University School of Business

DEPARTMENT - MBA
Master of Business Administration
Financial Reporting and Analysis 23BAT- 602
Chapter: 1.1

Faculty Name: Dr.Reepu

(Assistant Professor)

FINANCIAL STATEMENT
DISCOVER . LEARN . EMPOWER
ANALYSIS
 UNDERSTANDING
FINANCIAL
STATEMENT
Course Outcome
CO1 To understand the format and content of the three basic financial statements
CO2 To integrate the information obtained from financial statements for assessing the
financial performance of a business organization Will be covered in this
lecture
CO3 To examine the financial stability and growth of business organizations using financial
statement analysis techniques

CO4 To assess the quality of financial reports after detecting the manipulations in the
financial statements

CO5 To facilitate decision making on the basis of quality of financial reports

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It is a systematic process of the critical
examination of the financial information
contained in the financial statements in order to
understand and make decisions regarding the
operations of the firm

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Introduction of Financial Statement Analysis :

FSA is an analysis which highlights important relationships between items in the

financial statements.

FSA embraces the methods used in as­sessing and interpreting the results of past
performance and current financial position as they relate to particular factors of
interest in investment decisions.

It is an important means of assessing past performance and in forecasting and

planning future performance.

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 Definition:
FSA is the use of analytical or financial tools to examine and
compare financial statements in order to make business decisions.

In other words, FSA is a way for investors and creditors to examine financial
statements and see if the business is healthy enough to invest in or loan to.

FSA takes the raw financial information from the financial statements and turns it
into usable information that can be used to make decisions.

The three types of analysis are horizontal analysis, vertical analysis, and ratio
analysis.

Each one of these tools gives decision makers a little more insight into how well the
company is performing.

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Objectives of Analysis of Financial Statement:

(a) To ascertain short-term liquidity position of an enterprise by the application of

various liquidity ratios.
(b) To evaluate the long-term solvency position by the application of various
solvency ratios;
(c) To assess the risk (both financial as well as business) involved with firm.
(d) To assess the present earning capacity of the firm for the purpose of inter-firm
comparison and thereby to assess the progress or otherwise of the firm.

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Objectives of Financial Statement Analysis:

1. Assessment of Past Performance and Current Position:

Past performance is often a good indicator of future performance.

Therefore, an investor or creditor is interested in the trend of past sales, expenses, net
income, cast flow and return on investment.

These trends offer a means for judging management’s past performance and are
possible indicators of future performance.

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2. Prediction of Net Income and Growth Prospects:

The financial statement analysis helps in predicting the earning prospects and growth
rates in the earnings which are used by investors while comparing investment
alternatives and other users interested in judging the earning potential of business
enterprises.

Investors also consider the risk or uncertainty associated with the expected return.

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3. Prediction of Bankruptcy and Failure:

Financial statement analysis is a significant tool in predicting the bankruptcy and

failure probability of business enterprises.

After being aware about probable failure, both managers and investors can take
preventive measures to avoid/minimise losses.

Corporate managements can effect changes in operating policy, reorganize financial

structure or even go for voluntary liquidation to shorten the length of time losses.

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4. Loan Decision by Financial Institutions and Banks:

Financial statement analysis is used by financial institutions, loaning agencies, banks

and others to make sound loan or credit decision.

In this way, they can make proper allocation of credit among the different borrowers.

Financial state­ment analysis helps in determining credit risk, deciding terms and
conditions of loan if sanctioned, interest rate, maturity date etc.

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Significance of Financial Analysis to different parties:

Finance Manager

•Assessing the operational efficiency and managerial effectiveness of the

company.
•Analyzing the financial strengths and weaknesses and creditworthiness of
the company.
•Analyzing the current position of financial analysis,
•Assessing the types of assets owned by a business enterprise and the
liabilities which are due to the enterprise.
•Providing information about the cash position company is holding and how
much debt the company has in relation to equity.
•Studying the reasonability of stock and debtors held by the company.

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Top Management

•Financial analysis helps the top management:

•To assess whether the resources of the firm are used in the most efficient
manner

•Whether the financial condition of the firm is sound

•To determine the success of the company’s operations

•Appraising the individual’s performance

•To investigate the future prospects of the enterprise.

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Trade Payables:

Trade payables analyze of financial statements for:

•Appraising the ability of the company to meet its short-term obligations

•Judging the probability of firm’s continued ability to meet all its financial
obligations in the future.

•Firm’s ability to meet claims of creditors over a very short period of time.

•Evaluating the financial position and ability to pay off the concerns.

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Lenders:
Suppliers of long-term debt are concerned with the firm’s long-term solvency and
survival. They analyze the firm’s financial statements:

•To ascertain the profitability of the company over a period of time,

•For determining a company’s ability to generate cash, to pay interest and repay
the principal amount
•To assess the relationship between various sources of funds (i.e. capital structure
relationships)
•To assess financial statements which contain information on past performances
and interpret it as a basis for forecasting future rates of return and for assessing
risk.
•For determining credit risk, deciding the terms and conditions of a loan if
sanctioned, interest rate, and maturity date etc.

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Investors:

Investors, who have invested their money in the firm’s shares, are interested in the
firm’s earnings and future profitability.
After being aware of the probable failure, investors can take preventive measures to
avoid/minimize losses.

Labor Unions:

Labour unions analyze the financial statements:

•To assess whether an enterprise can increase their pay.

•To check whether an enterprise can increase productivity or raise the prices of
products/ services to absorb a wage increase.

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 Tools and Techniques of Financial Statement

Comparative financial statements

Common size statements

Trend analysis

Ratio analysis

Fund flow statement

Cash flow statement

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 Types of Financial Analysis

• External analysis: Conducted by those persons who do not have access to the
detailed record of the enterprise and depend on the published reports.
• Internal analysis: Conducted by management so as to know the financial position
and operational efficiency of the organization.
• Horizontal analysis: This analysis is made to review and analyse the financial
statements for number of years and are therefore based on the financial data based on
those years.
• Vertical analysis: This is made to review and analyse the financial statements of one
year only.

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 Importance of Financial Analysis

• Judging the earning capacity or profitabilty

• Judging the managerial efficiency
• Judging the long term and short-term solvency of the firm
• Inter firm comparison
• Making forecasts

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 Limitations

• Historical analysis
• Ignores price level changes
• Qualitative aspect ignored
• Not free from bias

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 Assessment Pattern

Blackboard
Assessment Pattern

Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled
Marks

Max. Marks 10 10 6 4 4 4 2 40

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 References

• Reference book- Maheshwari S.N, Accounting for Management, Vikas Publishing House, New Delhi,2010
• Reference Website: https://www.investopedia.com/terms/f/financial-statement-analysis.asp
• Reference Journal for advance study: Journal of Accountancy (JOA)

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THANK YOU

For queries
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