Computerized Accounting

FINANCIAL STATEMENT ANALYSIS
Steps involved in Financial Statement Analysis
The term Financial analysis, also known as analysis and interpretation of
1. Determine the scope and objective for financial statement analysis
financial statements is a process of evaluating the relationship between
One must have clear idea about the purpose and extent of analysis that is need to
component parts of a financial statement to obtain a better understanding of a
be carried out.
firms position and performance. According to Myers, Financial statement
2. Study and comprehend the contents of financial statements
analysis is largely a study of relationships among the various financial factors in
3. Collection of relevant information
business as disclosed by a single set of statements and a study of the trend of
Sufficient number of years of financial statements should be collected.
these factors as shown in a series of statements.
Additional
Objectives of Financial Statement Analysis
Information or data, if needed should also be gathered.
1) To ascertain the profitability and efficiency of the business operations.
4. Re arrange the data
2) To estimate the earning capacity of the firm.
The available data should be properly rearranged or regrouped. so that they can
3) To judge the short-term and long-term solvency of the company.
be made suitable for analysis.
4) To ascertain the debt capacity of the organization.
5. Analysis of collected data using analytical tools
5) To decide on the future prospects of the concern.
Now one can apply appropriate tool to analyse the data. tools like Comparative
6) To find out the efficiency in the utilization of assets.
statements, common-size statements, trends, calculate ratios, etc.can be applied
7) To facilitate inter-firm comparison.
6. Interpretation
8) To aid intra-firm comparison.
The facts revealed by the analysis should be properly interpreted, taking into
9) To facilitate leverage analysis.
account Relevant quantitative and qualitative factors.
10) To help prospective investors in their investment decision.
7. Presentation in suitable form

1
The interpretation drawn from the analysis should be presented in a form which
Worthiness, quality of human resources, reputation, etc.
serves the purpose for which the financial statements are analyzed.
2) They ignore changes in price level.
Types of Financial Analysis
3) The assumption that past happenings may get reflected in the future may not
On the basis of Material used :
hold good.
1. External Analysis: Analysis is done on the basis of published financial
4) Interpretation is based on personal judgment of the analyst, which may be
statements. This type of analysis is done by outsiders like creditors, suppliers
biased.
,investors and government agencies who do not have access to Internal
5) Window dressing, which is the major drawback of financial statements will
accounting records of the company.
have an impact on the analysis.
2. Internal Analysis: Analysis is done on the basis of internal and unpublished
Tools and Techniques for Analysis of Financial Statements
records. It is done by persons like executives and other authorized officials, who
The following are the most important tools are used for analysis,
have access to internal accounting. Records of the firm is called internal analysis.
1) Common size statements
On the basis of Modus Operandi:
2) Comparative statements
1. Horizontal Analysis: Here, every item in the financial statement is analyzed
3) Trend analysis
over a numberof years, order to ascertain its trend. Comparative statements and
4) Ratio analysis
Trend percentages arethe two tools used in this type of analysis.
5) Fund Flow analysis
2. Vertical Analysis: It refers to the study of relationship between various items
6) Cash Flow analysis
in a specificyears financial statement. Common size financial statements and
7) Cost-Volume Profit Analysis
financial ratios are the twotools used in this analytical mode.

Limitations of Financial Statement Analysis
1) Financial statements do not take into account qualitative factors like credit
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Accounting For Management [Type text]
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Measures the liquidity and solvency position of firm.
Facilitates management in decision making.
Helps prospective investors in arriving at an investment decision.
Aids management to initiate corrective action.
relationship between two related accounting figures and is calculated by dividing
Supplies management with inputs to aid in their forecasting and planning.
one by another. Ratio analysis is a technique used for analysis and interpretation
Ratio analysis Facilitates inter-firm comparison.
Ratio analysis helps in effective control over the business through the
RATIO ANALYSIS
Meaning of Ratio Analysis
According to accounting parlance Ratio may be defined as a numerical
of financial statements It helps us to analyze and understand the financial affairs
measuring of actual performancesand comparing it with the planned

and the strength and weakness ofa firm. Extent and quality of analysis and
interpretation depends on the use of apt type of ratio and on the talent of the
performance..
Supplies required information to the interest parties like owners, crs, govt
etc..
caliber analyst.
It brings to light financial strength and weakness of a firm.
Objectives of Financial Statement Analysis

1) To ascertain the profitability and efficiency of the business operations.
Limitation of Ratio Analysis
2) To estimate the earning capacity of the firm.
3) To judge the short-term and long-term solvency of the company.
Differences in the definition of ratios make their calculations and

interpretation Ambiguous.
4) To ascertain the debt capacity of the organisation.
5) To decide on the future prospects of the concern.
Financial statements form the basis for calculation of Ratios. Such
6) To find out the efficiency in the utilization of assets.
statements suffer from several limitations. Ratios derived from them are
7) To facilitate inter-firm comparison.
also suffer from such limitations.
8) To aid intra-firm comparison.
ratios invalid.
9) To facilitate leverage analysis.

10) To held prospective investors in their investment decision.
Importance or Uses of Ratio Analysis
Ratios ignore Changes in price level, which render the interpretation of
It is difficult to find out a proper basis for comparison.
Ratios just provide quantitative input, and its analysis and interpretation
is subject to the personal bias and competence of the analyst.
Ratio analysis Helps in understanding the general efficiency of mgnt.
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Ratios reflect the postmortem analysis of the past affairs of the firm. and
the past need not necessarily be an indicator of the future.
Financial statements are subject to serious limitation called window-
These ratios are calculated to check the short term repaying capacity of a
business. It is further classified into three types. They are
1. Current ratio
dressing. ratios are calculated from such statements. Hence users of such
ratios while making a decision should be careful.
2. Liquid ratio
Liquid Assets .
Current Liabilities
3. Absolute liquid ratio
Absolute liquid Assets

Current Liabilities
While preparing financial statements, different firms follow different

accounting Policies. Hence, interpretation made by
comparing these
ratios will not depict a real picture.
Current Assets .
Current Liabilities
Calculation of a single ratio may not give out the end result required and
THESE THREE RATIOS ARE ALSO CALLED AS LIQUIDITY RATIOS
hence one may be required to calculate several ratios. Too many ratios
LONG TERM SOVENCY RATIOS
can make decision making process confusing and time consuming.

Tools and Techniques for Analysis of Financial Statements
The most important tools are
1) Common size statements
These ratios are calculated in order to check the repaying capacity of the
business in a long run. Therefore it is called as long term solvency ratios. It is
further classified into two types. They are
1. Debt equity ratio
2) Comparative statements
3) Trend analysis
Total long term debts

Share holder funds
Long term debts = Debentures + long term loans and advances or long term
borrowings.
4) Ratio analysis
5) Fund Flow analysis
Share holder funds = Equity shares + Preference shares + reserves + surplus

[profits].
6) Cash Flow analysis

. SOLVENCY RATIOS
2. Proprietary ratio
These ratios are calculated to test the repaying capacity of a business

regarding its borrowing. It is further classified into two types. They are
1. Short term solvency ratios
2. Long term solvency ratios
SHORT TERM SOLVENCY RATIOS
Share holder funds.

Total tangible Assets
Total tangible assets = Current Assets + Fixed Assets.

. PROFITABILITY RATIOS
These ratios are calculated in order to know the profit earning capacity of a
business. It is further classified into four types. They are
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1. Office and administrative expenses.

1. Gross profit ratio
Gross profit X 100

Sales
2. Selling and distribution expenses.

NON OPERATING EXPENSES
Gross profit = Sales Cost of goods sold
These expenses are not essential or important to run or operate a business.
Sales = Cost of goods sold + Gross profit
Example
Cost of goods sold = Sales Gross profit
1. Depreciation
(OR)
2. Loss on sale of Assets
Cost of goods sold = [Opening stock + Purchases Closing stock] + all direct
expenses are to be debited in trading account.
3. Good will written off

4. Financial expenses like interest, dividend etc
5. Preliminary expenses or formation expenses or promotional expenses
2. Net profit ratio
Net profit
Sales
X 100
NON OPERATING INCOMES

These incomes are unusual in nature. Without these incomes and gains one
Net profit = Gross profit all expenses and losses + all incomes and gains.
can operate or run the business. Example

1. Financial incomes like interest, dividend etc.
3. Operating cost ratio
Operating cost
Sales
X 100
2. Profit on sale of Assets.

3. Bad debts recovered.
Operating cost = cost of goods sold + all operating expenses and losses.
4. Refund of Income tax.

IN ALL RATIOS SALES = SALES SALES RETURNS.
4. Operating profit ratio
Operating profit
Sales
X 100
. TURN OVER RATIOS
Operating profit = Gross profit All operating expenses.

(OR)
Operating profit = Net profit + All non operating expenses and losses All
It is classified into five types. They are

1. Stock TO ratio (OR) Inventory turnover ratio
Cost of goods sold

Average stock
non operating incomes and gains.

Average stock
OPERATING EXPENSES
These expenses are essential or very important to run or operate a business.
Example
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= Opening stock + Closing stock

2
2. Fixed Assets turnover ratio =
Sales
.
Fixed Assets
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III TURNOVER RATIOS ARE TO BE EXPRESSED IN TERMS OF TIMES.

Example 4 times, 3 times, 2 times etc.
Fixed Assets = Fixed Assets Depreciation.

3. Capital turnover ratio
Sales
.
Capital employed
1. Capital gearing ratio: it analyses the capital structure of the company.
Capital employed = Share holder funds + Total long term debts.

4. Debtors turnover ratio
Net credit sales

.
Average accounts receivable
This ratio measures the relationship between fixed interest and dividend
bearing funds and equity share holders funds.
Long term loans + debentures + preference share capital
Equity share holders funds
Credit sales = Total sales Cash sales

Net credit sales = Credit sales Sales returns
Alpha manufacturing co. has drawn up the following profit and loss a/c for the
year ended 31st March, 2006.
Average accounts receivable

= Opening debtors & bills receivable + Closing debtors & bills receivable
2
5. Creditors turnover ratio
Net credit purchases
Average accounts payable
Particulars
26,000 By Sales
To Purchase
80,000 By Closing Stock
To Wages
24,000
To Manufacturing Exp.
16,000
To Gross Profit
52,000
1,98,000
Net credit purchases = Credit purchases Purchase returns
To Selling and
Average accounts payable
Distribution Exp.
To Administrative Exp.
= Opening creditors & bills payable + Closing creditors & bills payable
2
To General Expenses
I
SOLVENCY RATIOS ARE TO BE EXPRESSED IN TERMS OF
PROPORTIONS.
Example 4:1, 3:1, 2:1 etc.
PROFITABILITY RATIOS ARE TO BE EXPRESSED IN TERMS OF

PERCENTAGE.
Example 40%, 30%, 20% etc.
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Particulars
To opening stock
Credit purchases = Total purchases Cash purchases
II
Rs.
To value of furniture lost

by fire
To Net Profit
4,000 By Gross Profit
22,800 By Compensation for

acquisition of land
Rs.
1,60,000
38,000
1,98,000
52,000
4,800
1,200
800
28,000
56,800
56,800
You are required to find out:

(a) Gross profit ratio (b) Net profit ratio (c) Operating ratio (d) Operating
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N.P to Net sales ratio.
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11. Netprofit ratio

12. Operating ratio.
Balance sheet as on 31.12..1997
Liabilities
Rs
Issued capital:
Assets
Rs
40,00,000
Building
30,00,000
Reseves
18,00,000
Plant
16,00,000
Creditors
26,00,000
Stock
29,69,000
Profit&loss a/c
6,00,000
Drs
14,20,000
6% Debentures
6,00,000
Bank
6,20,000
Total
96,00,000
40,000 shares of Rs.100 each
96,00,000
Profit & Loss Account

Particulars
Rs.
Particulars
Rs.
To Opening stock
19,90,000
By sales
1,70,00,000
To purchases
1,09,05,000
By closing stock
29,80,000
To Diorect expenses
2,85,000
To Gross profit C/d
68,00,000
1,99,80,000
1,99,80,000
From the following Balance sheet and Profit and loss account as on 31.12.1997 youare required to
To administration expenses
30,00,000
By gross profit b/d
68,00,000
calculate the below given ratios :
To selling and distribution
6,00,000
By non operating income
1,80,000
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
expenses
Current ratio
Quick ratio
Fixed asset ratio
Debt equity ratio
Proprietary ratio
Stock turn over ratio
Fixed asset turn over ratio
Return on capital employed
Debtor turn over ratio
Creditor turn over ratio
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To financial expenses
3,00,000
To non-operaring expenses
80,000
To net profit
30,00,000
69,80,000
69,80,000
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1. Current ratio :Current assets

Current liabilities
=
= 40, 00,0,00 +18, 00,000 + 6, 00,000

50,00,000
26,00,000
= 64, 00,000
5. Proprietary ratio =
= 1.92
Share holders fund

Total tangible assets
Current assets = stock + debtors + Bank = 29,60,000 + 14,20,000 + 6,20,000 = 50,00,000
Creditor = 26,00,000
= 64,00,000
96,00,000
2. Quick ratio = quick assets

Current liabilities
=
= 0.67
20,40,000
26,00,000
6. Stock turn over ration = cost of sales

Average stock
= 0.78
3. Fixed asset ratio =
fixed asset
Long term funds
Cost of sales = sales gross profit = 1,70,00,000 68,00,000 = 1,02,00,000
Average stock = opening stock + closing stock

2
46,00,000
19,90,000 + 29,80,000
2
70,00,0000
= 0.66
Fixed assets = building + plant = 30,00,000 + 16,00,000 = 46,00,000
= 24,85,000
Stock turn over ratio =
Long term funds = share capital + reserves + Profit & loss a/c + debentures
== 4.10 times.
= 40, 00,0,00 +18, 00,000 + 6,00,000 + 6,00,000
7. Fixed asset turn over ratio =
= 70, 00,000
4. Debt- equity ratio = long term debt
Share holders fund
= 6, 00,000
64, 00,000
= 0.094
Long term debt = debenture = 6, 00,000
Share holder fund = share capital + reserves + Profit & loss a/c
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1,02,00,000
24,85,000
cost of sales
Fixed assets
Cost of sales = 1,02,00,000

Fixed assets = building + plant = 30,00,000 + 16,00,000
= 46,00,000
Fixed asset turn overratio =1,02,00,000
46,00,000
= 2.22 times
8. Return on capital employed = profit before interest and taxX 100
Capital employed
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Profit before interest and tax = net profit + non operating expenses +
Interest Non- operating income
= 30,00,000 + 80,000 + 3,00,000 - 1,80,000
= 32,00,000
Capital employed = share capital + reserves + Profit & loss a/c + debentures
= 40, 00,0,00 +18, 00,000 + 6,00,000 + 6,00,000
= 70, 00,000
Return on capital employed =32,00,000X 100
70, 00,000
= 45.71%
9. Debtor turn over ratio = credit sales

Average debtors
= 1,70,00,000
14,20,000
= 11.97 times
10. Debt collection period = days or months in a year
Debtor turn over ratio
= 12 months
1 month
11.97
11. Creditor turn over ration = credit purchases
Net sales
= 30,00,000 X 100
1,70,00,000
= 17.64%
14. Operating ratio = cost of sales + Adm. expenses + selling expenses X 100
Sales
= 1,02,00,000 + 30,00,000 + 6,00,000 X 100
1,70,00,000
= 81.17%
Accounts payable
= 1,09,05,000
26,00,000
= 4.19 times
12. Creditor payment period = days or months in a year
Creditor turn over ratio
= 12 months
4.19
= 2.86 months
13. Net profit ratio = net profit X 100
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FUNDS FLOW ANALYSIS
statement describes the sources from which additional funds were derived
Introduction of Fund
and the use of which these funds were put. Funds flow
Fund means working capital. If current assets of company is more than current
To facilitate fund flow analysis, accounts shown in Balance Sheet can be
liability of business, it is called working capital and working capitals other name
classified as shown below:
is Fund.
Accounts shown in Balance Sheet
Fund = Working capital = Current assets Current liability
1. Current Accounts
a. Current Assets: Eg: Cash, Debtors, Stock,
33. Meaning of Fund Flow Statement

The term Funds has three different meanings. In a narrow sense, it means
b. Current Liabilities: Eg: Creditors, Bills, Payable, etc.,
cash only. In a broad sense, the term fund refers to all financial resources. In
2. Non-Current Accounts :
another sense , fund refers to Working Capital, which is the excess of Current
a. Fixed Assets : Eg: Machinery, Land & Building
Assets over Current Liabilities. In Fund Flow Statement, the word Fund means
b. Fixed Liabilities: Eg: Equity Capital, Preference
Working Capital. The term flow signifies change.
Capital
A Fund Flow Statement highlights the changes in working capital during a
Flow of fund takes place only when a transaction involves one current Account
period. It is popularly known as Statement of Sources and Application of
and one non-current account. For example, purchase of building which is non-
Funds. If a transaction results in increase in working capital, it is called sources
current Account, for cash which is a current account. Transaction between two
of funds. If a transaction decreases working capital, it is construed as
current accounts for example, cash paid to suppliers or two non-current accounts
application of funds. If it does not affect working
like issue of shares as consideration for purchase of building ,does not result in
Definition of fund flow statement
flow of funds. Transaction taking place between Current Accounts and Non-
Fund flow statement is a statement which shows the inflow and out flow of
Current Accounts only will generate funds. Thus, flow of funds can be
funds between two dates of balance sheet. So, it is known as the
represented as follows:
statement of changes in financial position. We all know that balance sheet
Current Accounts -------- Non-Transaction leading to flow of funds--------
shows our financial position and inflow and outflow of fund affects it. So,
Current Accounts
in company level business, it is very necessary to prepare fund flow
1.
statement to know what the sources are and what are applications of fund
The following steps are involved in the preparation of Fund Flow Statement:
Steps involved in the Preparation of Fund Flow Statement [16]
between two dates of balance sheet. Generally, it is prepare after getting
1) Preparation of Schedule of changes in Working Capital.
two year balance sheet. According to Prof. Anthony, The funds flow
2) Preparation of accounts for non-current items.
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3) Calculation of funds from operation through the Preparation of Adjusted
3) It depicts the reasons for changes in working capital.
Profit and Loss account.
4) It helps in working capital management.
4) Preparation of Fund Flow Statement.
5) Sources of funds reveal how the firm has funded its development projects in
the past, whether and to what extent from internal and external sources.
Step 1.Preparation of Schedule of changes in Working Capital:

Making
of
statement
of
Changes
of
Working
Capital
6) Analysis of Application of funds reveals how the resources were used in
For making of fund flow statement. It is very necessary to make
the past. This can act as a guide while planning future funds deployment.
statement of changes of working capital. Because net increase in
7) It gives a general idea about the overall financial management of the
working capital is use of fund and net decrease in working capital is
business.
source of fund. So, it is duty of accountant to make statement of changes
8) Acts as a guideline for efficient use of scarce resources.
of working capital. Making of statement of changes working capital is
9) Helps banks and financial situations to assess the credit worthiness and
repaying capacity of the firm.
very easy and simple.

We take two balance sheets, one is current year balance sheet and other is
10) Aids management in formulating financial policies in areas like dividend
previous year balance sheet. Then we separate current assets and current
declaration, creating reserves, etc
liabilities. If current assets are more than previous year current assets, it
8 . Limitations of Fund Flow Statement

1) It is not original in nature and is only a re-arrangement of data given in
means increase in working capital.

If current assets are less than previous year current assets, it means decrease in
financial statements.
working capital. Because, relationship between current assets and working
2) When both aspects of a transaction involve current account, they are
capital is positive and if any changes in current assets, working capital will
ignored in this statement.
change in same direction. If current liabilities are more than previous year
3) When both aspects of a transaction involve non-current account, they
current liabilities, it means decrease in working capital. If current liabilities are
are not considered in this statement.
less than previous year current liabilities, it means increase in working capital.
4) It depicts the past position and not the future.
Relationship between working capital and current liabilities are inverse.
5) It is not a ideal tool for financial analysis.

6) Changes in cash position are more important that working capital.
7 What are the importance or uses of Fund Flow Statement?

1) It shows how and from what sources funds were raised and they were used.
2) It shows the consequences of business operations, thus enabling management
to take remedial measures.
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9. Steps involved in the Preparation of Fund Flow Statement [FORMAT]

1) Preparation of Schedule of changes in Working Capital.
2) Opening of accounts for non-current items.
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3) Preparation of Adjusted Profit and Loss account.
Schedule of changes in Working Capital
4) Preparation of Fund Flow Statement.

10. What are the different kinds of ratios available to help the management?
i.Profitability ratios,
Effect on Working
Previous
ii. Activity ratios.
Particulars
Current
Year
Rs.
iii.Balancesheet rarios
Increase
Decrease
Rs.
Rs.
3. Distinguish between funds flow and cash flow statements?

1.
2.
3.
4.
5.
6.
Capital
Year
Rs.
Current Assets:
Basis of preparation
Basis of accounting
Changes shown
Usefulness
Short term solvency
Interdependence
Cash
Xxx
Xxx
Xxx
Bank
Xxx
Xxx
Xxx
Bills Receivable
Xxx
Xxx
Xxx
4. What is funds flow statement ? Explain the steps involved in the
Debtors
Xxx
Xxx
Xxx
preparation of funds flow statement.
C.A.
Xxx
Xxx
It refers to the statement showing the changes in working capital and sources and
Current Liabilities:
Bills Payable
Xxx
Xxx
Creditors
Xxx
Xxx
Bank Overdraft
Xxx
Xxx
C.L.
Xxx
Xxx
Net Working
Xxx
Xxx
application of funds
Xxx
i. Preparation of schedule of changes in working capital

ii. Preparation of funds from operation
iii .Preparation of funds flow statement.
Following are the rules for preparing the schedule
Particulars
(i) Increase in Current asset during current year
.
Impact on Working
Capital
Increase
-
Xxx
Capital (CA-CL)
(ii) Decrease in Current asset during current year
Decrease
Net Increase or
(iii) Increase in Current liabilities during current year
Increase
Decrease
(iv) Decrease in Current liabilities during current year
Increase
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Xxx
Total
Increase Decrease
Decrease
Increase
Xxx
Xxx
xxx
Xxx
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2) Opening of accounts for non-current items
[examples: Refund of tax, profit on sale of asset, Dividend received, Loss on
These are prepared, wherever warranted, to ascertain the sources or

application of funds. While preparing, additional information, if any, regarding
such accounts should also be considered.
sale of asset, etc.]
For instance, if opening and closing value of a machine given in balance

sheet are Rs. 1, 00,000 and Rs. 1, 25, 000, and as additional information, it is
given that depreciation charged during the year is Rs. 25, 000, the Machine
account will appear as follows:
Dr
Machine A/c
Particulars
To bal b/d
To Cash [Purchase of machine]
Amount
Rs.
Particulars
Cr
Amount
Rs.
1,00,000 By Depreciation
50,000 By bal c/d
25,000
1,25,000
1,50,000
1,50,000
The balancing figure of Rs. 50,000 represents purchase of machine involving

outflow or application of funds.
3) Preparation of Adjusted Profit and Loss A/c
This is opened to ascertain Funds from operation or Funds lost in
operation.
A fund from operation is the only internal source of funds. The net profit, earned
by the business is known as the internal source. But such net profit shown by
Profit and Loss A/c should be adjusted for Non-fund and Non-operating
items.
Dr
Particulars
To Depreciation on FA
To Goodwill, Patent, Preliminary expenses written off
To Transfer to reserves
To interim dividend Proposed
To Proposed Dividend (if
Amount
Xxx
Xxx
Particulars
By Balance b\d
By profit on sale of asset
Cr
Amou
nt
Xxx
Xxx
Xxx
Xxx
By Refund of income tax

By profit on sale of asset
Xxx
Xxx
Xxx
By Dividend received
Xxx
Xxx
Xxx *
To Provision for tax (if taken

as non-current item)
To Loss on sale of asset
Xxx
Income from Investment

By profit on sales
investment
Xxx
By Funds from operation
To Balance b\d
Xxx
taken as non-current item)
To funds lost in operation
Xxx
Xxx *
Xxx
xxx
The balancing figure in the Adjusted Profit and Loss A/c is either, Funds from
operation or Funds lost in operation.
Non-fund items are those income and expenses charged to Profit and Loss A/c
that does not involve any outflow of fund [examples: writing back of
Provision for tax, Depreciation, Transfer to General Reserve, etc.]
4)
Non-operating items are those income and expenses charged to Profit and Loss
of finds on another along with the data generated in the above three steps.
A/c which are not directly related to business operations of the company.
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Preparation of Fund Flow Statement
This is prepared by incorporating sources of funds on one side, and application
Following is the specimen of Fund Flow Statement:
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STATEMENT OF CHANGES IN WORKING CAPITAL
Fund Flow Statement for the Period
Particulars
Sources of Funds
Amount
Funds from operation
Xxx (1)
Issue of
shares/debentures
Xxx
Application of
Funds
Effects on Working
Increase
Funds lost in
operation
Redemption of
Xxx (1)
Preference shares,
Current Assets:
Stock-in-Trade
Debtors
Cash
CA
Xxx
Purchase of fixed
asset/investment
2004 Rs.
Amount
Debentures
Sale of fixed
2003 Rs.
Xxx
asset/investment
Xxx
Long term loans taken
Xxx
Repayment of long
term loans
Xxx
Decrease in Working
capital
Xxx (2)
Payment of tax
Xxx
Payment of dividend
Xxx
Creditors
CL
Net working
capital(CA-CL)
Net Incre in worki capital
1,21,000
1,81,000
48,000
1,36,000
1,70,000
70,000
3,50,000
3,76,000
1,06,000
1,06,000
2,44,000
62,000
3,06,000
Increase in Working
capital
15,000
Capital
Decrease
-
11,000
22,000
70,000
36,000
70,000
3,06,000
73,000
3,06,000
11,000
62,000
73,000
73,000
2. Prepare a Statement of changes in Working Capital from the following
Xxx (2)
Balance Sheets of Ram Seth Company

st
Xxx
xxx
1. From the following Balance Sheet prepare a schedule of changes in working capital
Liabilities
2003 Rs.
2004 Rs.
Assets
Share capital
3,00,000
3,75,000
Creditors
1,06,000
Profit & Loss A/c
14,000
4,20,000
Ramu Vasu MBA MPhil
2003 Rs.
2004 Rs.
Machinery
70,000
1,00,000
70,000
Stock in Trade
1,21,000
1,36,000
31,000
Debtors
1,81,000
1,70,000
Cash
48,000
70,000
4,20,000
4,76,000
4,76,000
BALANCE SHEET as on 31 December

Liabilities 2003 Rs. 2004 Rs.
Assets
Equity
5,00,000 5,00,000 Fixed Assets
capital
Debentures 3,70,000 4,50,000 Long-term
Investments
Tax
77,000
43,000
Work-inPayable
progress
Creditors
96,000
1,92,000 Stocks
Interest
37,000
45,000
Debtors
Payable
Dividend
50,000
35,000
Cash
Payable
11,30,000 12,65,000
2003 Rs.
6,00,000
2004 Rs.
7,00,000
2,00,000
1,00,000
80,000
90,000
1,50,000
70,000
2,25,000
1,40,000
30,000
10,000
11,30,000 12,65,000
Page 18
STATEMENT OF CHANGES IN WORKING CAPITAL
3. From the following Income Statement ascertain the amount of funds from operations:
Effect on Working
Particulars
2003
Capital
Increase
Decrease
2004
(+)
(-)
Current Assets:
Cash
30,000
10,000
20,000
Debtors
70,000
1,40,000
70,000
Stocks
1,50,000
2,25,000
75,000
Work-in-progress
80,000
90,000
10,000
3,30,000
4,65,000
CA
Tax Payable
77,000
43,000
34,000
Creditors
96,000
1,92,000
96,000
Interest Payable
37,000
45,000
8,000
Dividend Payable
50,000
35,000
15,000
2,60,000
3,15,000
70,000
1,50,000
80,000
80,000
1,50,000
1,50,000
2,40,000
2,04,000
CL
Working Capital
(CA C L)
Net Increase in
Working Capital
Ramu Vasu MBA MPhil
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4. From the following details, calculate funds from operations.
Ramu Vasu MBA MPhil
Page 20
Note: Non-operating items are not given. Hence, the difference between
the P&L a/c treated as funds from operations.
During the year ended 31st December 2005

a) Dividend paid Rs.23,000
b) Depreciation written off: Machinery Rs.14,000; Building Rs.10,000
c) Income tax paid Rs. 28,000 .
Prepare the following statements Statement of changes in working capital
Fund flow statement
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Ramu Vasu MBA MPhil
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Ramu Vasu MBA MPhil
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Ramu Vasu MBA MPhil
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1. Depreciation ofRs.10, 000 and Rs.20, 000 have been charged on plant
and building respectively.
2. A dividend of Rs.20,000 has been paid
3. Income tax of Rs.35,000 has been paid.
Solution: 1. Schedule of changes in working capital :- Increase in working capital
is Rs.51,000
2.Funds from operation :- Rs.1,76,000
3. funds flow statement:- 2,86,000
6. From the following prepare cash flow statement
5.From the following prepare funds flow statement (June 2013)
Particulars
1991
1992
Particulars
1991
1992
Equity share
3,00,000 4,00,000 Goodwill
1,15,000 90,000
1,50,000 1,00,000 Building
2,00,000 1,70,000
General reserve
40,000
70,000
plant
80,000
30,000
48,000
Drs
1,60,000 2,00,000
42,000
50,000
stock
77,000
1,09,000
55,000
83,000
Bills
20,000
30,000
capital
Particulars
Equity share
capital
Redeemable
pref.share.capital
General reserve
Profit and loss
Acc
Proposed
dividend
Creditors
2004
2005
Particulars
3,00,000 4,00,000 Goodwill
2004
1,15,000
2005
90,000
1,50,000 1,00,000 Building
2,00,000
1,70,000
40,000
30,000
70,000
48,000
plant
Drs
80,000
1,60,000
2,00,000
2,00,000
Profit and loss
42,000
50,000
stock
77,000
1,09,000
Proposed
55,000
83,000
20,000
30,000
dividend
Bills payable
Provision for tax
20,000
16,000
40,000
50,000
6,77,000 8,17,000
Bills
receivable
cash
Bank
15,000
10,000
6,77,000
10,000
8,000
8,17,000
pref.share.capital
Additional information:
Ramu Vasu MBA MPhil
Redeemable
2,00,000
Acc
Creditors
receivable
Bills payable
20,000
16,000
cash
15,000
10,000
Provision for tax
40,000
50,000
Bank
10,000
8,000
6,77,000 8,17,000
6,77,000 8,17,000
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Comparative financial statements
1.Depreciation ofRs.10, 000 and Rs.20, 000 have been charged on plant and
building respectively.
Common size statement

Trend analysis
2.A dividend of Rs.20,000 has been paid during 1992
9.who are the parties interested in the Analysis of financial statements?
3.Income tax of Rs.35,000 has been paid during 1992
Creditors
Solution:
Debtors
Customers
1. Cash from operation :- Rs.1,60,000

2. Funds from operation :- Rs.2,18,000
Employees
3. Cash flow statement |- Rs. 2,95,000
Research organizations
1. From the following prepare a balance sheet:-
Govt
Current ratio 2.5
Tax authorities
Liquid ratio 1.5
Owners
Proprietary ratio (fixed asset / proprietary fund) 0.75
Stock exchanges
Working capital Rs.60,000
Investors
Reserves and surplus Rs.40,000
Management
Bank over draft Rs.10,000
10.state the limitations of financial statement analysis.
Solution:-
Based on past data
Current assets Rs.1,00,000
Reliability of figures
Current liabilities: Rs.40,000
Different interpretations
Capital Rs.2,00,000
Price level changes
Fixed assets Rs.1,80,000
Change in accounting methods
8.What are the various methods used for analysis and interpretation of
financial statements?(June 2013).
Ratio analysis
Cash flow analysis
Funds flow analysis
Ramu Vasu MBA MPhil
Limitation of the tools of analysis

What is Cash Flow Analysis? Write down the steps in preparation of a cash Flow
statement.
A cash flow analysis portrays the changes in the cash position between
two accounting periods.
Page 27
Uses: It also provides a clear insight to the management about the different
III Steps: Cash flow statement
sources of cash inflows and the different uses or applications for which cash is
Particulars
needed. It helps in taking short erm financial decisions and also in the
Opening balances: Cash & Bank
preparation of cash budget for the next period. Steps:
Add: sources of cash
I step: Statement of funds from operations
Cash from operations
Particulars120092
Rs.
Net Profit as per P&L a/c

Add: Depreciation on FA
Loss on sale of
FA/investments
Rs.
Issues of shares
Xxx
Issue of debentures
Xxx
Sale of fixed assets and investments
Xxx
Lont term
Rs.
Rs.
xxx
Xxx
Goodwill written off
Xxx
Transfer to general reserve
Xxxx
Xxxx
Xxx
Less: Profit on sale of FA
xxx
2.What are the different kinds of ratios available to help the management?
Xxx
i.Profitability ratios,
II Step statement of cash from operations

Particulars
ii. Activity ratios.

Rs.
Funds from operation
Rs.
iii.Balancesheet rarios
xxx
Add: Increase in current liabilities
xxxx
1.basis of preparation
Decrease in current assets other than cash

&bank
2.basis of accounting
xxxx
Less: Increase in current assets other than cash&
xxxx
3.changes shown
xxxx
4.usefulness
xxx
5.shorterm solvency
bank
Decrease in current liabilities
Cash from operations (or)outflow
Ramu Vasu MBA MPhil
3. Distinguish between funds flow and cash flow statements?
6.interdependence
xxx
xxxx
4. What is funds flow statement ? Explainthe steps involved in the
xxxx
preparation of funds flow statement.
Page 28
It refers to the statement showing the changes in working capital and sources and
Solution: 1. Schedule of changes in working capital :- Increase in working
application of funds
capital is Rs.51,000
i.preparation of schudule of changes in working capitl
2.Funds from operation :- Rs.1,76,000
ii.prepration of funds from operation
3. funds flow statement:- 2,86,000
iii.perparation of funds flow statement
6. From the following prepare cash flow statement
5.From the following prepare funds flow statement (June 2013)

Particulars
Equity share
2004
2005
Particulars
3,00,000 4,00,000 Goodwill
Particulars
2004
2005
Equity share
1,15,000
90,000
capital
capital
Redeemable
2,00,000
1,70,000
pref.share.capital
General reserve
40,000
70,000
plant
80,000
30,000
48,000
Drs
1,60,000 2,00,000
42,000
50,000
stock
77,000
1,09,000
55,000
83,000
Bills
20,000
30,000
pref.share.capital
plant
80,000
2,00,000
Profit and loss
Profit and loss
30,000
48,000
Drs
1,60,000
2,00,000
Acc
Proposed
50,000
stock
77,000
1,09,000
dividend
Creditors
83,000
Bills
20,000
Bills payable
20,000
16,000
cash
15,000
10,000
Provision for tax
40,000
50,000
Bank
10,000
8,000
6,77,000
8,17,000
6,77,000 8,17,000
receivable
30,000
receivable
2,00,000
dividend
Creditors
55,000
1992
2,00,000 1,70,000
70,000
42,000
1991
1,50,000 1,00,000 Building
40,000
Proposed
Particulars
1,15,000 90,000
General reserve
Acc
1992
3,00,000 4,00,000 Goodwill
Redeemable
1,50,000 1,00,000 Building
1991
Bills payable
20,000
16,000
cash
15,000
10,000
Provision for tax
40,000
50,000
Bank
10,000
8,000
6,77,000 8,17,000
6,77,000 8,17,000
1.Depreciation ofRs.10, 000 and Rs.20, 000 have been charged on
4. Depreciation ofRs.10, 000 and Rs.20, 000 have been charged on plant
plant and building respectively.

2.A dividend of Rs.20,000 has been paid during 1992
and building respectively.

5. A dividend of Rs.20,000 has been paid
6. Income tax of Rs.35,000 has been paid.
Ramu Vasu MBA MPhil
3.Income tax of Rs.35,000 has been paid during 1992

Solution:
Page 29
4. Cash from operation :- Rs.1,60,000
3. Different interpretations
5. Funds from operation :- Rs.2,18,000
4. Price level changes
6. Cash flow statement |- Rs. 2,95,000
5. Change in accounting methods
8.What are the various methods used for analysis and interpretation of
6. Limitation of the tools of analysis
financial statements?(June 2013).

a. Ratio analysis
b. Cash flow analysis
c. Funds flow analysis
d. Comparative financial statements
e. Common size statement
f. Trend analysis
9.who are the parties interested in the Analysis of financial statements?
i. Creditors
ii. Debtors
iii. Customers
iv. Employees
v. Research organizations
vi. Govt
vii. Tax authorities
viii. Owners
ix. Stock exchanges
x. Investors
xi. Management
10.state the limitations of financial statement analysis.
1. Based on past data
2. Reliability of figures
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UNIT- V ACCOUNTING IN COMPUTERISED ENVIRONMENT
very expensive. Obtaining the computer systems, procuring the required software
PART A
packages, training the personnel in computer etc., would lead to high cost.
1. Name the basic type of computers.
Further, it involves very high maintenance cost.
Computers can be basically classified into two categories, viz; (i) Analog
9.What is a computer?
Computers (ii) Digital Computers
A computer is an electronic device which accepts data, processes the data
2.What is an 'analog' computer?
accepted and provides results. The data accepted by the computer is called input.
Analog Computers deals with variables that are measured along a continuous
The result provided by the computer is output. The input is fed into the computer
scale and recorded to some pre-determined degree of accuracy.
in coded language or in plain language
3.What is a 'digital' computer?
10.What is coding?
Digital Computers are those that operate on discrete data. It can perform
Conversion of the data in the language understandable,Convenient representation
mathematical operations of addition, subtraction, multiplication and division. It
of value of an item of data
provides complete accuracy
11.What is coding logic?
4.What is a 'hybrid' computer?
The idea behind coding is called coding logic. The identification of items, based on
A computer which combines the features of Analog and Digital computer, is
code is called coding logic.
called Hybrid Computer.
12.State any four requisites of a coding system.
5.What is meant by computerised accounting?
The code should be simple, but not complicated.Each code must represent only
A computerized accounting system is an accounting information system that
one item.It should be as compact as possible to minimise storage
processes the transaction and events as per Generally Accepted Accounting
requirements.It should be so designed to reduce errors in handling.
Principles (GAAP) to produce as per user requirements
13.Bring out any two advantages of coding.
6.Bring out any two advantages of computerising the data.
.Coding results in saving of storage space. Hence, more data can be entered in
in space technology,in the field of medical research,in applied science and
less space.It results in saving of time in entering data and in data transmission.
technology,in industrial research.
14.What is a file?
7.State any two advantages of computerised accounting
A data file or file is a compilation of related data records maintained or stored in
Results are obtained at high speed.Time-consumption is less.
some pre-arranged order.
8.What are the disadvantages of computerised accounting?
15.What is a master file?
Although, the cost of accounting is economical, the cost of installing the system is
A master file stores data regarding an entity in a system, the nature of which is
Ramu Vasu MBA MPhil
Page 31
that it does not change often, but is referred frequently. A master file holds
information that does not change often, but is required often. However, such files
processed, and summarized into financial statements and reports. An

accounting system can be represented by the following graphic.
are to be purged periodically (updated once in a while). Generally, master files

are indexed for fast retrieval of data.
16.What is a transaction file?
A transaction file holds data regarding transactions that take place in a system.
A transaction file holds information that changes frequently and which are large
The purpose of accounting is to provide information used in decision
in nature. These files are to be purged very frequently.
making. Accounting may be viewed as a system (a process) that converts data
17.State the between Master File and Transaction File.
into useful information.
Master fileholds information which does not change often but are required often
Information processes include:
where as Transaction fileholds information which changes very frequently.
1.
Recording
18.State any four documents which form source for data in computerised
2.
Maintaining
accounting?
3.
Reporting
The usual documents (i.e., sources of data) from which data are collected and
entered
into
computer,
as
part
of
computer
accounting
Every business has numerous processes. Some simple, others complex

and cumbersome. But as the business grows, acquires new customers, enters new
are:Invoices,Vouchers,Receipts,Debit Notes
markets and keeps pace with constant changes in statutory regulations... the
19.Name any four outputs of computerized accounting
company will need to maintain highly accurate and up-to-date accounting,
The output obtained from computerised accounting are:
inventory and statutory records.
Trial Balance,Profit and Loss A/c,BalanceSheet,Cash Flow Statements
This is where a computerized accounting helps simplify, integrate, and
20. Mention some of the prepackaged Software used in Accounting?
streamline all the business processes, cost-effectively and easily.
Categories
COMPUTERIZED ACCOUNTING SYSTEM
of
Accounting
Software,
Personal
Accounting
BusinessAccounting,Tally ERP 9.0, Oracle E-Business Suite
A computerized accounting system saves a great deal of time and effort,
Part B
considerably reduces (if not eliminates) mathematical errors, and allows for
1. THE ACCOUNTING SYSTEM
much more timely information than does a manual system. In a real-time
Accounting is the method in which financial information is gathered,
environment, accounts are accessed and updated immediately to reflect activity,

thus combining steps 2 and 3 as discussed in the preceding section. The need to
Ramu Vasu MBA MPhil
Page 32
test for equality of debits and credits through trial balances is usually not
2.
Complete Visibility
required in a computerized system accounting since most systems test for
Computerized accountings giving the company sufficient time to
equality of debit and credit amounts as they are entered. If someone were to
plan, increase the customer base, and enhance customer satisfaction. With
attempt to input data containing an inequality, the system would not accept the
Computerized accounting the company will have greater visibility into
input. Since the computer is programmed to post amounts to the various accounts
the day-to-day business operations and access to vital information.
and calculate the new balances as new entries are made, the possibility of
3.
Enhanced User Experience

Computerized accounting allows the company to enter data in a
mathematical error is markedly reduced.
variety of ways which makes work a pleasure. Adapting to the specific
Computers may also be programmed to record some adjustments
business needs is possible.
automatically at the end of the period. Most software programs are also able to
prepare the financial statement once it has been determined the account balances
4.
Accuracy, Speed
are correct. The closing process at the end of the period can also be done
Computerized accounting has User-definable templates which
automatically by the computer. Human judgment is still required to analyze the
provides fast, accurate data entry of the transactions; thereafter all documents and
data for entry into the computer system correctly. Additionally, the accountants
reports can be generated automatically, at the press of a button.
knowledge and judgment are frequently required to determine the adjustments
5.
Scalability
that are needed at the end of the reporting period. The mechanics of the system,
Computerized accounting adapts to the current and future needs of
however, can easily be handled by the computer.
the business, irrespective of its size or style.
2. WHAT IS THE SALIENT FEATURES OF COMPUTERIZED
6.
Computerized accounting has the ability to handle huge volumes
ACCOUNTING?
1.
Power
of transactions without compromising on speed or efficiency.
Fast, Powerful, Simple and Integrated

Computerized accounting is designed to automate and integrate all
7.
For Improved Business Performance
the business operations, such as sales, finance, purchase, inventory and
Computerized accounting is a highly integrated application that
manufacturing. With Computerized accounting, accurate, up-to-date
transforms the business processes with its performance enhancing
business information is literally at the fingertips. The Computerized
features which encompass accounting, inventory, reporting and statutory
accounting combine with enhanced MIS, Multi-lingual and Data
processes. This helps the company access information faster, and takes
organization capabilities to help the company simplify all the business
quicker decisions. Computerized accounting also guarantees real-time
processes easily and cost-effectively.
optimization of operations and enhanced communication.
Ramu Vasu MBA MPhil
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The computer systems safeguard all the classified information in a
8. Quick Decision Making

Generates real-time, comprehensive MIS reports and ensures
encryption, and biometrics.
access to complete and critical information, instantly.
5) Accuracy:
9. Complete Reliability
Computerized accounting makes sure that the critical financial
IS
THE
ADVANTAGES
IMPORTANCE
The computer systems enable you to process information with supreme

accuracy. The accuracy of the systems helps in reducing the
information is accurate, controlled and safe from data corruption.

3. WHAT
systematic manner. There are various tools available like pass word,
OF
turnaround time for preparation of financial statements for all the

entities that are interested in the financial statements.
COMPUTER SYSTEM IN ACCOUNTING?
6) Internal Control Systems:
1) Faster and efficient processing of information: In the current business environment the volumes of business are
The internal control systems are highly efficient in the computerized
extremely high and of tumultuous multitude. In order to process the ever
environment. They do not allow manipulations to take place
burgeoning information it is important that some tools expedite our
easily. Even if there is a scope of manipulation, the internal
work. It is highly cumbersome to attain such efficiency manually. Thus
control systems keep a tab that manipulations can be detected.
computer systems help us process voluminous information in real-time.

2) Automatic generation of accounting documents like invoices, cheques,
7) Real time transfer of funds:Transfer of money due to computerization has developed at a rapid
speed. The speed at which money gets transferred from one place
and statement of accounts: In order to carry out transactions day in and day out we need
to the other in the world has taken the world of business by storm.
documents like invoices, cheques and statements of account.
Banks are busy developing new technology to increase the
These documents are readily prepared by the computer system
efficiency of free flow of funds.

8) Convenience:
thus reducing the burden of manually.
Computerization has lead to customer convenience. ATM facilities have
3) MIS (Management Information Systems) generation:

The computerized system helps us in generating various reports that
increased the customers abilities to withdraw money from any
become very essential and crucial for management to base their
place at any point in time. Such facilities are only possible
judgments upon. MIS has become an extremely important decision
because of highly computerized accounting environment that
making tool in contemporary times.
facilitates such transactions.
4) Security of Information:
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4. WHAT
IS
THE
NEED
AND
REQUIREMENTS
OF
13. Accounting Queries

There are accounting queries which are based on some
COMPUTERSIED ACCOUNTING?
The need for computerised accounting arises from advantages of
external parameters. For example, a query to identify customers

who have not made the payments within the permissible credit
speed, accuracy and lower cost of handling the business transactions.
period can be easily answered by using the structured query
9. Numerous Transactions
The computerised accounting system is capable of
handling large number of transactions with speed and accuracy.
language (SQL) support of database technology in the

computerised accounting system. But such an exercise in a
manual accounting system is quite difficult and expensive in
10. Instant Reporting

The computerised accounting system is capable of offering
quick and quality reporting because of its speed and accuracy.
terms of manpower used. It will still be worse in case the credit

period is changed.
14. On-line facility
11. Reduction in paper work

A manual accounting system requires large physical
Computerised accounting system offers online facility to
storage space to keep accounting records/books and vouchers/
store and process transaction data so as to retrieve information to
documents. The requirement of stationery and books of accounts
generate and view financial reports.
along with vouchers and documents is directly dependent on the
15. Scalability
volume of transactions beyond a certain point. There is a dire need
Computerised accounting system are fully equipped with
to reduce the paper work and dispense with large volumes of
handling the growing transactions of a fast growing business
books of accounts. This can be achieved by introducing
enterprise. The requirement of additional manpower in Accounts
computerised accounting system.
department is restricted to only the data operators for storing

additional vouchers. There is absolutely no additional cost of
12. Flexible reporting

The reporting is flexible in computerised accounting
system as compared to manual accounting system. The reports of
processing additional transaction data.

16. Accuracy
a manual accounting system reveal balances of accounts on
The information content of reports generated by the
periodic basis while computerized accounting system is capable of
computerized accounting system is accurate and therefore quite
generating reports of any balance as when required and for any
reliable for decisionmaking. In a manual accounting system the
duration which is within the accounting period.
reports and information are likely to be distorted, inaccurate and
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The computer cannot make a decision like human beings.
therefore cannot be relied upon. It is so because it is being
It is to be guided by the user.
processed by many people, especially when the number of

transactions to be processed to produce such information and
4. Maintenance
Computer requires to be maintained properly to help
report is quite large.
maintain its efficiency. It requires a neat, clean and controlled
17. Security
Under manual accounting system it is very difficult to
secure such information because it is open to inspection by any
temperature to work efficiently.

5. Dangers for Health
eyes dealing with the books of accounts. However, in
Extensive use of computer may lead to many health
computerised accounting system only the authorised users are
problems such as muscular pain, eyestrain, and backache, etc.
permitted to have access to accounting data. Security provided by
This affects adversely the working efficiency and increasing
the computerised accounting system is far superior compared to
medical expenditure.
any security offered by the manual accounting system.
ADVANTAGES
5. WHAT IS THE LIMITATIONS OF A COMPUTER AND
The main advantages of a computerized accounting system are listed below:

1. Speed
COMPURISED ACCOUNTING
The limitations of computer are depending upon the operating
environment they work in. These limitations are given below as:
Automatic document production

2. Accuracy
3. Up-to-date information
1. Cost of Installation
Computer hardware and software needs to be updated
4. Availability of information
from time to time with availability of new versions. As a result
5. Management information
heavy cost is incurred to purchase a new hardware and software
6. GST/VAT return
from time to time.
7. Legibility
8. Efficiency
2. Cost of Training
To ensure efficient use of computer in accounting, new
versions of hardware and software are introduced.
10. Cost savings
This requires training and cost is incurred to train the staff personnel.
3. Self Decision Making
Ramu Vasu MBA MPhil
9. Staff motivation
11. Reduce frustration

12. The ability to deal in multiple currencies easily
Page 36
13. Redundant data storage permits efficient generations of some reports
system. It does away the necessity to create and maintain journals, ledgers, etc.,
14. Increase revenue while lowering operating costs and enhancing
which are essential part of manual accounting. Some of the commonly used
accounting softwares are Tally, Cash Manager, Best Books, etc.
competitive advantage of the company.
Accounting software is used to implement a computerised accounting.
6. DISADVANTAGES OF COMPUTERIZED ACCOUNTING
7.
1.
Transactions orientation only
The computerised accounting is based on the concept of database. It is basic
2.
Periodic not real time reporting
software which allows access to the data contained in the data base. It is a system
3.
Limited flexibility for ad hoc reports
to manage collection of data insuring at the same time that it remains reliable and
confidential.
ROLE OF COMPUTERS IN ACCOUNTING

The most popular system of recording of accounting transactions is
manual which requires maintaining books of accounts such as Journal, Cash

Book, Special purpose books, ledger and so on. The accountant is required to
Following are the components of Computerised accounting software:

1. Preparation of accounting documents
Computer helps in preparing accounting documents like Cash Memo,
prepare summary of transactions and financial statements manually. The
Bills and invoices etc., and preparing accounting vouchers
advanced technology involves various machines capable of performing different
2. Recording of transactions
accounting functions, for example, a billing machine. This machine is capable of
Every day business transactions are recorded with the help of computer
computing discount, adding net total and posting the requisite data to the relevant
software. Logical scheme is implied for codification of account and transaction.
accounts.
Every account and transaction is assigned a unique code. The grouping of
With substantial increase in the number of transactions, a machine was
accounts is done from the first stage. This process simplifies the work of
developed which could store and process accounting data in no time. Such
recording the transactions.
advancement leads to number of growing successful organisations. A newer
3. Preparation of Trial Balance and Financial Statements
version of machine is evolved with increased speed, storage, and processing
After recording of transaction, the data is transferred into Ledger account
capacity. A computer to which they were connected operated these machines. As
automatically by the computer. Trial Balance is prepared by the computer to
a result, the maintenance of accounting data on a real-time basis became almost
check accuracy of the records. With the help of trial balance the computer can be
essential. Now maintaining accounting records become more convenient with the
programmed to prepare Trading, Profit and Loss account and Balance Sheet.
computerised accounting.
These components can be shown as :
The computerised accounting uses the concept of databases. For this
COMPONENTS OF COMPUTERISED ACCOUNTING SOFTWARE
purpose an accounting software is used to implement a computerized accounting

Ramu Vasu MBA MPhil
Page 37
These steps can be explained with an example making use of Automatic

Recording of Transaction in
respective voucher
Teller Machine (ATM) facility by a Bank-Customer.

1. Data Entry :
Processing presumes data entry. A bank customer operates an
ATM facility to make a withdrawal. The actions taken by the customer
Purchase
Sales
constitute data which is processed after validation by the computerised

personal banking system.
Ledger
2. Data Validation :
It ensures the accuracy and reliability of input data by comparing
Trial Balance
the same with some predefined standards or known data. This validation
Trading,
Profit & Loss
Account
is made by the Error Detection and Error Correction procedures. The

Balance
Sheet
control mechanism, wherein actual input data is compared with

predetermined norm is meant to detect errors while error correction
procedures make suggestions for entering correct data input. The Personal
8.
WHAT ARE THE STEPS IN COMPUTERISED ACCOUNTING
Identification Number (PIN) of the customer is validated with the known
Transaction processing system (TPS) is the first stage of computerized
data. If it is incorrect, a suggestion is made to indicate the PIN is invalid.
accounting system. The purpose of any TPS is to record, process, validate and
Once the PIN is validated, the amount of withdrawal being made is also
store transactions that occur in various functional areas of a business for
checked to ensure that it does not exceed a pre-specified limit of
subsequent retrieval and usage. TPS involves following steps in processing a
withdrawal.
transaction: Data Entry, Data Validation, Processing and Revalidation, Storage,
3. Processing and Revalidation :

The processing of data occurs almost instantaneously in case of
Information and Reporting.

It is one of the transaction processing systems which is concerned with
Online Transaction Processing (OLTP) provided a valid data has been fed
financial transactions only. When a system contains only human resources it is
to the system. This is called check input validity. Revalidation occurs to
called manual system; when it uses only computer resources, it is called
ensure that the transaction in terms of delivery of money by ATM has
computerised system and when it uses both human and computer resources, it is
been duly completed. This is called check output validity.
called computer-based system.

Ramu Vasu MBA MPhil
4. Storage :
Page 38
Processed actions, as described above, result into financial

transaction data i.e. withdrawal of money by a particular customer, are
operates on such database using the required interface and also takes the
required reports by suitable transformations of stored data into information.
stored in transaction database of computerized personal banking system.
Therefore, the fundamentals of computerised accounting include all the basic
This makes it absolutely clear that only valid transactions are stored in the
requirements of any database-oriented application in computers. On the basis of
database.
the discussions, these are the following differences between manual accounting
and computerised accounting
5. Information :
The stored data is processed making use of the Query facility to
The primary objectives of the accounting function in an organization are
produce desired information.
to process financial information and to prepare financial statements at the end of
6. Reporting :
Reports can be prepared on the basis of the required information
ARE
THE
BASIC
REQUIREMENTS
the accounting period. Companies must systematically process financial

information and must have staff who prepares financial statements on a monthly,
content according to the decision usefulness of the report.

9. WHAT
10. WHAT ARE THE OBJECTIVES OF ACCOUNTING SYSTEM
OF
THE
quarterly, and/or annual basis.

To meet these primary objectives, a series of steps is required.
COMPUTERISED ACCOUNTING SYSTEM

The basic requirements of any computerised accounting system are the
Collectively these steps are known as the accounting cycle. The steps, applicable
to a manual accounting system, are described below. Later, there will be a brief
followings:
discussion of a computerized processing system.
1. Accounting framework
It is the application environment of the computerised accounting
system. A healthy accounting framework in terms of accounting
principles, coding and grouping structure is a pre-condition for any
computerized accounting system.
THE STEPS OF THE CYCLE

1. Collect and analyze data from transactionsand events:
As transactions and events related to financial resources occur, they are
analyzed with respect to their effect on the financial position of the
company. As an example, consider the sales for a day in a retail
2. Operating procedure
A well-conceived and designed operating procedure blended with suitable
establishment that are collected on a cash register tape. These sales
operating environment of the enterprise is necessary to work with the
become inputs into the accounting system. Every organization establishes
computerised accounting system.
a chart of accounts that identifies the categories for recording transactions
The computerised accounting is one of the database-oriented applications

wherein the transaction data is stored in well- organized database. The user
Ramu Vasu MBA MPhil
and events. The chart of accounts for the retail establishment mentioned
earlier in this paragraph will include Cash and Sales.
Page 39
to the ledger, all amounts recorded on the debit side of accounts (i.e.,
2. Journalize transactions:
After collecting and analyzing the information obtained in the
first step, the information is entered in the general journal, which is
recorded on the left side) must equal all amounts recorded on the credit
side of accounts (i.e., recorded on the right side).
called the book of original entry. Journalizing transactions may be
Preparing an unadjusted trial balance tests the equality of debits and credits as
done continually, but this step can de done in a batch at the end of the
recorded in the general ledger. If unequal amounts of debits and credits are
day if data from similar transactions are being sorted and collected, on
found in this step, the reason for the inequality is investigated and corrected
a cash register tape, for example. At the end of the day, the sales of
before proceeding to the next step. Additionally, this unadjusted trial
$4,000 for cash would be recorded in the general journal in this form:
balance provides the balances of all the accounts that may require
adjustment in the next step.
3. Post to general ledger:

The general journal entries are posted to the general
5. Prepare adjustments:
ledger, which is organized by account. All transactions for the
Period-end adjustments are required to bring accounts to
same account are collected and summarized; for example, the
their proper balances after considering transactions and/or events
account entitled Sales will accumulate the total value of the
not yet recorded. Under accrual accounting, revenue is recorded
sales for the period. If posting were done daily, the Sales
when earned and expenses when incurred. Thus, an entry may be
account in the ledger would show the total sales for each day as
required at the end of the period to record revenue that has been
well as the cumulative sales for the period to date. Posting to
earned but not yet recorded on the books. Similarly, an adjustment
ledger accounts may be less frequent, perhaps at the end of each
may be required to record an expense that may have been incurred
day, at the end of the week, or possibly even at the end of the
but not yet recorded.

6. Prepare an adjusted trial balance:
month.
As with an unadjusted trial balance, this step tests the
4. Prepare an unadjusted trial balance:

At the end of the period, double-entry accounting requires that debits and
equality of debits and credits. However, assets, liabilities, owners
credits recorded in the general ledger be equal.Debit and credit merely
equity, revenues, and expenses will now reflect the adjustments
signify position left and right, respectively. Some accounts normally
that have been made in the previous step. If there should be
have debit balances (e.g., assets and expenses) and other accounts have
unequal amounts of debits and credits or if an account appears to
credit balances (e.g., liabilities, owners equity and revenues). As
be incorrect, the discrepancy or error is investigated and
transactions are recorded in the general journal and subsequently posted
corrected.
Ramu Vasu MBA MPhil
Page 40
7. Prepare financial statements:
3.
greater accuracy
Financial statements are prepared using the corrected
4.
more timely reports
balances from the adjusted trial balance. These are one of the
5.
better control
primary outputs of the financial accounting system.
But the questions are: Will you achieve these results? And how quickly?
8. Close the accounts:
One of the biggest mistakes an agency can make is to believe that an accounting
Revenues and expenses are accumulated and reported by
system in trouble can be improved by putting it on the computer. This is virtually
period, either a monthly, quarterly, or yearly. To prevent their not
never the case: a mess put in to the computer can be worse than a mess on ledger
being added to or comingled with revenues and expenses of
paper.
another period, they need to be closed outthat is, given zero
THE PREREQUISITES FOR COMPUTERIZING YOUR ACCOUNTS
balancesat the end of each period. Their net balances, which
The most important factor to consider when deciding whether to
represent the income or loss for the period, are transferred into
computerize the accounting system is the accounting expertise of responsible
owners equity. Once revenue and expense accounts are closed,
people at your agency. People, not computers, do accounting. Computers add
the only accounts that have balances are the asset, liability, and
numbers very quickly, and enable you to enter the number into the system once
owners equity accounts. Their balances are carried forward to the
for it to appear in all journals, ledgers and other reports.
next period.
However, a human being has to decide where to enter that information
9. Prepare a post-closing trial balance:
and then to keep the data into the system. Someone in the organization still has to
The purpose of this final step is two-fold: to determine that
understand debits and credits, decide what account code to charge each
all revenue and expense accounts have been closed properly and
transaction to, determine whether an error has been made and, if so, how to
to test the equality of debit and credit balances of all the balance
correct that error. So, computerizing the accounting function does not
sheet accounts, that is, assets, liabilities and owners equity.
automatically lead to greater accuracy or better control.

It is important to have "clean," that is accurate, up-to-date beginning
11. WHY SHOULD YOU COMPUTERIZE YOUR ACCOUNTING

SYSTEM?
balances to enter into your new computerized accounting system. This is one
Most organizations seek the following benefits from accounts
area where "garbage in, garbage out" really applies. Many organizations choose
to enter data starting from audited financial statements to get them off to a fresh
automation:
start.
1.
increased efficiency
2.
lower costs (less staff time supporting accounting activities)
Ramu Vasu MBA MPhil
12. What accounting software should you purchase?
Page 41
Well, there is no one definite answer to this question. To
No way. Since there are so few controls for spreadsheet software,
understand why, imagine answering the question, What's the best car to
numbers can be easily changed, damaging the integrity of your financial reports.
buy? In order to answer, you would first need to ask questions such as:
However, you can export, or electronically transfer, data from your accounting
How many passengers do you normally have? How much are you willing
system into a spreadsheet package such as Lotus or Excel to prepare more
to spend? What features are important to you?
customized reports.
One of these considerations might outweigh all of the others.
Similarly, it is not a good idea to keep your books on database software
Once you have all the information, there might be two or three cars which
which does not have the controls or reporting capability of accounting software.
meet the criteria. The final decision will be based on personal preference.
Finally, many consultants do not recommend using checkbook software for
A similar set of questions and circumstances can be applied to selecting
nonprofit bookkeeping. The attraction of checkbook software is that it is easy to
an accounting software package.
use. However, most nonprofits outgrow checkbook software quickly because it
13. What to look for when selecting a accounting software package?

The following factors often play an important role in the final selection of
accounting software's:
does not use double-entry bookkeeping and its reporting capabilities are often
very limited.
15. PLANNING FOR A COMPUTERIZED ACCOUNTING SYSTEM
Selecting accounting software is a major responsibility that takes a
i.
How many checking accounts are permitted?
ii.
Can the software handle the payroll function, including W-2s
considerable amount of careful planning. After all, if the selected program fails
and 1099s? How easily?
to meet the organization's needs or the accounting staff is not adequately trained
Is there room to grow into the software? Will it be able to
to operate it, the business could be thrown into turmoil, losing much time and
accommodate your needs as they become more sophisticated?
money.
iii.
iv.
Does the software include security features which prevent
a. WHERE TO BEGIN
unauthorized personnel from accessing and/or manipulating data
b. SAFEGUARDING DATA
in the accounting system?
c. SOFTWARE LINKS
v.
What installation and ongoing support is available?
vi.
How long has the company been in business?
vii.
Are there user groups or other support mechanisms outside of
16. Distinguish between manual accounting and computerized accounting?
the vendor?
14. Why can't we just put the books on spreadsheet software?
Ramu Vasu MBA MPhil
Page 42
18. What are the Features?

a. Processing by one or more computers
b. Operated by the entity or by a third party
c. Processing with the help of one or more computer software e.g.
Tally
d. Software used may be a generic software purchased from the
market (package software) or
e. May be developed specifically for the business (custom
software)
19. Role / Benefits / Advantages
a) Speeding up the process
b) Automation of ledger posting, Trial balance and subsidiary
ledger
c) Accuracy
17 What are the Significance of Computerized Accounting
System?
a. Inventory control
d) Reduced error
e) Eliminating duplication of work
f) Immediate availability of information
b. Production planning
g) Easy access
c. Budgeting and Variance analysis
h) Flexibility
d. Plant capacity utilization
i) Better quality of work, clean and neat
e. Quality control
j) Scalable
f. Market research
k) Lower operating cost
g. Purchase accounting
l) Improved efficiency
h. Sales accounting
m) Relieves employee monotony
i. Payroll accounting
n) Facilitates standardization
j. Informationmanagement, etc.
o) Minimization of frauds
Ramu Vasu MBA MPhil
Page 43
20. What are the Limitations / Disadvantages
23. What are the Coding Procedure?
a) Security / Integrity / Virus / Hacking
Maintaining the Hierarchy of Ledgers
b) May lead to unemployment
Maintaining Hierarchy of Ledgers
c) High cost of installation
a) Accounting master files are created with codes and description
d) Requires special skills for operation
of accounts
e) Frequent repairs
b) In a hierarchical coded system reports can be generated based
f) Frequent power failures
on codes
c) General ledger, Debtors ledger and Creditors ledger are
21. What are the Features of A/cg Software

a) On-screen input and print outs
automatically created by any standard software
b) Automatic updating
d) At the time of creation, some of the account heads are indicated
c) Automatic stock adjustments
to the system as cash, bank, debtors and creditors
d) Integration of database with the accounting programme

e) Automatic calculation of payroll
purchases to creditors a/c
22. Codification and Grouping of Accounts - Coding System

1.
Codification refers to allotting code numbers to accounts in a

hierarchical structure
2.
3.
e) The system then automatically posts sales to debtors a/c and
24. Explain the Prepackaged Accounting Software?

Prepackaged Software
a) Prepackaged
software
are
generic
accounting
systems
Accounts are first systematically grouped into Major Heads such
purchased from the market rather than developed in-house (ex:
as:
Tally accounting Software)

b) These Software are easy to use, relatively inexpensive and
1.
Assets
2.
Liabilities
3.
Revenue Receipts
c) The installation of these Software are very simple
4.
Capital Receipts
d) A network version is generally available which works on client-
5.
Revenue Expenditure
6.
Capital Expenditure, etc.
readily available
server architecture
e) User manuals guide the user on how to use the Software
The sub-groups or Minor Heads could be Cash or Receivables
f) Vendor provides regular updates.
or Payables and so on.

Ramu Vasu MBA MPhil
Page 44
Configuring / Customizing / Installing Prepackaged Software

a) Creation of Company, name, address, contact details, PAN,
CST/TNGST, etc
e) Bank Book
f) Cash Purchase Book
g) Purchase Return register
b) Defining accounting period
h) Stock movement register
c) Creation of chart of accounts in master file with codes
i) Journal Book
d) Each a/c to be classified according to type
j) Petty Cash Book
e) Opening balances need to be entered
k) General Ledger
f) Creating master files for customer, supplier, product, etc.
l) Stock Ledger
g) Defining system of valuation such as LIFO, FIFO, Weighted
m) Purchase Book
average, etc
n) Creditors Ledger
o) Subsidiary Ledger
List of Master Files

a) Typically, any standard prepackaged Software will have the
following master file screens:
p) Production register
q) Sales Book
1. Company master file
r) Debit Note Register
2. Accounts master file
s) Debtors Ledger
3. Sub ledger master file
t) Consumption Register
4. Customer master file
1. Document printing options such as trial balance, POs, challans,
5. Vendor master file
declaration forms and invoices printing
6. Product master file
2. Bank reconciliation reports
7. Division master file
3. MIS reports like aging of debtors, slow moving and non-
25. List
of
Following reports are common to most Software:
Reports
moving stock, etc.

4. House keeping section provides:
a) Cash Book
1. System maintenance features
b) Cash Sales Book
2. Taking back-up and system restore
c) Sales Return register
3. Clean-up, fine tuning and re-indexing of Software, etc.
d) Credit Note Register

Ramu Vasu MBA MPhil
Page 45
developed on the basis of requirement specifications provided
Advantages of Prepackaged Software
by the user organization.
a) Easy to install
2. The need for customized accounting software could be:
b) Relatively inexpensive
c) Easy to use
1. Unique nature of the business or
d) Backup procedure is simple
2. The functionality desired may not available in pre-
e) Flexibility
packaged software.
f) Very effective for small and medium size businesses
Advantages of Customized Software

1. Uncommon functions can also be computerized
Disadvantages of Prepackaged Software

a) Does not cover peculiarities of specific business
2. The input screens and input documents can be matched for ease
b) Does not cover all functional areas
of data entry
c) Customization may not be possible in most such software
3. Reports can be designed as desired
d) Reports generated are not sufficient or serve the purpose
4. Additional MIS reports can be included
e) Lack of security
5. Bar-code scanners can be used as input devices
f) Bugs in the software
6. The system can align with the organizational structure of the

company.
Considerations Involved in Selection?

a) Some of the criteria for selection of prepackaged Software
could be the following:
Disadvantages of Customized Software

1. Ambiguous specifications resulting in a defective or incomplete
1. Fulfillment of business requirements
system
2. Completeness of reports
2. Presence of bugs in the software
3. Ease of use
3. Incomplete documentation
4. Cost
4. Inadequate change management procedure resulting in system
5. Reputation of the vendor
compromise
6. Regular updates.
5. Poor vendor support and lack of access to source code
Customized Accounting Software
6.
Delay in completion of the software.
1. Customized accounting software is one where the software is
Ramu Vasu MBA MPhil
Page 46
Part A (10 x 2 = 20 Marks)

1. What is Forfeiture of Shares?
2. List the disadvantages of HRM?
3. What are the Tools and Techniques used by Management Accountant?
4. What are the objectives of Financial Accounting?
5. Definition Company?
1. Define Accounting.
2. What are the Function of accounting?
3. Define Cost Accounting
4. Define the HRA.
5. Define Inflation accounting.
Part B
6. (a) Generally Accepted Accounting Principles (GAAP)?
(b) What are the methods of human resources?
[6]
[7]
7. (a) What are the functions of financial accounting? And its advantages and
limitation?
[7]
(b) Distinguish between cost account and Management accounts?
Purchased
75,000
Opening Stock
25,000
Establishment Expenses
15,000
Wages
2,000
Insurance
1,000
Commission Received
4,500
Sundry Debtors
28,100
Bank Balance
20,000
Sundry creditors
10,000
Interest (Cr)
3,000
The following adjustment are to be made:
a) The closing stock was Rs.32,000
b) Outstanding wages Rs. 500 and Outstanding interest 900.
c) Prepaid Insurance Rs. 300
d) Commission received on advance Rs. 300
e) Allow interest on capital @10%
f) Depreciation Building 2.5 % , Furniture & Motor Van @10%
g) Charge interest on Drawing Rs. 500
h) Accrued Interest Rs. 500.
6. (a) What are the techniques used in Inflation Accounting?
[6]
(b) Explain the various Statutory Books that are maintained by a

[6]
8. From the following Balance of Mr. Rajan for the year ending on
31.3.2014
[14]
company.
[7]
7. (a) What are the advantages of human resources accounting?
[7]
(b) What is the difference between financial account and Management

Capital
1,00,000
Drawings
18,000
Buildings
15,000
Furniture
7,500
Motor Van
25,000
Loan from Hari @12% interest
15,000
Interest paid above
900
Sales
1,00,000
Ramu Vasu MBA MPhil
accounts?
[6]
8. From the following prepare final accounts for the year ended
31.3.2014
Page 47
[14]
particulars
capital
Plant
Sales
Purchases
Returns
Opening stock
Discount
Bank charges
Creditors
Salaries
Manufacturing
wages
Carriage (in)
Carriage(out)
Debtors
Bad debt provision
Rent and rates
Advertisement
Cash
Bank
Total
Debit Rs.
Credit Rs
50,000
80,000
1,77,000
60,000
1000
30,000
350
75
750
800
25000
6800
10000
525
Personal account(persons and artificial persons) Debit the receiver

and Credit the giver
Real account(tangibles, assets, cash,etc.) - Debit what comes in and
Credit what goes out
Nominal account Debit all expenses/loses and Credit all
incomes/gains
4. Explain management accounting information?
Management Accounting is concerned with providing necessary
information to the management in such a way as to enable it to
2,54,075
discharge its management functions efficiently.

Management accounting is concerned with the supply of information
Adjustments:
a. Closing stock Rs.35000
b. Depreciate plant by 6%
c. Interest on capital 5% pa.
d. Bad debt provision to be adjusted to Rs.500
which is useful to management in decision-making for the efficient

functioning of the enterprise and, thus, in maximising profits. It is the
reproduction of financial statements (Profit and Loss Account and
1. What are the different ways by which alteration of share capital of

company can be carried out?
1. Historical cost accounting Vs Inflation accounting

2. Adjustment items
3. Use of index numbers
a. It replaces monetary unit of measurement
b. It provides a uniform measuring rod.
c. It provides a tool for comparison of diverse resources.
d. It advocates its use for restating assets as well as shareholders
capital.
It presents information to the proprietors, showing how their funds are utilized.
3. What are the golden Rules of Accounting?
750
1200
45000
10000
2000
900
6000
2,54,075
Consolidation or subdivision of the existing shares in to shares of larger or

smaller denominations.
Conversion of fully paid up shares in to stocks and vice versa
Cancellation of unissued shares
2. What are the issues in inflation accounting?
Balance Sheet) in such a way as will enable the management to take

decisions and to control activities.
Increase of share capital by issue of new shares

Ramu Vasu MBA MPhil
Page 48
5. What is compound journal entry?
6. (b) Write the pro forma of vertical balance sheet.
[6]
a. Journal is a systematic recording of business transaction keeping

the golden rules of accounting.
b. A compound journal entry is a simple journal entry in which there
will be more than one debit or credit .
Part B
(a) Write the format of journal, ledger and trial balance?
Ramu Vasu MBA MPhil
[7]
Page 49
7. (a) Write the format of final accounts.
[7]
Application of 8000 shares were rejected and the remaining applications

were allotted the 50000 shares on pro-rate basis. The excess money on
application was adjusted towards the amount due on allotment.
The first and final call was made in due course the amount due received
with the exception of 1000 shares.
These share were forfeited And subsequently re- issued as full played for
Rs 8 Per share pass the journal enters for the above transaction.
(b) What is the difference between cost account and Management

accounts?
[14]
[6]
8. The company issued 50,000 equity share of Rs 10 each at

premium of Rs 3 per share payable as follow.
a. Application 4
b. Allotment - 5 (Including of premium)
c. First Call and Final call Rs 4 per Share.
Subscription received for 70,000 share.
Ramu Vasu MBA MPhil
Page 50

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FINANCIAL STATEMENT ANALYSIS

Steps involved in Financial Statement Analysis

The term Financial analysis, also known as analysis and interpretation of

1. Determine the scope and objective for financial statement analysis

financial statements is a process of evaluating the relationship between

component parts of a financial statement to obtain a better understanding of a

firms position and performance. According to Myers, Financial statement

2. Study and comprehend the contents of financial statements

analysis is largely a study of relationships among the various financial factors in

3. Collection of relevant information

business as disclosed by a single set of statements and a study of the trend of

Sufficient number of years of financial statements should be collected.

these factors as shown in a series of statements.

Objectives of Financial Statement Analysis

Information or data, if needed should also be gathered.

1) To ascertain the profitability and efficiency of the business operations.

4. Re arrange the data

2) To estimate the earning capacity of the firm.

3) To judge the short-term and long-term solvency of the company.

be made suitable for analysis.

4) To ascertain the debt capacity of the organization.

5. Analysis of collected data using analytical tools

5) To decide on the future prospects of the concern.

6) To find out the efficiency in the utilization of assets.

statements, common-size statements, trends, calculate ratios, etc.can be applied

7) To facilitate inter-firm comparison.

8) To aid intra-firm comparison.

9) To facilitate leverage analysis.

account Relevant quantitative and qualitative factors.

10) To help prospective investors in their investment decision.

7. Presentation in suitable form

Worthiness, quality of human resources, reputation, etc.

2) They ignore changes in price level.

Types of Financial Analysis

On the basis of Material used :

1. External Analysis: Analysis is done on the basis of published financial

4) Interpretation is based on personal judgment of the analyst, which may be

statements. This type of analysis is done by outsiders like creditors, suppliers

,investors and government agencies who do not have access to Internal

5) Window dressing, which is the major drawback of financial statements will

accounting records of the company.

have an impact on the analysis.

2. Internal Analysis: Analysis is done on the basis of internal and unpublished

Tools and Techniques for Analysis of Financial Statements

1) Common size statements

On the basis of Modus Operandi:

1. Horizontal Analysis: Here, every item in the financial statement is analyzed

Trend percentages arethe two tools used in this type of analysis.

5) Fund Flow analysis

2. Vertical Analysis: It refers to the study of relationship between various items

6) Cash Flow analysis

in a specificyears financial statement. Common size financial statements and

7) Cost-Volume Profit Analysis

financial ratios are the twotools used in this analytical mode.

Accounting For Management [Type text]

Measures the liquidity and solvency position of firm.

Facilitates management in decision making.

Helps prospective investors in arriving at an investment decision.

Aids management to initiate corrective action.

relationship between two related accounting figures and is calculated by dividing

Supplies management with inputs to aid in their forecasting and planning.

Ratio analysis Facilitates inter-firm comparison.