Financial Statement Analysis

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Basics of Financial Statements


  • Depreciation is a charge for the use of fixed assets.
  • It is an expense. It is a non-cash expense since cash was paid at the time fixed assets were acquired.
  • Depreciation is allocation of these expenditures over the life of assets that have helped in generating revenue.
  • 09/07/21

Methods of Depreciation

  • Depreciation may be provided on
  • Straight Line Method (SLM) or
  • Written Down Value Method (WDV).
  • 09/07/21

Concepts of Profit

  • Gross profit = sales – cost of goods sold (CGS)
    • CGS = raw material consumed + manufacturing expenses of goods that have been sold
  • PBDIT = Profit before dep., interest and tax = sales – expenses, except dep., interest and tax
  • PBIT= Profit before interest and tax
  • = PBDIT – DEP
  • PBT= Profit before tax = PBIT – Interest
  • PAT = Profit after tax = PBT – Tax
  • 09/07/21

Functions of Income Statement

  • Summary of revenues and expenses
  • Measurement of profitability
  • 09/07/21

Standards of Financial Reporting

  • Full disclosure
  • Materiality
  • Consistency
  • Conservatism
  • Fairness
  • 09/07/21

Accounting Principles and Concepts

  • Business entity concept
  • Money measurement concept
  • Going concern concept
  • Cost concept
  • Duality concept
  • Accounting period concept
  • Realization concept
  • Matching concept
  • 09/07/21

Cash Flow

  • Liquidity refers to resources currently available with the firm. It is reflected by the cash flows rather than the stock of current assets and liabilities.
  • Cash flows occur due to changes in items in the balance sheet and profit & loss statement. Thus liquidity analysis involves measurement of changes in assets, liabilities and equity.
  • 09/07/21

Cash Flow

  • The cash flow statement organizes and reports the cash generated and used in the following categories:
  • Operating activities
  • Converts the items reported on the income statement from the accrual basis of accounting to cash.
  • Investing activities
  • Reports the purchase and sale of long-term investments and property, plant and equipment
  • 09/07/21


  • Financing activities
  • Reports the issuance of equity capital and redemption of the company's debentures and the payment of dividends etc.
  • Supplemental information
  • Reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid
  • 09/07/21

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