CAIIB ABM Unit 27 - Analysis of Financial Statements

Financial statements

1. Balance-sheet
2. P&l a/c / income & expenditure a/c
3. Auditors report
4. Fund flow statement/cash flow - AS 3 std makes compulsory for listed/to above 50 cr cos.  As-17 – segmentwise reporting. Banking co – formats of b/s and p&l prescribed by BR Act /Co Act for companies (no p&l prescribed)

Basic Concepts Used in Preparation of Financial Statements

1. Entity Concept
2. Money Measurement Concept
3. Stable Monetary Unit Concept
4. Going Concern Concept
5. Cost Concept
6. Conservatism Concept
7. Dual Aspect Concept
8. Accounting Period Concept
9. Accrual Concept
10. Realization Concept
11. Matching Concept

Horizontal form of B/S

Liabilities                     Assets
Share capital               Fixed assets
Res/surplus                 investments
Secured loans              current assets
Unsec. loans                loans & adv
Current liabilities        misc exp./losses
Provisions

Vertical Form of B/S

Sources of Funds

1. Shareholder’s funds
            (a) Share capital
            (b) Res. & surplus
2. Loan funds
            (a) Secured loans
            (b) Unsecured loans

Application of Funds

1. Fixed assets
2. Investments
3. Current assets/loans & advances
    less: current liabilities/provisions
    Net current assets
4. Misc exp/losses
    As per IT act, B/S FY is Apr-Mar. But Co’s act does not prescribe. But max 15 months duration, 18 months with permission of ROC.

Profit & Loss Account

1. Gross and Net sales
2. Cost of goods sold
3. Gross profit
4. Operating expenses
5. Operating profit
6. Non-operating surplus/deficit
7. Profit before interest and tax
8. Interest
9. Profit before tax
10. Tax
11. Profit after tax (Net Profit)

Analysis of financial statements

1. Asstt of fin position/performance
2. Projections of future performance
3. Warning signals
4. Credit requirement assessment
5. Exam fund flow
6. Cross checking
7. Fund flow analysis : diversionidle funds
8. Trend analysis : trends/op.efficiency
9. Ratio analysis : profitability, liquidity, capital structure(der), ability to service debt/int, inventory/debtor turnover

 

Bankers mostly use three methods for analysis of financial statements.

(a) Funds Flow Analysis
(b) Trend Analysis
(c) Ratio Analysis

While different users of financial statements are interested in different ratios, the ratios which interest a banker most, are the following:

(a) Profitability Ratios
(b) Liquidity Ratios
(c) Capital Structure Ratios
(d) Ratio Indicating Ability to Service Interest and Instalments
(e) Turnover Ratios
(1) Inventory Turnover Ratio
(2) Debtors’ Turnover Ratio