000 48 48

Gross Profit 13,00,000 8,00,000 52 52

(Operating Expenses) 120,000 80,000 4.8 4.8

Operating Income 11,80,000 720,000 47.20 47.20

(Non-Operating Expense)

15,000 12,000 0.60 0.60

PROFIT 11,65,000 708,000 46.60 39.33

TREND ANALYSIS

Year Sales (Rs.) Stock (Rs.) Profit Before Tax (Rs.)

2010 1881 709 321

2011 2340 781 435

2012 2655 816 458

2013 3021 944 527

2014 3768 1154 627

TREND ANALYSIS

Year Sales (Rs.) Trend (%)

Stock (Rs.) Trend (%) Profit (Rs.)

Trend (%)

2010 1881 100 709 100 321 100

2011 2340 124 781 110 435 136

2012 2655 141 816 115 458 143

2013 3021 161 944 133 527 164

2014 3768 200 1154 163 627 195

RATIO ANALYSIS

Selected Financial Data for Microsoft for 2002:

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,576Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 67,646Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,744Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 15,466Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,180Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,365Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 7,829Market value of shares . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 293,137

Debt Ratio = Total Liabilities/Total Assets  = 15,466/67,646 = 22.9%  It shows that Microsoft borrowed 22.9% of money to but its assets. But it has to be notice that value is good or bad debt ratio. If you are a banker that you want Microsoft to have a low debt ratio because a smaller amount of other liabilities increases your chances of being repaid. If you are a Microsoft stockholder, you want a higher debt ratio because you want the company to add borrowed funds to your investment dollars to expand the business.

RATIO ANALYSIS

Current Ratio = Current Assets/Current Liabilities

=48,576/12,744 =3.812

Asset Turnover = Sales/Total Assets  =28,365/67,646 =0.42  It shows that for each dollar of assets, it is able to generate $0.42 in sales. The higher the asset turnover ratio, the more efficient the company is using assets to generate sales.

RATIO ANALYSIS

Return on Equity (R.O.E) = Net Income/Stockholder’s Equity  = 7,829/52,180 =15.0% Microsoft’s return on equity of 15% means that 15 cents of profit were earned for each dollar of stockholder investment in 2002. Good companies typically have return on equity values between 15% and 25%. Return on equity is the fundamental measure of overall company performance.

LIMITATIONS OF FINANCIAL STATEMENTS

Some major limitations of financial analysis are mentioned below:

• Financial analysis does not consider price level changes.

• Financial analysis may be misleading without the knowledge of the changes in accounting procedure followed by a firm.

• Financial analysis is just a study of reports of the company.

• Monetary information alone is considered in financial analysis while non- monetary aspects are ignored.

• The financial statements are prepared on the basis of accounting concept, it does not reflect

the current position.

SUMMARY

Major Parts of an Annual Report An annual report contains basic financial statements, viz., Balance Sheet, Statement of Profit and Loss and Cash Flow Statement. It also carries management’s discussion of corporate performance of the year under review for futuristic prospects. Tools of Financial Analysis Commonly used tools of financial analysis are: Comparative statements, Common size statement, trend analysis, ratio analysis, and cash flow analysis etc.