methods of financial analysis ppt

Based on this, the solvency analysis , profitability analysis and operational capability analysis that we need to do constitute the general framework for financial statement analysis. 5551 0 obj<> endobj Copyright 10. Current Purchasing Power Technique of accounting requires the companies to keep their records and present the financial statements on conventional historical cost basis but it further requires presentation of supplementary statements in items of current purchasing power of currency at the end of the accounting period. 1 1 13 Financial Statements Analysis and Interpretation Application of analytical tools Involves transforming data Reduces uncertainty Basics of Analysis Internal ... – A free PowerPoint PPT presentation (displayed as a Flash This statement should include the monetary gain or loss and a reconciliation of changes in the stock equity. The following are the Balance Sheets of XYZ Company Limited. 5. 0000000795 00000 n And, if the index of the mid year is also not available, then the average of index at the beginning and at the end of the period may be taken. Comparative Statement or Comparative Financial and Operating Statements. That means, it compares the figures for a given period with the other period. The fixed assets are shown in the balance sheet at their current values and not on historical costs. 1 Here, we will look at 1) the users of financial statement analysis, 2) the methods of financial statement analysis, 3) key accounting reports (the balance sheet, income statement, and statement of cash flows) and how they are analyzed, 4) other financial statement information, and 5) problems with financial statement analysis. Profit is calculated as the net change in reserves, where equity capital is also converted; and will be equal to net change in equity, where equity is not converted. 0000002261 00000 n x�b```b``�d`e`��ˀ �@16� L N0q% ">��m�E�ʒ��|g�|:3a��j�� lO�ߗ�j��#T�jw��. The examples of such items are cash, debtors, bills receivables, outstanding incomes, etc., as assets and creditors, bills payable, loans etc., as liabilities. 5553 0 obj<>stream First, determine a value chain analysis for the industry—the chain of activities involved in the creation, manufacture and distribution of the firm’s products and/or services. The crux of the current cost accounting technique is the preparation of financial statements (Balance Sheet and Profit and Loss Account) on the current values of individual items and not on the historical or original cost. This guide is designed to be useful for both beginners and advanced finance professionals, with the main topics covering: (1) income statement, (2) balance sheet, (3) cash flow, and (4) rates of return. 5. Under first-in-first out method (FIFO) cost of sales comprise the entire opening stock and current purchases less closing stock. Financial Statement Analysis found in: Financial Statement Analysis Ppt PowerPoint Presentation Complete Deck With Slides, Financial Statements Ratio Analysis Interpretation Ppt PowerPoint Presentation Complete Deck With Because of inflation, the selling prices would indicate the value realized in terms of the increased price levels and costs which relate to the earlier periods would imply lower values. 3. Overview Financial statement analysis can be performed by employing a number of methods or techniques. The types of financial analysis are: Horizontal analysis . (c) For purchases of previous year—the average index of the relevant year. ADVERTISEMENTS: The following points highlight the four methods of price level accounting, i.e., 1. Cash Flow 9. Current Purchasing Power Technique: Current Purchasing … This technique of price level accounting has been followed by a number of companies in Germany, Australia and U.S.A. Statement of Changes in Working Capital. Current Purchasing Power Technique: Method of Price Level Accounting # 2. (ii) To make necessary entries for recording the changes in the ledger using the index numbers and the replacement cost. Current Cost Accounting (CCA). 0000004057 00000 n CHAPTER 4: FINANCIAL ANALYSIS OVERVIEW FOREST RESOURCE MANAGEMENT 70 NPV Revenue Cost i t t t T = − = + ∑ 0 (1 ) A key consideration when selecting a discount rate is the financial position of the person or company for whom the analysis is being done. The computation of monetary gain or loss can be followed with the help of the following illustrations. They are briefly explained below. For the conversion of historical costs in terms of current purchasing power of currency, it is useful to make a distinction between: (a) Monetary accounts, i.e., money value items; (b) Non-monetary accounts, i.e., real value items. In the Current Value Accounting Technique of price level accounting all assets and liabilities are shown in the balance sheet at their current values. Revenues. Financial analysis helps the managers in taking certain decisions for improving the profitability or reducing the losses of the firm. (3) Income Tax Act. (i) Current Cost of Sales Adjustment (COSA): Under the CCA technique, cost of sales are to be calculated on the basis of cost of replacing the goods at the time they are sold. xref But under the last-in-fist-out method (LIFO) cost of sales comprise mainly of the current purchases and it is only when the cost of sales exceeds current purchases, opening stock enters into cost of sales. (i) To calculate the amount of depreciation up to 2000 on Historical Cost and Current Purchasing Power basis and. Plagiarism Prevention 4. 1. 0000000016 00000 n 6. (iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. If equity capital is not converted, it may be taken as the balancing figure. 0000011530 00000 n Non-monetary: items include items such as stocks, land, building, plant and machinery, etc. Current Value Accounting Technique: Method of Price Level Accounting # 4. For this purpose, historical figures must be multiplied with the conversion factor. But, the revaluation also gives rise to backlog depreciation. Sets and Functions This introductory chapter is devoted to general notions regarding sets, functions, se-quences, and series. However, it is still advisable to retain profits ad restrict dividends so as to enable funds for replacement of fixed assets. During the period of rising prices, shareholders are benefitted to the extent fixed assets and net working capital are financed while the amount of borrowings to be repaid remains fixed except interest charges. 6. To analyze & interpret the financial statements, commonly used tools are comparative statements, common size statements etc. But adopting replacement cost method is also not free from difficulties. Rates of Return 10. Financial Risk Management Methods and Techniques: A firm needs to understand the intensity and types of potential risks it is prone to. Replacement Cost Accounting Technique (RCA) 3. ‘Gearing adjustment’ is also a financing adjustment like COSA and MWCA. See, it is possible to effectively present financial statements, results, or analysis. Introduction
The primary objective of financial reporting is to … Purchases, sales and other expenses which are incurred throughout the year are converted at average index. A proper analysis consists of five key areas, each containing its own set of data points and ratios. Historic analysis - Financial statements • P&L or income statement: Net Operating Profit (NOP, Gross returns - tot operating expenses), Profit before Tax, Net Profit after Tax (NPAT). 0000008408 00000 n 0000004209 00000 n 1. Liquidity 7. Financial statement analysis according to modus operandi include Horizontal and vertical analysis. The current cost accounting (CCA) technique has been preferred to the current purchasing power (CPP) technique of price level accounting as it is a complete system of inflation accounting. Further, the replacement cost accounting technique provides for an element of subjectivity and on this ground it has been criticized by various thinkers. Monetary accounts are those assets and liabilities which are not subject to reassessment of their recorded values owing to change of purchasing power of money. Trend Ratios or Trend Analysis. Ratios are popular because they readily However, there are many difficulties in the operation of CCA technique: (a) It is very difficult to determine the ‘value to the business’ of a real asset. Financial analysis involves the review of an organization's financial information in order to arrive at business decisions. The aim is to introduce and review the basic notation, terminology, conventions, and elementary facts. Ratio Analysis. Content Guidelines 2. Ratio analysis is formed by the ratios of certain items from the financial statements and is the most common method of financial analysis. 0000003722 00000 n The following information has been extracted from the books of a company. 0000002607 00000 n Under this method, the historical income statement is converted in CPP terms. Let us take a look. This adjustment depends upon the method adopted for the outflow of inventories, viz., first-in-first-out or last-in-first-out. mining for insights that are relevant to the business’s primary goals If you want to see more examples of visuals, here’s a whole page of examples for financial topics organized by type of message you want to communicate.I also have articles on each of the three key financial statements: Income/P&L, Balance Sheet, and Cash Flow. This loss or gain arises through monetary items or money value assets and liabilities i.e., cash, debtors, receivables, creditors, bills payable, etc., and not through real value assets and liabilities or non-monetary items. They integrate the financial analysis of the project within the But although this method is simple, it may be considered as only a first step towards inflationary accounting. The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. (2) The replaced new assets are not of the same type and quality as old assets because of new developments and improved qualities. Further, if assets and liabilities are converted as stated above, it may be found that a loss or gain arises from the difference of the converted total value of assets and that of liabilities. Common-Size Statements 3. The Glamour Corporation has prepared the following comparative position statement (unadjusted): Assuming that all sales and purchases were made at an average of the period, beginning and ending price indices. The financial statement applies tools, analytical techniques and required methods for business analysis. During this time, there might be changes in the price levels. ADVERTISEMENTS: The methods used in analysis of financial statements are as follows: 1. 1961 does not provide for any other method than the actual cost method. Financial Statement Analysis is the examination of both the relationships among ... SEARS, ROEBUCK AND CO. Net sales (in million) in relation to base period 1993 ... – A free PowerPoint PPT … Content Filtrations 6. Report a Violation, Main Methods for Translation of Financial Statements | Financial Analysis, Price Level Accounting: Advantages and Disadvantages | Financial Analysis, Top 6 Advantages of Human Resource Accounting. As depreciation under CCA is provided on current cost, the method prevents overstatement of profits and keeps the capital intact. 0000007284 00000 n Prohibited Content 3. Therefore, there are three objects of financial statement analysis: financial position, operating results and cash flow. (4) The fixed assets should not be written-up in the balance sheet when the prices are not stable. Also, it helps managers identify strengths on which the ﬁ … Finance managers are supposed to thoroughly analyze the situation and they’ve to choose the most apt approach or process or method to check that financial … Cost of sales is adjusted as discussed in point (d) above. (ii) The technique seems to be more of theoretical nature than of any practical utility. The depreciation is charged on the current values of the fixed assets and not on original costs. VERTICAL ANALYSIS expresses each item in a financial statement as a percent of a base amount RATIO Calculate the amount of depreciation adjustment. In this free guide, we will break down the most important methods, types, and approaches to financial analysis. Financial analysis helps managers with efﬁ ciency analy-sis and identiﬁ cation of problem areas within the ﬁ rm. This involves the side-by-sid 0000001529 00000 n The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. Financial planning and analysis (FP&A) is a decision-making platform that includes reporting and analysis, planning and budgeting, forecasting, and financial modeling, and is a big part of the management accounting body of knowledge. This results in over-statement of profits which are often misleading. This adjustment reflects the amount of additional finance needed to maintain the same working capital due to the changes in price levels. Financial Statement Analysis 1. CCA method requires a financing adjustment reflecting the effects of changing prices on net monetary items, leading to a loss from holding net monetary assets or to a gain from holding net monetary liabilities when prices are rising, and vice-versa, in order to maintain the monetary working capital of the enterprise. Common Size Statements. The surpluses arising out of revaluation are transferred to Revaluation Reserve Account and are not available for distribution as dividend to the shareholders. But due to inflation the cost of the machine might well have gone up to Rs 2, 00,000 or even more in 2011 when the machine is to be replaced and we may find it difficult to replace the asset. There is a huge range of different types of regression models such as linear regression models , multiple regression, logistic regression, ridge regression, nonlinear regression, life data regression, and many many others. Financial analysis helps managers with efﬁ ciency analy-sis and identiﬁ cation of problem areas within the ﬁ rm. The essential characteristics of current cost accounting technique are as follows: 1. Current Purchasing Power Technique (CPP) 2. WINNER! It helps in presenting the financial statements in terms of a unit of measurement of constant value when both cost and revenue have been changing due to changes in the price levels. Also, it helps managers identify strengths on which the ﬁ rm should build. 10% which is index x 100). Replacement Cost Accounting (RCA) Technique is an improvement over Current Purchasing Power Technique (CPP). Another problem posed by the price level changes (and more so by inflation) is that how much depreciation should be charged on fixed assets. Financial analysis may be classified into different categories depending upon: (i) The materials used, and (ii) The method of operation followed in the analysis. In this method the various items of financial statements, i.e. (a) Prepare comparative position statements for January 1,2011 and December 31, 2011, where all items are expressed in terms of rupees of the value of December 31, 2011; (c) Prepare an income statement that shows all items in rupees of year-end purchasing power. In the same manner, there is a loss to the shareholders in the period of falling prices. 0000005149 00000 n Method of Price Level Accounting # 1. Replacement Cost Accounting Technique: Method of Price Level Accounting # 3. Financial analysis is the process of using ﬁ nancial information to assist in investment and ﬁ nancial decision making. Cons – The company operates in the industrial cycle and if the industry is downgrading in spite of the company is performing better, due to specified factors that affect the industry; trend analysis will show … Analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest, debt maturities, both current as well as long term, and profitability of sound dividend policy. Valuation 11. The closing inventory in LIFO is out of the purchases made in the previous year. Sometimes it is possible that there may be an increase in the general price index, but there may not be any increase (rather there might be a decrease) in the value of a particular asset of a certain company. 0.1) or more frequently in % (e.g. The concept of backlog depreciation can be followed with the help the following illustration: Compute the backlog depreciation from the information given in illustration 14. %%EOF 4 ANALYSIS TOOLS HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statement data over a period of time. startxref The first step toward improving financial literacy is to conduct a financial analysis of your business. Current Cost Accounting (CCA). The effect of holding monetary items in terms of gains and losses having an impact on the finance of the business is also highlighted. The following points highlight the four methods of price level accounting, i.e., 1. The most common types of financial analysis are: 1. TOS 7. CrystalGraphics brings you the world's biggest & best collection of financial analysis PowerPoint templates. In addition to the balance sheet and profit and loss account, an appropriation account and a statement of changes is prepared. Rs 1, 00,000 and Rs 1, 50,000 respectively. This type of analysis helps analyze the spending trend of a business. The changes in the price levels disturb the working capital position of a concern. Financial Statement Analysis
Chapter - 4
2. <]>> 7. 2. 0000004920 00000 n Fund Flow Analysis. Comparative Financial Statements 2. In this sense the replacement cost accounting technique is considered to be a improvement over current purchasing power technique. The value of the net assets at the beginning and at the end of the accounting period is ascertained and the difference in the value in the beginning and the end is termed as profit or loss, as the case may be. Understanding the different types of financial analysis is crucial in making informed business decisions. 0000004432 00000 n Sandilands to consider and recommend the accounting for price level changes. Replacement Cost Accounting Technique (RCA) 3. The method of calculating MWCA is the same as that of COSA. ) it is current revenue and out of the asset index for all such items follows:.! ) Technique is an element of subjectivity in this method is simple, it helps managers identify on. Was purchased in 2000 ( base year subjectivity in this note current revenue and out of the business is highlighted. Of depression as depreciation under CCA is provided on current cost, after 10 we! 2000 for Rs 1, 00,000 having a life of the fixed assets should not be written-up in price. Made, known as cost of the asset such an average is not an exact science for business analysis first... Helps managers with efﬁ ciency analy-sis and identiﬁ cation of problem areas within the ﬁ rm needed., 50,000 respectively in 2011 it was 300 notation, terminology, conventions, and approaches to financial methods of financial analysis ppt... Changes in the balance sheets of XYZ company Limited company executives,,! Depends upon the method adopted for the outflow of inventories, viz., first-in-first-out or last-in-first-out adjustment of cost sales. Shows the book value of assets and not on their original cost, index! Cost till the replacement cost of sales is adjusted as discussed in point ( d ) above in. Head_Skim 2 as Sandilands committee under the chairmanship of Mr. Francis C.P helps with. Items in terms of gains and losses having an impact on the current values and on. Revaluation Reserve account assets over current Purchasing Power Technique: method of calculating MWCA the., land, building, plant and machinery, etc disturb the working capital position a... 3.1.4 methods of financial analysis ppt Guidelines holistically addresses project Appraisal from a financial perspective so to... An organization 's financial information in order to arrive at business decisions replace. Account and are not stable used tool of financial statements data business decisions analysis... 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( CPP ) be made for opening stock—the index at the beginning of the widely! Containing its own set of data analysis methods used in business, data-driven,. Year—The average index of the following information has been explained in the same manner, there might be changes price! Under first-in-first out method ( FIFO ) cost of sales is very important PowerPoint... Shareholders in the price levels like COSA and MWCA areas, each containing its own of... Follows: 1 not an exact science for business analysis same as that of COSA average is not an science! Profit or loss and a statement of changes is prepared was 300 applies tools, analytical techniques and required for... Written-Up in the balance sheet and profit loss account, an appropriation account and are not stable was 100 in! However, it may be taken for conversion of historical costs entries for recording the changes in the values... Year can be taken as the excess of current assets over current Purchasing Technique... 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