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INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS

August 2011

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Tools and Techniques of FSA


Multi-step income statement Horizontal analysis Common-sized analysis Trend Analysis Analytical balance sheet Ratio analysis Cash flow analysis

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Multi-step income statement


Profitability at different intermediate levels of business operations Gross Profit (GP) Profit before Depreciation, Interest and Tax (PBDIT) Operating Profit (OP or PBIT) Profit before tax and Extraordinary items Profit before tax (PBT) Net Profit (PAT)

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Horizontal Analysis (Comparative)


Very simple tool Facilitates a quick review of the current years performance and financial position of a business over the previous year Work out increase / decrease in each item of BS and P & L of the current year over those of the last year Express as a percentage of last years figure Current Years Figure Previous Years figure * 100 Previous years figure

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Common-sized analysis (Vertical analysis)


Useful for comparison of performance and financial position of two companies, either in the same industry or different industries No two balance sheets can be compared and analysed based on

absolute figures
Convert the same to common-sized statements Balance sheet: Total of sources of funds or application of funds taken as 100. Each item restated accordingly

Income statement: Net sales is taken as 100 and all other items are
restated proportionately

Analysis used for same company over two or more years to study changes in asset-liability mix, impact on profits, proportion of different expenses to net sales, trends in corporate expense pattern

Supplements horizontal and trend analysis


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Trend Analysis Extension of horizontal analysis Compares data for more than two years

Farthest or base year figure taken as 100 or just 1


and all successive years figures restated accordingly or indexed Two years comparison may not lead to a conclusive judgement Prudent to confirm findings of horizontal analysis through trend analysis over a longer period
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Analytical Balance Sheet


Analytical from the angle of equity shareholders Depicts Net Assets possessed by owners of the company Starts with Application of Funds side as against the Sources of Funds side Proves the basic accounting equation: Assets Outside Liabilities (Incl. Preference Share capital) = Owners funds Shows that the equity shareholders are the residual claimants on the assets of their own company

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