Documente Academic
Documente Profesional
Documente Cultură
STUDY OF FINANCIAL
STATEMENTS
M Syed Kunmir
email kunmir@yahoo.co.uk
To achieve maximisation of
value of the company, finance
manager has to take careful
decisions in respect of
-Financing
-Investment
-Dividend
-Current asset management.
Investment decision
It relates to acquisition of assets.
Assets are classified into
real assets such as
- land
- building
- plant
- equipment etc.
and
- the financial assets are
- shares and
- debentures etc.
It indicates available mix of financing to fund
companys activities.
Such decisions on investment in projects come
within the field of capital budgeting which is
derived from net present value of assets.
Difficulties
-Measurement
problems
-Uncertainty
-Temporal spread
Payback method
- A selection method in which a
firm sets a maximum payback
period
during which cash
inflow must be
sufficient to
recover the initial outlay.
- This method ignores the time
value of money and cash flow
beyond the
pay
back
period.
Study of financial
statements
Who are the party interested in firms
financial condition?
- Shareholders
- Creditors/suppliers
- Financiers
- Employees
- Tax authorities.
Cash credit
Overdraft
Billsdiscounting
Commercial papers and
Trade credit.
Preference Shares
- These shareholders get a fixed
return
and their risk is less than
the equity
Shareholders.
- They have a right to the first slice
of dividend.
- Obligation to redeem the
preference
shares after its time period.
- They do not have a right to vote.
Bills rediscounting
- The buyer can repay in a long
period of time
- while seller gets his money
back
by discounting the
bills.
- For the seller, this helps him to
go
ahead with production
and
increase the
turnover.
Trade credit
- When materials are bought from
suppliers,the trade credit is
extended for few days or a
couple of
months.
- The supplier is willing to wait to
collect money.
- This also depends on the
suppliers
financial position and
- The buyers credit worthiness.
Commercial paper
- These are short term
promissory
notes with fixed
maturity period.
- They are issued by very large
companies
- Who are reputed and
- Have high credit worthiness.
- Credit rating agencies certify
their credit rating.
Entity concept
Elements
Elements of
of financial
financial statements
statements
Balance Sheet
Typical Limited
Balance Sheet
as at 30 June 2002
ASSETS
Non-Current Assets
Property, plant & equipment
Current Assets
Inventories
Receivables
Cash assets
Total Current Assets
Total Assets
2002
2001
Rm
Rm
1,227
65
122
21
208
1,435
1,137
60
108
15
183
1,320
500
415
915
500
340
840
Non-current Liabilities
Long-term borrowings
Total non-current liabilities
400
400
380
380
Current Liabilities
Trade and other payables
Short-term borrowings
Total current liabilities
98
22
120
88
12
100
1,435
1,320
Typical Limited
Income Statement
Income Statement
For the year ended 30 June 2002
Sales revenue
Cost of Sales
Gross Profit
Distribution, selling and marketing expenses
Administration and general expenses
Other expenses
Profit (earnings) before interest and tax expense
Finance costs
Profit before tax
Income tax expense
Profit for the period
Earnings per share
2002
2001
Rm
Rm
3,573
2,036
1,537
679
322
254
282
100
182
54
128
2,320
1,206
1,114
394
186
116
418
80
338
101
237
0.256
0.474
340
128
468
-53
415
202
237
439
-99
340
U +
Tools of Analysis
Horizontal
Horizontal Analysis
Analysis
Comparing a companys financial condition
and performance across time
Time
Horizontal Analysis
Time
Now, lets
look at
some ways
to use
horizontal
analysis.
Comparative Statements
Calculate Change in Dollar Amount
Dollar
Change
Analysis Period
Amount
Base Period
Amount
Comparative Statements
Calculate Change as a Percent
Percent
Change
Dollar Change
Base Period Amount
100%
Now, lets
look at trend
analysis!
Trend Analysis
Also called trend
percent analysis
or index number
trend analysis.
Trend
Trend analysis
analysis is
is used
used to
to reveal
reveal patterns
patterns in
in data
data
covering
covering successive
successive periods.
periods.
Trend
Percent
100%
Trend Analysis
Berry Products
Income Information
For the Years Ended 31 December
Item
Revenues
Cost of sales
Gross profit
2004
$ 400,000
285,000
115,000
2003
$ 355,000
250,000
105,000
2002
$ 320,000
225,000
95,000
2001
$ 290,000
198,000
92,000
2000
$ 275,000
190,000
85,000
Trend Analysis
Berry Products
Income Information
For the Years Ended 31 December
Item
Revenues
Cost of sales
Gross profit
2004
$ 400,000
285,000
115,000
2003
$ 355,000
250,000
105,000
2002
$ 320,000
225,000
95,000
Item
Revenues
Cost of sales
Gross profit
2004
2003
2002
(290,000 275,000)
(198,000 190,000)
(92,000 85,000)
100% = 105%
100% = 104%
100% = 108%
2001
$ 290,000
198,000
92,000
2001
105%
104%
108%
2000
$ 275,000
190,000
85,000
2000
100%
100%
100%
Trend Analysis
Berry Products
Income Information
For the Years Ended 31 December
Item
Revenues
Cost of sales
Gross profit
Item
Revenues
Cost of sales
Gross profit
2004
$ 400,000
285,000
115,000
2004
145%
150%
135%
2003
$ 355,000
250,000
105,000
2003
129%
132%
124%
2002
$ 320,000
225,000
95,000
2002
116%
118%
112%
2001
$ 290,000
198,000
92,000
2001
105%
104%
108%
2000
$ 275,000
190,000
85,000
2000
100%
100%
100%
Trend Analysis
Vertical Analysis
Vertical Analysis is also called as
common-size analysis
The term vertical analysis arises from the updown (down-up) movement of our eyes as we
review common-size financial statements.
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Common-Size Statements
Calculate Common-size Percent
Common-size
Percent
Analysis Amount
Base Amount
100%
Financial
FinancialStatement
Statement
Base
BaseAmount
Amount
Balance
BalanceSheet
Sheet
Total
TotalAssets
Assets
Income
IncomeStatement
Statement
Revenues
Revenues
Profit maximization is a
a)
b)
c)
d)
Wealth maximization is a
a)
b)
c)
d)
Horizontal Analysis is
a)Changes in financial statements
b) percentage analysis of increase &
decrease in corresponding items in
comparative financial statements.
c) Financial statements which depict
financial data.
d)none of the above.
Fund Flow is
a) Sources & Uses statement
b) Sources Statement
c) Uses Statement
d) none of the above.
THANK YOU
Email kunmir@yahoo.co.uk