Analysis of

Financial Statements
Session # 1
19-Sep[-2020
Today’s topics
1. Introduction of the Course
2. Introduction of Students
3. Framework for Financial Statement Analysis
4. Accounting Policies and their impact on Financial Analysis
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 What do you think, what is
“Analysis of Financial Statements” ?

The Myths…
Ratio Analysis

The focus is on Why and not on What

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What Is Analysis of Financial Statements?

Analysis of Financial Statement is the process of analyzing

a company's financial statements for decision-making
purposes.

External stakeholders use it to understand the overall

health of an organization as well as to evaluate financial
performance and business value. Internally it is used as a
monitoring to tool for efficiently managing the
organization.
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The focus is on Why and not
on What

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Course Outline and Deliverables

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Course Outline
Session Date Topic
1 19-Sep-2020 Framework for Financial Statements Analysis
2 26-Sep-2020 Understanding Financial Statements
3 03-Oct-2020 Financial Analysis Techniques – 1
4 10-Oct-2020 Financial Analysis Techniques – 2
5 17-Oct-2020 Financial Institution Analysis - CAMELS.
CAMEL
6 24-Oct-2020 1st Mid Term – Assessment Report
7 31-OCt-2020 Inventory Analysis
8 07-Nov-2020 Analysis of Long-Lived Assets
9 14-Nov-2020 Analysis of Non-Current Liabilities
10 21-Nov-2020 Analysis of Inter-corporate Investments
11 28-Nov-2020 2nd Mid Term Assessment
12 05-Dec-2020 Early Warning Signals
13 12-Dec-2020 Students’ Presentations of Term Report     
14 19-Dec-2020 Application of Financial Analysis – Case Study
15 26-Dec-2020 Final Assessment

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Marking Scheme

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 Analysis of Financial Statements
Marking Scheme
S. No Assessment Methods Marks
1 Quizzes 5
2 Class Assignments & 5
Participation
3 CAMELs Report 5

4 Final Presentation 5

5 Final Report 10

6 1st Mid Term Assessment 15

7 2nd Mid Term Assessment 15

8 Final Assessment 40
  Total = 100
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Manufacturing vs Banking Company

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 Part 1
Framework for Financial Statement Analysis

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What Is Analysis of Financial Statements?

Analysis of Financial Statement is the process of analyzing

a company's financial statements for decision-making
purposes.

External stakeholders use it to understand the overall

health of an organization as well as to evaluate financial
performance and business value. Internally it is used as a
monitoring to tool for efficiently managing the
organization.
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Financial Reporting
• Financial Reporting involves the disclosure
of financial information to the various
stakeholders about the financial
performance and financial position of the
organization over a specified period of time.

• These stakeholders include – investors,

creditors, public, debt providers,
governments & government agencies.

• In case of listed companies the frequency of

financial reporting is quarterly & annual.

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Objectives of Financial Reporting
“To provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic
decisions.”

Three Stakeholders who use Financial Statements to make better economic decisions

1) Investors : Long term earning power of the company with

ability to pay dividends and increase firm value

2) Creditors : Short Term – immediate liquidity . Long Term –

ability to repay debt and service loans.

3) Management : for the purpose of planning, analysis,

benchmarking and decision making.

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Class Activity / Assignment:
Upload you introduction in the assignment activity of LMS

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Components of financial reporting:

1. Quarterly & Annual Financial Statements.

2. The financial statements : 

a) Balance Sheet
b) Profit & Loss Statement
c) Cash Flow Statement
d) Statement of changes in stock holder’s equity

3. Notes to financial statements

4. Prospectus (In case of companies going for IPOs)

5. Management Discussion & Analysis (published in Annual Reports)

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Balance Sheet

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Income Statement

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Cash flow Statement
 Statement of
Changes in Equity

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Notes to the Financial Statements

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Notes to the Financial Statements

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Management Discussion & Analysis (published in Annual Reports)

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Importance of Financial Reporting

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 2017 2018 Increase %

Sales 5,000,000 6,300,000 26%

units 50,000 45,000 -10%

Unit Price 100 140

5,000,000 6,300,000

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 Importance of Financial Reporting
The importance of financial reporting cannot be over emphasized. It is required by each and every
stakeholder for multiple reasons & purposes. The following points highlights why financial reporting
framework is important :
1. It helps organizations to comply with various regulatory requirements. In case of listed
companies, quarterly as well as annual results are required to be filed with Stock
Exchanges and published.
2. It facilitates external audits. External Auditors are required to audit the financial
statements of an organization to express their opinion.
3. Financial Reports forms the backbone for financial planning, analysis, benchmarking
and decision making.
4. Financial reporting helps organizations to raise capital both domestic as well as
overseas.
5. On the basis of financials, the public in large can analyze the performance of the
organization as well as of its management.
6. For the purpose of bidding, labor contract, government supplies etc., organizations are
required to furnish their financial reports & statements.
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 Financial Statement Analysis Framework :
Following are the SIX steps, phases or stages in financial statement analysis framework:

1. Establish objectives of financial analysis by defining the purpose and

context of financial statements analysis.
2. Collect data necessary for financial analysis from different sources.
3. Process the data gathered in the second phase which may range from
simple sorting and adjustments to preparing common-size financial
statements and graphical representation of ratios and trends.
4. Conduct analysis on processed data and interpret the results.
5. Develop recommendations / conclusion in the light of inferences
drawn from analysis conducted and report them to relevant
stakeholders.
6. Follow up (Review), if necessary, to check whether conclusions reached
and recommendations given earlier need any revisions or not on the
basis of updated information.
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 End of Part 1
Framework for Financial Statement Analysis

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 Part 2
Accounting Policies and their impact on Financial Analysis

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 Accounting Policies and their impact on Financial Analysis

• Accounting policies are very important for the proper

understanding of the information provided in the financial
statements.

• An entity should clearly state the accounting policies it has

used while preparing the financial statements.

• Disclosure of accounting policies is important because many

accounting standards allow alternative treatments for a same
transaction or item.

• Users of financial statements will not be able to compare the

financial information with other entities if the accounting
policies are not clearly outlined

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 Accounting Policies and their impact on Financial Analysis
The choice of accounting policy could significantly affect the analysis of financial statements in the following
ways:
• Policy on asset valuation particularly regarding land and building. In this situation, historical cost may or may
not be departed from. This will affect profit through depreciation charges and balance sheet structure.
• Depreciation policy will certainly affect profit and assets value.
• The method adopted in the valuation of stock (LIFO, FIFO) will impact profit, ending inventory as well as
liquidity ratio.
• Goodwill valuation and method of elimination from the financial statements.
• Lease allocation between operating and finance lease and the method of allocating finance charges relating to
the type of lease.
• Research and development policy regarding possible capitalization of development costs and policy on
amortization.
• Use of temporal or closing rate method for translation of foreign trading operations.
Hence, in analyzing and interpreting financial statements, it is very important to take into consideration the
accounting policies adopted by the reporting entity. This will enable the users to know how the accounting
policies impact the items in the financial position and income statement.

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 End of Part 2
Accounting Policies and their impact on Financial Analysis

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Thank you

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