FINANCIAL STATEMENTS &TREND ANALYSIS
MEANING OF FINANCIAL STATEMENT
It is a written report of the financial condition of a firm. Financial statements include the balance sheet, income statement, statement of changes in net worth and statement of cash flow. These are prepared at the end of the year.
OBJECTIVES FOR PREPRATION
Various External And Internal Parties are Interested in the Financial Statements.The Nature of Interests is also different.From the analysis of financial statements,each party interested in business can find out whether his interests are safe,whether business is progressing,whether business can pay debts on time and the main objective is what is earning capacity of business etc.
NEEDS OF FINANCIAL STATEMENTS
FOR MANAGEMENT FOR CREDITORS FOR INVESTORS FOR THE GOVERNMENT FOR THE STOCK EXCHANGE FOR THE BANKERS
MANAGEMENT
First and foremost need the information is to the owners of the business, without the information in a financial statement it would be very difficult to make any important business decision. It explains the facts relating to Creditability, Efficiency, Performance and Financial control. As the Management is able to decide the course of action taken in future.
CREDITORS
From the analysis of Financial Statements, the creditors can ascertain the liquidity of business.They also get imformation regarding long-term financial soundness& Profitability.
INVESTORS
The Investors includes Both long-term and Short term investors. They can analyse the financial position and earning capacity of business. With the help of financial analysis ,they can determine the rate of dividend in the previous year and can forecast future rate.
GOVERNMENT
The Financial Statements are used to assess tax liability of business enterprises. These Statements enables the government to find out whether business is following various rules or regulations or not.
STOCK EXCHANGE
The Stock Exchanges deal in purchases and sale of securities of different companies. The Financial Statements enable the stock brokers to judge the financial position of different concerns. The fixation of prices for securities, etc., is also based on these statements.
BANKERS
The Banker is interested to see that the loan amount is secure or not. The banker analyses the balance sheet to determine financial strength of the concern. It is through the financial statements that banker can keep a watch on the business plans and performances.
TREND ANALYSIS
INTRODUCTION:
Trend analysis is based on the idea that what has happened in the past and gives traders an idea of what will happen in the future. Trend analysis is done when it is required to analyze the trend of data shown in a series of financial statements of several successive years. This method involves the calculation of percentage relationship that each statement bears to the same item in the base year.
Merits of Trend Analysis:
Trend percentages indicate the increase or decrease in an accounting data. As analyst is able to see the trend of figures, whether upward or downward. Effective than the absolute data. The trend percentages facilitate an efficient comparative study . Measures financial performance of a business enterprise over a period of time.
TREND PERCENTAGES OR RATIOS
Trend Analysis helps in future forecasts of various items on the basis of data of previous year. Under this method one year is taken as base year and its basis the ratios in the form of percentages for others years are calculated. From the study of these ratios, the changes in that item are examined and trend is estimated. To find out trend ratios, each item of base year is taken as 100 and percentage of an item of other years can be calculated accordingly.
Procedure For Calculating Trends:1)One Year is taken as base year .Generally the First and Last year is taken as base year. 2)The Figures of base year are taken as 100. 3)Trend Percentages are calculated in relation to base year. 4)Each year Figure is divided by the base year figure.
For Example,
If the stock for 1995,1996 and 1997 is Rs.5000 Rs.7000, and Rs.10,000 respectively, the trend ratios for 1996 and 1997 on the basis of 1995,can be calculated as under: 1996=Rs. 7000/5000*100=140% 1997=Rs.10000/5000*100=200% It means that during the past three years, there has been constant increase in the stock which has doubled in 1997 as compared to1995.
Precautions in Trend Analysis:
Base year should be a normal year so that it can be true representative of other years. The years which are included in Trend analysis should be accounted for continuously on similar principles. Before calculating trend ratios, the necessary adjustments for price level should be made. Trend Analysis should be calculated for such important items which are logically related to each other.
