Tools of Financial Statements Analysis
A number of techniques are used for proper analysis and interpretation of such information. The most commonly used techniques of financial analysis are:
Comparative Statements
The figures in the comparative statements can be used for identifying the direction of changes and also the trends in different indicators of performance of an organisation. It can be prepared by following steps:
- List out absolute figures in rupees of two points of time.
- Find out change in absolute figures by subtracting the first year from the second year and indicate the change as increase (+) or decrease (–) and,
- Also calculate the percentage increase or decrease.
Example1: Convert the following statement of profit and loss of Samona Co. Ltd. into the comparative statement of profit and loss:
Particulars 2021-22 (Rs.) 2022-23 (Rs.) 1. Revenue from operations 90,00,000 1,20,00,000 2. Other income 2,25,000 2,00,000 3. Expenses 65,00,000 75,00,000 4. Income tax 40% 45%
Solution: Comparative statement of profit and loss of Samona Co. Ltd. for the year ended March 31, 2022 and 2023:
Particulars 2021-22 (Rs.) 2022-23 (Rs.) Absolute Increase (+) or Decrease (Rs.) Percentage Increase (+) or Decrease (%) 1. Revenue from operations 90,00,000 1,20,00,000 30,00,000 33.33 2. Add- Other incomes 2,25,000 2,00,000 25,000 11.11 3. Total Revenue (1+2) 92,25,000 1,22,00,000 29,75,000 32.24 4. Less- Expenses Profit before tax 65,00,000 27,25,000 75,00,000 47,00,000 10,00,000 19,75,000 15.38 72.47 5. Less- Tax Profit after tax 10,90,000 16,35,000 21,15,000 25,85,000 10,25,000 9,50,000 94.03 58.10
Example2: From the following statement of profit and loss of Samona Co. Ltd., prepare comparative statement of profit and loss for the year ended March 31, 2022 and 2023.
Particulars 2021-22 (Rs.) 2022-23 (Rs.) Revenue from operations 16,00,000 20,00,000 Employee benefit expenses 8,00,000 10,00,000 Other expenses Tax Rate 40% 2,00,000 1,00,000
Solution:
Comparative statement of profit and loss of Samona Co. Limited for the year ended March 31, 2022 and 2023:
Particulars 2021-22 (Rs.) 2022-23 (Rs.) Absolute increase or decrease (Rs.) Percentage increase or decrease (%) 1. Revenue from operations 16,00,000 20,00,000 4,00,000 25 2. Less: Expenses a) Employee benefit expenses b) Other expenses 8,00,000 2,00,000 10,00,000 1,00,000 2,00,000 (1,00,000) 25 (50) Profit before tax 6,00,000 9,00,000 3,00,000 50 3. Less tax @ 40% Profit after tax 2,40,000 3,60,000 3,60,000 5,40,000 1,20,000 1,80,000 50 50
Example 3: The following are the Balance Sheets of Samona Ltd. as at March 31, 2016 and 2017. Prepare a Comparative balance sheet.
Particulars March,31 2017 (Rs.) March,31 2016 (Rs.) I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 20,00,000 3,00,000 15,00,000 4,00,000 2. Non-current Liabilities- Long-term borrowings 9,00,000 6,00,000 1. Current liabilities- Trade payables 3,00,000 2,00,000 Total 35,00,000 27,00,000 II. Assets 1. Non-current Assets a) Fixed assets - Tangible assets - Intangible assets 20,00,000 9,00,000 15,00,000 6,00,000 2. Current assets - Inventories - Cash and cash equivalents 3,00,000 3,00,000 4,00,000 2,00,000 Total 35,00,000 27,00,000
Solution:
Comparative Balance Sheet of Samona ltd. as at March 31, 2016 and March 2017:
Particulars March,31 2016 (Rs.) March,31 2017 (Rs.) Absolute change Percentage change I. Equity and Liabilities 1. Shareholders’ Funds a) Share capital b) Reserve and surplus 15 4 20 3 5 (1) 33.33 (25) 2. Non-current Liabilities Long-term borrowings 6 9 3 50 1. Current liabilities Trade payables 2 3 1 50 Total 27 35 8 29.63 II. Assets 1. Non-current assets a) Fixed assets - Tangible assets - Intangible assets 15 6 20 9 5 3 33.33 50 2. Current assets - Inventories - Cash and cash equivalents 4 2 3 3 (1) 1 (25) 50 Total 27 35 8 29.63
Common Size Statement
It is also known as component percentage statement. Here, each item in the statement is stated as a percentage of the aggregate, or revenue from operations of which that item is a part. For example, a common size balance sheet shows the percentage of each asset to the total assets, and that of each liability to the total liabilities. Similarly, in the common size statement of profit and loss, the items of expenditure are shown as a percentage of the revenue from operations. Common size analysis is used to compare enterprises which differ substantially in size as it provides an insight into the structure of financial statements. Inter-firm comparison or comparison of the company’s position with the related industry as a whole is possible with the help of common size statement analysis. The following procedure may be adopted for preparing the common size statements.
- List out absolute figures in rupees at two points of time, say year 1, and year 2.
- Choose a common base (as 100). For example, revenue from operations may be taken as base (100) in case of statement of profit and loss and total assets or total liabilities (100) in case of balance sheet.
- For all items of year 1 & year 2, work out the percentage of that total.
Example1:
From the following information, prepare a Common size Income Statement for the year ended March 31, 2016 and March 31, 2017:
Particulars 2016-17 (Rs.) 2015-16 (Rs.) Revenue from operations Cost of goods sold Operating expenses Non-operating expenses Depreciation Wages 18,00,000 10,00,000 80,000 12,000 20,000 10,000 25,00,000 12,00,000 1,20,000 15,000 40,000 20,000
Solution:
Common Size Income Statement for the year ended March 31, 2016 and March 31, 2017.
Particulars Absolute Amounts Percentage of Net Sales 2015-16 (Rs.) 2016-17 (Rs.) 2015-16 (%) 2016-17 (%) Revenue from operations 25,00,000 18,00,000 100 100 (Less) Cost of goods Sold* 12,00,000 10,00,000 48 55.56 Gross Profit 13,00,000 8,00,000 52 44.44 (Less) Operating Expenses** 1,20,000 80,000 4.80 4.44 Operating Income 11,80,000 7,20,000 47.20 40 (Less) Non-Operating Expenses 15,000 12,000 0.60 0.67 Profit 11,65,000 7,08,000 46.60 39.33
* Wages is the part of cost of goods sold; ** Depreciation is the part of operating expenses.
Example 2:
From the following information, prepare Common size statement of profit and loss for the year ended March 31, 2016 and March 31, 2017:
Particulars 2015-16 (Rs.) 2016-17 (Rs.) Revenue from operations 25,00,000 20,00,000 Other income 3,25,000 2,50,000 Employee benefit expenses 8,25,000 4,50,000 Other expenses 2,00,000 1,00,000 Income tax (% of the profit before tax) 30% 20%
Solution:
Common size statement of Profit and Loss for the year ended March 31, 2016 and March 31, 2017.
Particulars Absolute Amounts (Rs.) Percentage of Net Revenue from operations (%) 2015-16 2016-17 2015-16 2016-17 Revenue from Operations (Add) other income 25,00,000 3,25,000 20,00,000 2,50,000 100 13 100 12.5 Total Revenue 28,25,000 22,50,000 113 112.5 (Less) Expenses: (a) Employee benefit expenses (b) Other expenses 8,25,000 2,00,000 4,50,000 1,00,000 33 8 22.5 5 Profit before tax (Less) taxes 18,00,000 5,40,000 17,00,000 3,40,000 72 21.6 85 17 Profit after tax 12,60,000 13,60,000 50.4 68
Example 3
Prepare common size Balance Sheet of Samona Ltd. from the following information:
Particulars March,31 2016 March,31 2017 A. Equity & Liabilities 1. Shareholders’ fund a. Share capital b. Reserve & surplus 2. Non-current liabilities Long term borrowings 3. Current liabilities Trade payable Total 15,00,000 5,00,000 6,00,000 15,50,000 41,50,000 12,00,000 5,00,000 5,00,000 10,50,000 32,50,000 B. Assets 1. Non-current assets a. Fixed assets - Tangible assets Plant & Machinery - Intangible assets Goodwill b. Non-current Investments 2. Current Assets Inventories 14,00,000 16,00,000 10,00,000 1,50,000 8,00,000 12,00,000 10,00,000 2,50,000 Total 41,50,000 32,50,000
Solution: Common size Balace Sheet of Samona Co. Ltd. as at March 31, 2016 and March 31, 2017.
Particulars Absolute Amounts (Rs.) Percentage of Total Assets (%) A. Equity & Liabilities 1. Shareholders’ fund a. Share capital b. Reserve & surplus 2. Non-current liabilities Long term borrowings 3. Current liabilities Trade payable Total 15,00,000 5,00,000 6,00,000 15,50,000 41,50,000 12,00,000 5,00,00 5,00,000 10,50,000 36.14 12.05 14.46 37.35 36.93 15.38 15.38 32.31 B. Assets 1. Non-current assets a. Fixed assets - Tangible assets Plant & Machinery - Intangible assets Goodwill Non-current Investments 2. Current Assets Inventories 14,00,000 16,00,000 10,00,000 1,50,000 8,00,000 12,00,000 10,00,000 2,50,000 33.73 38.55 24.10 3.62 24.62 36.92 30.77 7.69 Total 41,50,000 32,50,000 100 100
32,50,000
100
100
See also….
Financial Statement Analysis