Q.1- What are the significant factors of financial statements? Discuss the various tools of financial analysis. Ans:
There are two significant factors of financial statements, first one is profitability and second is financial soundness. Balance sheet of a business firm/company shows the financial soundness whereas; profit & loss and trading account shows the profitability. VARIOUS TOOLS OF FINANCIAL ANALYSIS:
There are various tools of Financial Analysis, described as under: a. Comparative Financial Statements.
b. Trend percentages.
c. Fund flow analysis.
d. Ratio analysis
We may describe the above tools of Financial Analysis as under: a. Comparative Financial Statements: in this process, figures of financial statements for two or more periods are placed side by side to facilitate comparison. Both the income statement or profit & loss statement and balance sheet can be prepared in the form of comparative Financial Statements. In India, the Companies Act, 1956, provides that companies should give figures for different items for the previous period, together with current period figures in their Profit and Loss Account and Balance Sheet. b. Trend Percentages: Trend Percentages are calculated for making a comparative comprehensive study of the financial statements for several years. Usually the earliest year is taken as the base year and a relationship is established with percentage of each item of each of the years. It should be kept in mind that the defect of this tool is that trend percentages are not calculated for all the items in the financial statements, instead, they are usually calculated only for major items since the purpose is to highlight important changes. c. Funds Flow analysis:
Funds Flow Analysis is an important analytical tool of financial analysis, for credit granting institutions and financial managers. Funds flow analysis reveals the changes in working capital positions during a particular period. It reveals the sources from which the working capital was obtained and the purposes for which it was used.
d. Ratio Analysis:
A ratio shows the relationship in mathematical terms between two inter-related accounting figures. The financial analyst may calculate different ratios for different purposes.
Q.2- What is a Fund Flow Statement? Discuss the uses and preparation of Fund Flow Statements Ans-
The Fund Flow Statement is a method by which we study the net fund flow between two points of time. These points conform to beginning and ending financial statement dates for whatever period of examination is relevant – a quarter or a half-year or a year. USES OF FUNDS FLOW STATEMENT-
Funds flow statement is a tool for analysis and understanding changes in the distribution of resources between two balance sheet dates. The uses of funds flow statement are as under- i. It explains the financial consequences of business operations. ii. It gives reasonable answars for intricate queries such as regarding the overall creditworthiness of the business, the sources of repayment of the term loans, funds generated through normal business operations, utilization of funds etc. iii. It works as an instrument for allocation of resources.
iv. It serves as a test of effectiveness or otherwise use of working capital. PREPARATION OF FUNDS FLOW STATEMENT :
Process flow of the preparation of funds flow statement is described as under- Sources of Funds : there are internal as well external sources of funds. Internal sources :- The only internal source of funds is funds from operations. Add:
1. Depreciation on fixed assets.
2. Preliminary expenses, goodwill etc., written off.
3. Contribution to debenture redemption fund, transfer to general reserve etc., if they have been deducted before arriving at the figure of net profit. 4. Loss on sale of fixed assets.
Note : Provision for taxation and proposed dividend are not taken as current liabilities for the purpose of Funds Flow...
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