Tools for Financial Statement Analysis
Tools Of Analysis Of Financial Statements
Various tools and techniques are employed to analyse and interpret financial statements. These tools help in simplifying, classifying, and comparing financial data to extract meaningful information.
The major tools used for financial statement analysis are:
- Comparative Statements: Comparing financial data of two or more periods or entities.
- Common Size Statements: Converting financial data into percentages to a common base.
- Ratio Analysis: Calculating relationships between different financial variables.
- Trend Analysis: Analysing the trend of financial data over several periods.
- Cash Flow Analysis: Analysing the movement of cash and cash equivalents.
Each tool offers a unique perspective on the company's financial situation and performance. Often, a combination of these tools is used for a comprehensive analysis.
Comparative Statements
Comparative Financial Statements are statements that present the financial data for two or more periods side-by-side, along with the changes in absolute amounts and in percentages.
The purpose of comparative statements is to facilitate the comparison of financial figures over time and identify trends and significant changes in individual items or groups of items.
Common types of comparative statements are:
- Comparative Balance Sheet
- Comparative Statement of Profit and Loss
The format typically includes:
- Particulars (Items from the financial statement)
- Figures for the Previous Period
- Figures for the Current Period
- Absolute Change (Current Period Value - Previous Period Value)
- Percentage Change ($ \frac{\text{Absolute Change}}{\text{Previous Period Value}} \times 100 $)
Preparation of Comparative Balance Sheet
A Comparative Balance Sheet shows the changes in assets, liabilities, and equity over two or more balance sheet dates.
| Particulars | Note No. | Previous Year (₹) | Current Year (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||||
| 1. Shareholders' Funds | |||||
| a) Share Capital | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| b) Reserves and Surplus | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| c) Money received against share warrants | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| 2. Non-current Liabilities | |||||
| a) Long-term Borrowings | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| b) Long-term Provisions | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| 3. Current Liabilities | |||||
| a) Short-term Borrowings | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| b) Trade Payables | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| c) Other Current Liabilities | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| d) Short-term Provisions | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Total Equity and Liabilities | ZZZ | PPP | PPP - ZZZ | ((PPP - ZZZ) / ZZZ) * 100 | |
| II. ASSETS | |||||
| 1. Non-current Assets | |||||
| a) Property, Plant and Equipment and Intangible Assets | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| b) Non-current Investments | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| c) Long-term Loans and Advances | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| d) Other Non-current Assets | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| 2. Current Assets | |||||
| a) Current Investments | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| b) Inventories | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| c) Trade Receivables | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| d) Cash and Cash Equivalents | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| e) Short-term Loans and Advances | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| f) Other Current Assets | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Total Assets | ZZZ | PPP | PPP - ZZZ | ((PPP - ZZZ) / ZZZ) * 100 |
Preparation of Comparative Statement of Profit and Loss
A Comparative Statement of Profit and Loss shows the changes in revenues, expenses, and profit over two or more periods.
| Particulars | Note No. | Previous Year (₹) | Current Year (₹) | Absolute Change (₹) | Percentage Change (%) |
|---|---|---|---|---|---|
| I. Revenue from Operations | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| II. Other Income | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| III. Total Revenue (I + II) | ZZZ | PPP | PPP - ZZZ | ((PPP - ZZZ) / ZZZ) * 100 | |
| IV. Expenses: | |||||
| Cost of Materials Consumed | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Purchases of Stock-in-Trade | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Changes in Inventories... | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Employee Benefits Expense | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Finance Costs | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Depreciation and Amortisation Expense | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Other Expenses | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| V. Total Expenses | AAA | BBB | BBB - AAA | ((BBB - AAA) / AAA) * 100 | |
| VI. Profit Before Tax (III - V) | CCC | DDD | DDD - CCC | ((DDD - CCC) / CCC) * 100 | |
| VII. Tax Expense: | |||||
| Current Tax | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| Deferred Tax | XXX | YYY | YYY - XXX | ((YYY - XXX) / XXX) * 100 | |
| VIII. Profit After Tax (VI - VII) | EEE | FFF | FFF - EEE | ((FFF - EEE) / EEE) * 100 |
Interpretation: Comparative statements highlight specific items that have changed significantly in absolute terms or percentage terms. A large percentage increase or decrease in any item warrants further investigation to understand the underlying reasons.
For example, a significant increase in 'Trade Receivables' might indicate problems with collecting dues from customers, while a substantial rise in 'Revenue from Operations' is generally a positive sign (unless accompanied by a proportionally higher increase in expenses).
Common Size Statement
Common Size Financial Statements are statements in which each item is expressed as a percentage of a common base figure. The purpose is to show the relative proportion of each item to the total.
- In the Common Size Balance Sheet, each item is expressed as a percentage of the Total Assets (or Total Equity and Liabilities, which are equal).
- In the Common Size Statement of Profit and Loss, each item of revenue and expense is expressed as a percentage of Revenue from Operations (Net Sales).
Common size statements are particularly useful for comparing:
- The financial structure or performance of a company over time (trend analysis in percentages).
- The financial structure or performance of different companies, even if they are of significantly different sizes, as the data is standardised to percentages.
Preparation of Common Size Balance Sheet
Each item in the Balance Sheet is expressed as a percentage of Total Equity and Liabilities (or Total Assets).
| Particulars | Note No. | Previous Year (₹) | Previous Year (%) | Current Year (₹) | Current Year (%) |
|---|---|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||||
| 1. Shareholders' Funds | |||||
| a) Share Capital | XXX | (XXX / Total Prev Year) * 100 | YYY | (YYY / Total Current Year) * 100 | |
| b) Reserves and Surplus | XXX | (XXX / Total Prev Year) * 100 | YYY | (YYY / Total Current Year) * 100 | |
| ... (Other Liabilities) | ... | ... | ... | ... | |
| Total Equity and Liabilities | ZZZ | 100 | PPP | 100 | |
| II. ASSETS | |||||
| 1. Non-current Assets | |||||
| a) Property, Plant and Equipment and Intangible Assets | XXX | (XXX / Total Prev Year) * 100 | YYY | (YYY / Total Current Year) * 100 | |
| b) Non-current Investments | XXX | (XXX / Total Prev Year) * 100 | YYY | (YYY / Total Current Year) * 100 | |
| ... (Other Assets) | ... | ... | ... | ... | |
| Total Assets | ZZZ | 100 | PPP | 100 |
Preparation of Common Size Statement of Profit and Loss
Each item of revenue and expense is expressed as a percentage of Revenue from Operations.
| Particulars | Note No. | Previous Year (₹) | Previous Year (%) | Current Year (₹) | Current Year (%) |
|---|---|---|---|---|---|
| I. Revenue from Operations | XXX | 100 | YYY | 100 | |
| II. Other Income | XXX | (XXX / Revenue from Operations Prev Year) * 100 | YYY | (YYY / Revenue from Operations Current Year) * 100 | |
| III. Total Revenue (I + II) | ZZZ | (ZZZ / Revenue from Operations Prev Year) * 100 | PPP | (PPP / Revenue from Operations Current Year) * 100 | |
| IV. Expenses: | |||||
| Cost of Materials Consumed | XXX | (XXX / Revenue from Operations Prev Year) * 100 | YYY | (YYY / Revenue from Operations Current Year) * 100 | |
| Employee Benefits Expense | XXX | (XXX / Revenue from Operations Prev Year) * 100 | YYY | (YYY / Revenue from Operations Current Year) * 100 | |
| ... (Other Expenses) | ... | ... | ... | ... | |
| V. Total Expenses | AAA | (AAA / Revenue from Operations Prev Year) * 100 | BBB | (BBB / Revenue from Operations Current Year) * 100 | |
| VI. Profit Before Tax (III - V) | CCC | (CCC / Revenue from Operations Prev Year) * 100 | DDD | (DDD / Revenue from Operations Current Year) * 100 | |
| VII. Tax Expense: | |||||
| Current Tax | XXX | (XXX / Revenue from Operations Prev Year) * 100 | YYY | (YYY / Revenue from Operations Current Year) * 100 | |
| ... (Other Tax) | ... | ... | ... | ... | |
| VIII. Profit After Tax (VI - VII) | EEE | (EEE / Revenue from Operations Prev Year) * 100 | FFF | (FFF / Revenue from Operations Current Year) * 100 |
Interpretation: Common size statements show the composition of the Balance Sheet and the distribution of revenue among various expenses. For example, in a common size Balance Sheet, a trend of increasing percentage of Non-current Assets might indicate expansion. In a common size P&L, an increasing percentage of Cost of Materials Consumed relative to Revenue from Operations might indicate a decline in raw material cost efficiency or inability to pass on cost increases to customers. Comparing percentages across companies helps assess their relative cost structures or asset structures.