Analysis of Financial Statements
Unit V. Preparing and interpreting company financial statements.
About this unit
Financial statements contain a great deal of data, but users need information. This unit shows how a company presents its Statement of Profit and Loss and Balance Sheet in the prescribed form, and how these statements are analysed using comparative and common-size statements, accounting ratios and the cash flow statement. These tools help investors, lenders and managers judge liquidity, solvency, efficiency and profitability.
Key ideas
- Schedule III format of the Balance Sheet and Statement of Profit and Loss.
- Meaning, objectives and limitations of financial analysis.
- Horizontal analysis (comparative statements) and vertical analysis (common-size statements).
- Liquidity, solvency, activity and profitability ratios.
- Cash flow statement with operating, investing and financing activities.
How to prepare
Learn the major headings and sub-headings of Schedule III well enough to classify any item. Memorise the formula and the components of each ratio, and practise the indirect method for cash from operating activities. Expect classification questions and short ratio numericals.
Topics in this chapter
Financial statements of a company
Statement of Profit and Loss and Balance Sheet in the prescribed form, with major headings and sub-headings.
5 questionsFinancial analysis
Meaning, significance, purpose and limitations of financial analysis.
5 questionsComparative and common-size statements
Tools for comparing financial statements across years and items.
5 questionsAccounting ratios
Meaning, objectives and types: liquidity, solvency, activity (turnover) and profitability ratios.
5 questionsCash flow statement
Meaning, objectives and preparation, with depreciation, amortisation, dividend, tax and sale of non-current assets.
5 questions