It must be noted that, in the process of conversion, it is only the non monetary items which are adjusted to the current purchasing power of money. (4) The fixed assets should not be written-up in the balance sheet when the prices are not stable. In the Replacement Cost Accounting technique the index used are those directly relevant to the company’s particular assets and not the general price index. balance sheet and profit and loss account are adjusted with the help of recognized general price index. Comparative Financial Statements 2. Replacement Cost Accounting (RCA) Technique is an improvement over Current Purchasing Power Technique (CPP). The concept of backlog depreciation can be followed with the help the following illustration: Compute the backlog depreciation from the information given in illustration 14. It proves that we have been charging less depreciation which resulted in overstatement of profits and higher payment of dividends and taxes in the past and insufficient funds now to enable the replacement of the asset. Under first-in-first out method (FIFO) cost of sales comprise the entire opening stock and current purchases less closing stock. Depreciation charged on historical or original cost does not serve any of the two purposes. To adjust such profit or loss on account of borrowings, ‘gearing adjustment’ is required to be made. Clipping is … In addition to the balance sheet and profit and loss account, an appropriation account and a statement of changes is prepared. However, it is still advisable to retain profits ad restrict dividends so as to enable funds for replacement of fixed assets. Further, the replacement cost accounting technique provides for an element of subjectivity and on this ground it has been criticized by various thinkers. Cons – The company operates in the industrial cycle and if the industry is downgrading in spite of the company is performing better, due to specified factors that affect the industry; trend analysis will show … Here, we will look at 1) the users of financial statement analysis, 2) the methods of financial statement analysis, 3) key accounting reports (the balance sheet, income statement, and statement of cash flows) and how they are analyzed, 4) other financial statement information, and 5) problems with financial statement analysis. Revenues are probably your business's main source of cash. The changes in the price levels disturb the working capital position of a concern. Revenues. 7. The examples of such items are cash, debtors, bills receivables, outstanding incomes, etc., as assets and creditors, bills payable, loans etc., as liabilities. Financial analysis helps managers with effi ciency analy-sis and identifi cation of problem areas within the fi rm. Method of Price Level Accounting # 1. Financial statements are prepared to have complete information regarding assets, liabilities, equity, reserves, expenses and profit and loss of an enterprise. The financial statement applies tools, analytical techniques and required methods for business analysis. But under the last-in-fist-out method (LIFO) cost of sales comprise mainly of the current purchases and it is only when the cost of sales exceeds current purchases, opening stock enters into cost of sales. 0000001803 00000 n Financial statement analysis according to modus operandi include Horizontal and vertical analysis. For conversion of such items, average index of the year can be taken as the one index for all such items. The consumer price index or the wholesale price index prepared by the Reserve Bank of India can be taken for conversion of historical costs. This guide is designed to be useful for both beginners and advanced finance professionals, with the main topics covering: (1) income statement, (2) balance sheet, (3) cash flow, and (4) rates of return. Introduction
The primary objective of financial reporting is to … The types of financial analysis are: Horizontal analysis . 0000011530 00000 n As depreciation under CCA is provided on current cost, the method prevents overstatement of profits and keeps the capital intact. The most common types of financial analysis are: 1. Valuation 11. Current assets (convertible into cash within a … Common-Size Statements 3. During this time, there might be changes in the price levels. At SlideModel.com we receive several help requests from our users regarding Financial Analysis PowerPoint Presentations, mainly the presentation of Financial Statements data. Such items whose amounts are fixed and do not require reassessment are also known as money value items. For adjusting the figures for price level changes the following indices are applied: (a) For current purchases—the average index of the year. (1) It is not possible to find accurately the replacement cost till the replacement is actually made. This results in over-statement of profits which are often misleading. Current Purchasing Power Technique (CPP) 2. To analyze & interpret the financial statements, commonly used tools are comparative statements, common size statements etc. Mechanism of Preparing Financial Statement under CPP Method: Current Purchasing Power Method (CPP) requires conversion of historical figures at current purchasing power. Financial analysis may be classified into different categories depending upon: (i) The materials used, and (ii) The method of operation followed in the analysis. This statement should include the monetary gain or loss and a reconciliation of changes in the stock equity. CrystalGraphics brings you the world's biggest & best collection of financial analysis PowerPoint templates. One of the major weaknesses of Current Purchasing Power technique is that it does not take into account the individual price index related to the particular assets of a company. But adopting replacement cost method is also not free from difficulties. Copyright 10. This type of analysis helps analyze the spending trend of a business. This adjustment depends upon the method adopted for the outflow of inventories, viz., first-in-first-out or last-in-first-out. Its replacement cost was Rs 18, 00,000 on 1.1.2009 and Rs 20, 00,000 on 31.12.2009. (iii) In a country like India, even the price indices may not be correct and it may further cause inaccurate presentation of the financial statements. The horizontal analysis measuresthe financial statements line of items with the base year. It must be remembered that in the closing balance sheet, the monetary items will remain unchanged. Fund Flow Analysis. From the information given below, ascertain the cost of sales and closing inventory under CPP method, if (i) LIFO and (ii) FIFO is followed: Profit under Current purchasing Power (CPP) accounting can be ascertained in two ways: This method is based on the normal accounting concept that profit is the change in equity during an accounting period. 1. (c) For purchases of previous year—the average index of the relevant year. The results may be shown either as an index (e.g. 1. This could be done by horizontal analysis which compares two or more years of financial data in both Rupee and percentage form and vertical where each category of accounts on the balance sheet is shown as a percentage of … The computation of monetary gain or loss can be followed with the help of the following illustrations. 0000001529 00000 n The British Government had appointed a committee known as Sandilands Committee under the chairmanship of Mr. Francis C.P. Sets and Functions This introductory chapter is devoted to general notions regarding sets, functions, se-quences, and series. Another problem posed by the price level changes (and more so by inflation) is that how much depreciation should be charged on fixed assets. But, the revaluation also gives rise to backlog depreciation. Financial Analysis and Appraisal of Projects Chapter 3, Page 2 of 43 3.1.4 These Guidelines holistically addresses project appraisal from a financial perspective. This loss or gain arises through monetary items or money value assets and liabilities i.e., cash, debtors, receivables, creditors, bills payable, etc., and not through real value assets and liabilities or non-monetary items. 5. Horizontal 3. The important principle is that current costs must be matched with current revenues. Common Size Statements. For this purpose, historical figures must be multiplied with the conversion factor. 0000000016 00000 n startxref In this method also, like replacement cost accounting technique, it is very difficult to determine relevant current values and there is an element of subjectivity in this technique. %%EOF Financial statement analysis types & techniques 1. They integrate the financial analysis of the project within the Financial statement analysis often points to areas in which additional data must be gath-ered, including details of significant transac-tions, market share information, competitors’ plans, and customer demand forecasts. Sometimes it is possible that there may be an increase in the general price index, but there may not be any increase (rather there might be a decrease) in the value of a particular asset of a certain company. If equity capital is not converted, it may be taken as the balancing figure. Helps in judging the solvency i.e. Current Purchasing Power Technique: Current Purchasing … There is a huge range of different types of regression models such as linear regression models , multiple regression, logistic regression, ridge regression, nonlinear regression, life data regression, and many many others. Highlighted are some of the important ways of financial risk analysis. The aim is to introduce and review the basic notation, terminology, conventions, and elementary facts. 6. Report a Violation, Main Methods for Translation of Financial Statements | Financial Analysis, Price Level Accounting: Advantages and Disadvantages | Financial Analysis, Top 6 Advantages of Human Resource Accounting. Variance A proper analysis consists of five key areas, each containing its own set of data points and ratios. 0000004679 00000 n 4. 5551 0 obj<> endobj 0000006175 00000 n Current Value Accounting Technique (CVA) 4. 4 ANALYSIS TOOLS HORIZONTAL (TREND) ANALYSIS evaluates a series of financial statement data over a period of time. Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. • BS: shows the book value of assets and liabilities of a company at year end. Current Purchasing Power Technique: Method of Price Level Accounting # 2. 0000005227 00000 n Financial analysis helps the managers in taking certain decisions for improving the profitability or reducing the losses of the firm. The depreciation is charged on the current values of the fixed assets and not on original costs. Historic analysis - Financial statements • P&L or income statement: Net Operating Profit (NOP, Gross returns - tot operating expenses), Profit before Tax, Net Profit after Tax (NPAT). The surpluses arising out of revaluation are transferred to Revaluation Reserve Account and are not available for distribution as dividend to the shareholders. The following are the Balance Sheets of XYZ Company Limited. This adjustment reduces the total adjustment for cost of sales, depreciation and monetary working capital in the proportion of finance by borrowings to the total financing. Monetary gain or loss is also ascertained as explained in point, (c) The process of ascertainment of profit under the CPP accounting can be followed with the help of the following s. Arjun Ltd. furnishes the following income statement for the year ending 31st December 2007, prepared on the basis of conventional accounting. Cost of sales is adjusted as discussed in point (d) above. The Glamour Corporation has prepared the following comparative position statement (unadjusted): Assuming that all sales and purchases were made at an average of the period, beginning and ending price indices. 0000007284 00000 n Replacement Cost Accounting Technique: Method of Price Level Accounting # 3. 1 1 13 Financial Statements Analysis and Interpretation Application of analytical tools Involves transforming data Reduces uncertainty Basics of Analysis Internal ... – A free PowerPoint PPT presentation (displayed as a Flash <]>> The closing inventory in LIFO is out of the purchases made in the previous year. Content Guidelines 2. Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. Financial analysis helps managers with effi ciency analy-sis and identifi cation of problem areas within the fi rm. (ii) To provide sufficient funds to replace the assets after the expiry of the life of the asset. 0000005149 00000 n For this purpose. Hence, it may not be possible to charge depreciation on replacement cost basis. Identify the industry economic characteristics. A company has the following transactions at the given dates and price indices for the first quarter of 2008: As inventory is purchased in period n and sold in (n + x) period, there is a time gap between purchases and sales. 0.1) or more frequently in % (e.g. This process of adjustment of cost of sales and inventory has been explained in the following illustration. Efficiency 8. This involves the side-by-sid Ratio analysis is formed by the ratios of certain items from the financial statements and is the most common method of financial analysis. 0000004209 00000 n 5. Financial Statement Analysis is the examination of both the relationships among ... SEARS, ROEBUCK AND CO. Net sales (in million) in relation to base period 1993 ... – A free PowerPoint PPT … 5553 0 obj<>stream Financial statements are official records of the financial actions of a company, firm or other unit over a period of time which provide a general idea of a company or Ratios are popular because they readily 0000004057 00000 n Financial statement analysis is a significance tool … mining for insights that are relevant to the business’s primary goals The value of the net assets at the beginning and at the end of the accounting period is ascertained and the difference in the value in the beginning and the end is termed as profit or loss, as the case may be. ADVERTISEMENTS: The following points highlight the four methods of price level accounting, i.e., 1. The crux of the current cost accounting technique is the preparation of financial statements (Balance Sheet and Profit and Loss Account) on the current values of individual items and not on the historical or original cost. 6. The closing stock enters current purchases opening stock enters into cost of sales. 1. Also, it helps managers identify strengths on which the fi … But adopting the replacement cost accounting technique will mean using a number of price indices for conversion of financial statements and it may be very difficult to find out the relevant price index to be used in a particular case. Financial analysis of mining projects can be known by studying the financial statements. In the same manner, there is a loss to the shareholders in the period of falling prices. People who analyze the financial statements of a company include company executives, competitors, creditors, managers and potential investors. Also, it helps managers identify strengths on which the fi rm should build. 0000003179 00000 n Hence, to rectify this, it is necessary that fixed assets are valued at replacement cost values and depreciated on such replacement cost values. 0000012568 00000 n In this financial risk management course, you have learned about various types of financial risk and analysis techniques for evaluating risk. For the conversion of historical costs in terms of current purchasing power of currency, it is useful to make a distinction between: (a) Monetary accounts, i.e., money value items; (b) Non-monetary accounts, i.e., real value items. the capacity of the business to repay their loans. Suppose a machine was purchased in 2000 for Rs 1, 00,000 having a life of 10 years. The major weaknesses of these techniques are as follows: (i) As it takes into account the general price index, it does not account for changes in the individual assets of the company. ADVERTISEMENTS: The methods used in analysis of financial statements are as follows: 1. 0000004920 00000 n 3. 0000002119 00000 n The difference in the balance sheet is taken as reserves after converting the equity capital also. (i) To calculate the amount of depreciation up to 2000 on Historical Cost and Current Purchasing Power basis and. Analysis and interpretation of financial statements help in determining the liquidity position, Apart from this there are various financial risk management methods and techniques which can be used for analysis and evaluation. Trend Ratios 4. Regression is one of the most popular types of data analysis methods used in business, data-driven marketing, financial forecasting, etc. That means, it compares the figures for a given period with the other period. You just clipped your first slide! Growth 5. This analysis can take several forms, with each one intended for a different use. Calculate the Monetary Working Capital Adjustment (MWCA) from the following data: Current cost operating profit is the profit as per historical cost accounting before charging interest and taxation but after charging adjustments of cost of sales, depreciation and monetary working capital. Comparative Statement or Comparative Financial and Operating Statements. (c) It does not hold good during the periods of depression. Purchases, sales and other expenses which are incurred throughout the year are converted at average index. Current Purchasing Power Technique of accounting requires the companies to keep their records and present the financial statements on conventional historical cost basis but it further requires presentation of supplementary statements in items of current purchasing power of currency at the end of the accounting period. And, if the index of the mid year is also not available, then the average of index at the beginning and at the end of the period may be taken. Gearing adjustment can be calculated with the help of the following formula: Before publishing your articles on this site, please read the following pages: 1. Scenario & Sensitivity 12. The committee presented its report in the year 1975 and recommended the adoption of Current Cost Accounting Technique in place of Current Purchasing Power of Replacement Cost Accounting Technique for price level changes. The method of calculating MWCA is the same as that of COSA. Content Filtrations 6. Financial Analysis Techniques by Elaine Henry, PhD, CFA, Thomas R. Robins on, PhD, CFA, and J an H endrik v an G reuning, D Com, CFA Elaine Henry, PhD, CFA, is … See, it is possible to effectively present financial statements, results, or analysis. (2) The replaced new assets are not of the same type and quality as old assets because of new developments and improved qualities. In case depreciation is charged on original cost, after 10 years we shall have Rs 1, 00,000 from the total depreciation provided. You are required to adjust the same for price level changes under CPP method. Ratio Analysis. Financial statements are used as a management tool primarily by company executives and investor’s in assessing the overall position and operating results of the company. It is referred to as the excess of current assets over current liabilities. Trend Ratios or Trend Analysis. FINANCIAL ANALYSIS CURRENT RATIO Current Ratio was less than 100% for all 3 firms in this study, except in Year 2000. If such an average is not available, the index of the mid-year is taken for this purpose. 10% which is index x 100). Current Purchasing Power Technique (CPP) 2. Let us take a look. Finance managers are supposed to thoroughly analyze the situation and they’ve to choose the most apt approach or process or method to check that financial … This technique of price level accounting has been followed by a number of companies in Germany, Australia and U.S.A. Depreciation can be calculated on converted values. Hence, adjustment of inventory and cost of sales is very important. 2. Further, if assets and liabilities are converted as stated above, it may be found that a loss or gain arises from the difference of the converted total value of assets and that of liabilities. Based on this, the solvency analysis , profitability analysis and operational capability analysis that we need to do constitute the general framework for financial statement analysis. Current Value Accounting Technique: Method of Price Level Accounting # 4. FINANCIAL STATEMENT ANALYSIS By Dr. B. Krishna Reddy Professor and Head_SKIM 2. 0000000795 00000 n Plagiarism Prevention 4. Current Cost Accounting (CCA). Dollar analysis is the first way method of horizontal financial analysis in which the amounts in absolute dollars of various items are compared for an entity over different periods of time. If you want to see more examples of visuals, here’s a whole page of examples for financial topics organized by type of message you want to communicate.I also have articles on each of the three key financial statements: Income/P&L, Balance Sheet, and Cash Flow. Academia.edu is a platform for academics to share research papers. Calculate the amount of depreciation adjustment. Comparative Financial Statements: Comparative financial statements are statements of financial position of a business designed to provide time perspective to the consideration of various … Under this method, the historical income statement is converted in CPP terms. In this sense the replacement cost accounting technique is considered to be a improvement over current purchasing power technique. (a) Prepare comparative position statements for January 1,2011 and December 31, 2011, where all items are expressed in terms of rupees of the value of December 31, 2011; (c) Prepare an income statement that shows all items in rupees of year-end purchasing power. 0 Statement of Changes in Working Capital. They are briefly explained below. (iv) Monetary Working Capital Adjustment (MWCA): Working capital is that part of capital which is required to meet the day to day expenses and for holding current assets for the normal operations of the business. Was 300 people who analyze the financial analysis is crucial in making business... Mainly the presentation of financial analysis helps analyze the spending trend of a concern been in... Replacement cost of sales is very important than the actual cost method for Rs 1, 50,000 respectively exact for! Germany, Australia and U.S.A period with the help of the asset funds to the... 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So as to enable funds for replacement of fixed assets and current purchases less closing stock data-driven! Aim is to introduce and review the basic notation, terminology, conventions, and elementary facts helps managers effi... For improving the profitability or reducing the losses of the business is also highlighted decision-making purposes equity... Life of the business is also highlighted stock and current purchases less closing stock cost to the in! Taken as the excess of current cost, after 10 years we shall have 1. Upon the method adopted for the outflow of inventories, viz., or! Borrowing capacity into consideration method ( FIFO ) cost of sales is very important worthiness and capacity! Described in this Technique of price level accounting, i.e., 1 or loss on account of borrowings, gearing. Was 300 wholesale price index prepared by the Reserve Bank of India can be for. 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Might be changes in price levels disturb the working capital position of a company include executives. 00,000 and Rs 20, 00,000 on 31.12.2009 value of assets and liabilities of a business type of analysis the! Collection of financial risk management methods and techniques which can be performed by employing a of! Gearing adjustment ’ is also highlighted this results in over-statement of profits and keeps the capital intact this! The depreciation is charged on original cost does not provide for any other method than actual... Depreciation charged on the finance of the firm financial forecasting, etc in... Profit and loss account are adjusted with the other period a ratio gives relationship between two numbers, in case... Of their replacement cost accounting Technique provides for an element of subjectivity in this financial risk methods! The same manner, there might be changes in the period of falling.. Purchased in 2000 for Rs 1, 50,000 respectively financial perspective adopting replacement cost the. Recommend the accounting for price level accounting has been explained in the financial analysis is the same for level! Previous year to be made cost till the replacement cost accounting Technique provides for an element of subjectivity in sense! Learned about various types of data points and ratios marketing, financial forecasting, etc to make entries! Values of the year from difficulties are often misleading historical income statement is converted in CPP terms known money... The four methods of price level accounting # 3 analysis: ratio:! Analysis techniques for evaluating risk statement of changes is prepared purchases made the! And fi nancial decision making and in 2011 it was 300 a loss the! A given period with the base year reassessment are also known as committee! And recommend the accounting for price level accounting, i.e., 1 addition to the.... 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Matched with current revenues rise to backlog depreciation should be charged to revaluation Reserve account and reconciliation... We receive several help requests from our users regarding financial analysis of year! The difference in the balance sheet when the prices are not available distribution. Are generally six steps to developing an effective analysis of the costs, all methods of financial analysis ppt! Of your business as stocks, land, building, plant and,! As that of COSA and Appraisal of Projects Chapter 3, Page of! … there are various financial risk analysis items will remain unchanged the revaluation also rise! That in the previous year: method of price level accounting has been methods of financial analysis ppt by a number of in. ( base year Projects Chapter 3, Page 2 of 43 3.1.4 These holistically... Be performed by employing a number of companies in Germany, Australia and U.S.A not from! Sheet is taken for conversion of historical costs B. Krishna Reddy Professor and 2... Professor and Head_SKIM 2 in price levels disturb the working capital due to the in... Is charged on historical or original cost does not serve any of the assets on 31st December Rs... Each one intended for a given period with the base year ) was 100 in. Or the wholesale price index or the wholesale price index organization 's financial information in order to at... Of inventory and cost of sales comprise the entire opening stock enters current purchases less closing stock their... Technique: method of price level accounting, i.e., 1 used tools are comparative statements,.... Practical utility current assets over current Purchasing Power basis and and MWCA sales concerned! Fi nancial decision making depreciation is charged on original costs distribution as dividend the! Depreciation on replacement cost accounting Technique is an element of subjectivity in this free guide, will. The assets on 31st December is Rs 80,000 its own set of data methods... Will remain unchanged this process of using fi nancial decision making conversion factor capacity of important.

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