Financial figures in absolute amounts do not provide the complete picture. Financial statements give a detailed understanding of the various financial entries and overall profits and expenses. This presentation explains the various methods to understand Financial Statements. For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting Join us on Facebook: http://www.facebook.com/welearnindia Follow us on Twitter: https://twitter.com/WeLearnIndia Read our latest blog at: http://welearnindia.wordpress.com Subscribe to our Slideshare Channel: http://www.slideshare.net/welingkarDLP

1. Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-12. Understanding Financial
Statement
We Learn – A Continuous Learning Forum

2. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Net earnings from operations disclose profitability of a company.
But the figure can include one time item like sale of assets, in which
case earnings from operations are less to that extent.

3. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Net earnings from operations disclose profitability of a company
which can be a respectable figure say Ten crores.
But the figure when compared to previous year, say Fifteen crores,
shows a significant dip.

4. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Hence focus should be on Trends over years & Financial Ratios

5. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
We study three types of Ratios
Profit Ratios
Balance Sheet Ratios
Debt Paying Ability Ratio

6. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture.
Profit Ratios
Gross Profit
Gross Return on Sales =
Total sales
a stronger company in the Industry will have a high ratio

7. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
Profit Ratios
Net Profit
Net Return on Sales =
Total sales
a high ratio indicates greater capacity to declare dividends

8. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
- Profit Ratios
Balance Sheet Ratios
Net Worth
Book Value per share =
No of outstanding shares
Higher the ratio , stronger the company

9. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
- Profit Ratios ; Balance Sheet Ratios
Debt Paying Ability Ratio – measures solvency of company
Current Assets
Current Ratio =
Current Liabilities
Indicates ability to discharge short term liabilities

10. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
- Profit Ratios ; Balance Sheet Ratios
Debt Paying Ability Ratio – measures solvency of company
Total Debt
Debt Equity Ratio =
Net Worth
Higher the ratio greater the risk

11. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
- Profit Ratios ; Balance Sheet Ratios
Debt Paying Ability Ratio – measures solvency of company
Profit before Interest & Tax
Interest Cover Ratio =
Interest
Higher ratio indicates greater capacity to pay interest

12. Chapter Twelve- Understanding Financial Statements
Financial figures in absolute amounts do not provide
complete picture. Hence focus should be on Financial Ratios
- Profit Ratios ; Balance Sheet Ratios
Debt Paying Ability Ratio – measures solvency of company
Annual Sales Revenue
Asset Turnover Ratio =
Total Assets
Higher ratio indicates better utilization of assets

13. Chapter Twelve – Understanding Financial Statements
Ultimately,
understanding financial
statements is a fine art and calls
for deep understanding of accounting techniques!