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Chapter 3 Analysis of Financial Statements
Chapter 3 Analysis of Financial Statements
Chapter 3 Analysis of Financial Statements
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The process of systematic recording of the business transaction in the various books of account maintained by the entity with ultimate purpose of preparing financial statement there from is called Financial Accounting. Financial accounting summarizes the transaction taking place during a period with the objective of preparing the financial statements Balance sheet indicates the state of affair of the organization or entity at a given point of time in terms of its assets and liabilities while Profit/loss statement shows the result of operation carried out by the organization during the given period of time. To ascertain the profit or loss and indicate the financial position of an organization is the main purpose of the financial accounting. …show more content…
The financial statement becomes a tool for future planning and forecasting. The analysis of these statements involves their division according to similar groups and arranged in desired form. The interpretation involves the explanation of financial facts in a simplifier way Objective of Analysis and Interpretation The user of the financial statement has definite objectives to analysis and interpretation. Objective of the interpretation is varied by various class of the person. There are certain specific and common objectives which are listed below • To measure managerial efficiency of the firm or entity • To measure the short-term and long-term solvency of the entity • To determine the future position of the …show more content…
In fact, analysis of liquidity needs the preparation of cash budgets. It also establishing relationship between cash and other current asset to current liabilities provide a quick measure of liquidity Activity Ratio or Turnover Ratio Activity ratio refers to highlights the activity and efficiency of the business entity. It measures relationship between the sales and assets. It is useful in the evaluation of the efficiency with which firm manages and utilize its assets. Profitability Ratio It reflects the final result of the business operations. Profit earning is considered vital for the business. It is like blood in human body. Profitability ratio indicate the relationship between profit and sales Earnings Ratio Income of shareholders through the investment of the share is called earning. It is useful to the investors for the value of the shares that they have been holding Comparative Balance Sheet To evaluate the financial position of the entity over a period of years, comparative balance sheet is useful. It is used to study the trends of same or group of items in two or more balance sheet of the same organization on different
Financial statement analysis: theory, application and interpretation / Leopold A Bernstein and John J. Wild 6th edition Mc Graw Hill 1998
The balance sheet provides a snapshot of a firm’s financial position at a specific point in time, by using the company’s Asset and Debit Equity.
It is a profitability ratio and it calculates the ability of the company to produce profit from the investments of its shareholders. It shows the profit generated by each dollar of shareholder’s equity. It is important ratio because investors always see that how efficiently and effectively the management of the company is using their wealth to generate profit.
In year 2012, it is -5% but in 2013, it is improved to 2%. Operating ration shows the operational efficiency of the business. A small value of operating ratio shows that MCS has to take care of its operational activities so further this ratio may be improved.
In a real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. They are entitled to all the profits remaining after all outsider claims are met preference dividend paid. In view of this, the profitability of a firm should be assessed in terms of return to the equity shareholders.it is calculated by dividing profit after taxes and preference dividend by the equity capital.
Return on owner's equity (ROE) ratio: Net profit after taxes/Total shareholders equity. This ratio is calculated as net profit after tax divided by the total shareholders equity. This ratio measures the shareholders rate of return on their investment in the company. Activity ratios are another group of ratios; it's usually used to measure the ability to optimize the use of the available resources. These ratios are other measures of operational efficiency and performance. Among this group of ratios is the turnover to capital employed or return on investment (ROI)
Financial ratios which would be used in this study are profitability ratios, activity turnover ratios, turnover ratios etc. These are found out from the financial statements prepared and presented by the company every year. These help us in speaking about the financial stability and profitability of the company. These also tell about the creditability of the company which help the outsider in taking important decisions.
Ratio analysis is one of the most important and powerful tool in analyzing the financial position of the company where ratios are applied for evaluating the financial condition and act of the firm. Investigation and understanding of different accounting ratios gives a clear study and a better understanding of the financial position of the firm
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
The statement of profit or loss is also known as income statement and it’s equation is revenue minus expenses equals profit or loss. The statement of profit or loss summarize the revenues and expenses of a business and also shown the ability of a business to generated business. The total profit or loss that generated in an organization during an accounting period can be seen through the income statement. For example, if the expenses of the company are higher than revenues, the company will get a loss in the business. However, the company will generate a profit when the revenues are greater than the
Financial statements provide an overview of a business' financial condition in both short and long term. They help in understanding the past performance of the company and making future predictions about the company. It thus helps us to look beyond the profit figures.
Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016)
Balance sheet-: Balance sheet is a statement at the book value of all of the assets and liabilities of a business or other organization present a particular date such as the end of the financial year. It is known as a balance sheet because it reflection accounting identity the components of the balance sheets. The balance sheet must follow the following formula:
The purpose of this document is to describe the nature, purpose and scope of accounting and it deliberately explains the details of each category in accounting. Accounting involves in preparing financial documents of an entity by analyzing, verifying, and reporting this records. It emphasizes its major characteristic role in field of banking and finance, with a mixture of supportive sub topics.
A financial statement (or financial report) is a formal record of all the financial actions/activities and the position of a business venture, person, or any other entity. Pertinent fiscal information is presented in a very systematic and structured manner and in a form that is easy to comprehend. Data that are recorded in the financial statements are affected by Accounting Principles, Accounting Concepts and Conventions, Recorded facts and Personal Judgments. The essential qualities of any Financial Statements are-