Prepared by:

Mr. Jagannath Mishra

B. Com(Hons’), PGDM

It is the process of identifying the financial
strengths and weaknesses of the firm by
properly establishing relationship between the
items of the balance sheet and the profit and
loss account.

Three steps involved in the analysis of financial
statements:
1. Selection
2. Classification
3. Interpretation

Comparative statements

Trend analysis

Common-size statements

Funds Flow analysis

Cash Flow analysis

Ratio analysis

Cost-Volume-Profit Analysis

It is the process of establishing and interpreting
various ratios for helping in making certain
decisions.

Four steps involved in the ratio analysis:
1. Selection of relevant data from the financial
statements depending upon the objective of the
analysis
2. Calculation of appropriate ratios from the above
data
3. Comparison of the calculated ratios with the ratios
of the same firm in the past or the projected
financial statements
4. Interpretation of the ratios
 Classification according
to significance
OR
Importance

Analysis of Short-Term Analysis of Long-Term

Financial Position Financial Position

Current Assets
Movement
Liquid Ratios
OR
Efficiency Ratios

Quick or Acid Test or Debtors Turnover Ratio =

Current Ratio= Liquid Ratio= Inventory Turnover Ratio Net Credit Annual Sales/
= Cost of goods sold/ Avg. Trade Debtors
C.A./C.L. (QUICK or LIQUID Avg. inventory at cost
ASSETS)/C.L. = No. of times

Absolute Liquid Ratio Creditors Turnover Ratio Working Capital

OR Cash Ratio= = Net Credit Annual Turnover Ratio
(Absolute Liquid Assets)/ Purchases/ Avg. Trade = Cost of Sales/
C.L. Creditors Avg. Working Capital
 Analysis of Long-Term Financial
Position

Funded Debt to Total Capitalization

Debt-Equity Ratio= Outsiders fund Ratio =
/ Shareholders fund (Funded Debt/
Total Capitalisation ) * 100

Proprietory Ratio OR Equity Ratio = Solvency Ratio = Total Liabilities to

Shareholder’s fund / Total Assets Outsiders/ Total Assets

Fixed Assets to Net Worth Ratio = Fixed Assets Ratio =

Fixed Assets(After dep.)/ Fixed Assets(After Dep.) /
Shareholders’ funds Total Long-Term Funds

Gross profit Ratio=(gross profit/net sales)*100

Operating Ratio= (Operating cost/net
sales)*100

Operating Profit Ratio=(Operating
Profit/Sales)*100

Expenses Ratio= (PARTICULAR Expenses/Net
Sales)*100

Net Profit Ratio = (Net Profit after tax/Net
Sales)*100 OR (Net Operating Profit/ Net
Sales)*100

ROI or Net Worth = (Net Profit after interest &
tax/ Shareholders’ funds)* 100

Return on Equity Capital = (Net Profit after tax
– Preference Dividend) /(Equity Share
Capital(paid-up))

Earning Per Share = (Net Profit after tax –
Preference Dividend)/ No. of Equity Share

Return on Net Capital Employed =(Adjusted
Net Profits /Net Capital Employed) * 100

*********CAPITAL TURNOVER RATIO**********


Dividend yield ratio = Dividend per share/
Market value per share

Dividend per share = Dividend paid to
shareholders/ No. of shares

Dividend pay-out ratio= Dividend per Equity
shares/ Earning per shares

Price Earning Ratio = Market Price per Equity
Share/ Earning per shares

Earning Yield Ratio = (EPS/MPS)* 100

It is a statement which shows the movement of
funds and is a report of the financial operations
of the business undertaking. It indicates various
means by which funds were obtained during a
particular period and the ways in which these
funds were employed.

Flow of funds is said to have taken place when
any transaction makes changes in the amount of
funds available before happening of the
transaction.

If the effect of transaction results in the increase
of funds, it is called a source of funds and if it
results in the decrease of funds, it is known as an
application of funds.

The flow of funds occurs when a transaction
changes on the one hand a non-current account
and on the other a current account and vice-versa.

Funds movement occurs when a transaction
affects:
i. A current asset and a fixed asset
ii. A fixed and a current liability
iii. A current asset and a fixed liability
iv. A fixed liability and current liability

Funds do not move when the transaction affects fixed

assets and fixed liability or current assets and
current liabilities.
 WHEN
WHEN
ONE CURRENT
BOTH CURRENT
AND
OR
OTHER
NON CURRENT
NON-CURRENT
ACCOUNTS ARE
ACCOUNTS ARE
INVOLVED
INVOLVED
 FLOW OF FUNDS?

NO
CURRENT ASSETS CURRENT LIABILITIES

YES
YES

YES YES

NON-CURRENT NON-CURRENT
ASSETS LIABILITIES
NO

Analyze the transaction and find out the two
accounts involved.

Make journal entry of the transaction.

Determine whether the accounts involved in
the transaction are current or non-current.

Follow the rule.

Preparation of a funds flow statement
consists of two parts:

Statement or schedule of charges in working

capital

Statement of sources and application of funds