Analysis of Financial Statements

Meaning of Analysis of Financial Statements:

Financial statement analysis is the procedure of scrutinizing an enterprise’s financial statements for taking up the decisions for the purposes and to comprehend the comprehensive health of an establishment. Financial statements document financial information, which must be assessed through financial statement analysis to become more helpful to shareholders, managers, investors and other interested parties. To put it in other words, the term ‘financial analysis’ comprises both ‘analysis and interpretation’.

BALANCE SHEET OF A COMPANY AS PER SCHEDULE III OF the COMPANIES ACT 2019

THE FORMAT OF BALANCE SHEET AS PRESCRIBED IN PART I OF SCHEDULE III OF THE COMPANIES ACT, 2013, IS AS FOLLOWS:

Name of the Company….

BALANCE SHEET as at…

Particulars

(1)

Note No.

(2)

Figures as at the end of the current reporting period

(3)

Figures as at the end of the previous reporting period

(4)

I. EQUITY AND LIABILITIES

  1. Shareholders’ Funds

(a) Share Capital

(b) Reserves and Surplus

(c) Money Received against Share Warrants

  1. Share Application Money Pending Allotment
  2. Non-Current Liabilities

(a) Long-term Borrowings

(b) Deferred Tax Liabilities (Net)

(c) Other Long-term Liabilities

(d) Long-term Provisions

  1. Current Liabilities

(a) Short-term Borrowings

(b) Trade Payables

(c) Other Current Liabilities

(d) Short-term Provisions

Total

II. ASSETS

  1. Non-Current Assets

(a) Fixed Assets

(i) Tangible Assets

(ii) Intangible Assets

(iii) Capital Work-in-Progress

(iv) Intangible Assets under Development

(b) Non-current Investments

(c) Deferred Tax Assets (Net)

(d) Long-term Loans and Advances

(e) Other Non-current Assets

  1. Current Assets

(a) Current Investments

(b) Inventories

(c) Trade Receivables

(d) Cash and Cash Equivalents

(e) Short-term Loans and Advances

(f) Other Current Assets

Total

The significance of Analysis of Financial Statements:

Financial analysis is the procedure of recognising the financial strengths and weaknesses of the enterprise by accordingly chartering the relationships between several items of the balance sheet and the statement of P&L. Financial analysis can be initiated by the management of the enterprise or by parties outside the enterprise, viz., finance manager, trade payables, lenders, labour unions and others. Financial analysis is helpful and vital for distinct users in the below mentioned following ways :

Management:

Financial analysis assists the top management :

  • To evaluate whether the resources of the enterprise are utilised in the most effective way
  • Whether the financial condition of the enterprise is good
  • To ascertain the success of the enterprise’s functions
  • Computing the individual’s performance
  • Assessing the structure of internal control
  • To scrutinize the future aspects of the enterprise

Trade Payables:

Trade payables scrutinize the financial statements for:

  • Computing the capability of the enterprise to meet its short-term responsibilities
  • Judging the feasibility of the enterprise’s continued capability to meet all its financial responsibilities in the upcoming future
  • Enterprise’s capability to meet claims of payables over a short period of time
  • Assessing the financial position and capability to pay off the concerns

Lenders:

Suppliers of long-term debt are concerned with the enterprise’s long-term financial competence and survival. They inspect the enterprise’s financial statements :

  • To determine the profitability of the enterprise over a time frame
  • For ascertaining an enterprise’s capability to get cash, to repay the principal amount and pay interest
  • To evaluate the association between various sources of capital (i.e.capital structure associations)
  • To evaluate financial statements which comprise data on past performances and decipher it as a ground for anticipating the future rates of return and for evaluating risk factor
  • For ascertaining credit risk, ascertaining the terms and conditions of a loan if granted, maturity date and interest rate etc.,

Labour Unions:

Labour unions scrutinize financial statements:

  • To evaluate whether a firm can raise their pay
  • To check whether a firm can raise productivity or increase the cost prices of services/products to absorb an increase in the wage

Objectives of Analysis of Financial Statements:

Analysis of financial statements discloses the significant facts concerning managerial performance and the effectuality of the enterprise. To be more particular, the inspection is undertaken to serve the following objectives :

  • To evaluate the current profitability and functional capability of the enterprise as comprehensive as well as its distinct departments so as to arbitrate the financial health of the enterprise
  • To determine the relative significance of distinct elements of the financial condition of the enterprise
  • To recognize the reasons for the change in the profitability/financial position of the enterprise
  • To judge the capability of the enterprise to repay its debt and evaluating the short-term as well as long-term liquidity position of the enterprise

1 MARK QUESTIONS

Q.1 WHAT IS MEANT BY ‘ANALYSIS OF FINANCIAL STATEMENTS’? {CBSE, All India 2011 (III)}

ANSWER: It is a process of critical examination of the financial information to understand and make a decision about the operations of the business is called ”analysis of the financial statements.”

Q.2 STATE ONE ADVANTAGE OF FINANCIAL STATEMENTS ANALYSIS. {CBSE, DELHI 2013 (III)}

ANSWER: It helps to know long-term as well as short-term solvency of the firm.

Q.3 NAME ANY TWO TOOLS OF ANALYSIS OF FINANCIAL STATEMENTS.

ANSWER: (i) Comparative Statement; (ii) Common Size Statement.

1 MARK QUESTIONS

Q.1 MENTION ONE OBJECTIVE OF FINANCIAL STATEMENT ANALYSIS.

ANSWER: It is used to determine the long-term/short-term financial position of the business.

Q.2 HOW IS SOLVENCY OF A BUSINESS ASSESSED BY ‘FINANCIAL STATEMENT ANALYSIS’? {CBSE, DELHI 2010(II)}

ANSWER: The solvency of a business can be assessed by analysis of solvency ratios such as Debt to Equity Ratio, Proprietary Ratio, etc.

Q.3 HOW IS ‘EARNING CAPACITY OF A BUSINESS’ ASSESSED BY “FINANCIAL STATEMENT ANALYSIS”? {CBSE, DELHI 2010(III)}

ANSWER: ‘Earning capacity of a business’ can be assessed on the basis of Profitability Ratio.

Q4. STATE THE SIGNIFICANCE OF ANALYSIS OF FINANCIAL STATEMENTS TO THE ‘LENDERS’? {CBSE, DELHI 2012}

ANSWER: On the basis of Analysis of Financial Statements, lenders can decide whether their loans as well as interest due, would be paid on time or not.

Q5. STATE THE SIGNIFICANCE OF ANALYSIS OF FINANCIAL STATEMENTS TO ‘TOP MANAGEMENT’?

ANSWER: Financial statements analysis helps in measuring the success of the company’s operations, appraising the individual’s performance and evaluating the system of internal control.

Q6. WHAT ARE THE IMPORTANCES OF FINANCIAL STATEMENT ANALYSIS?

ANSWER: (i) Assessing the Profitability; (ii) Judging the efficiency; (iii) Judging the liquidity.

The above mentioned is the concept, that is elucidated in detail about the Analysis of Financial Statements, its meaning, significance and objectives for the class 12 Commerce students. To know more, stay tuned to BYJU’S.

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