E-FINANCIAL ARTICLES

True / False Questions & answers related to economics

True / False Questions

1. Increased demand for a product or service will usually result in lower prices for the item. FALSE

2. Inflation reduces the buying power of money. TRUE

3. When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years. TRUE

4. A decrease in the demand for a product or service may result in a decrease in wages for people producing that item. TRUE

5. A financial plan is another name for a budget. FALSE

6. Short-term goals are usually achieved within the next year or so. TRUE

7. Opportunity costs refer to time, money, and other resources that are given up when a decision is made. TRUE

8. Risks associated with most financial decisions are fairly easy to measure. FALSE

9. The financial planning process is complete once you implement your financial plan.
FALSE

Multiple Choice Questions

10. Higher prices are likely to result from:
A. lower demand by consumers.
B. increased production by business.
C. lower interest rates.
D. increased spending by consumers without increased production.
E. an increase in the supply of a product.

11. With an inflation rate of 9 percent, prices would double in about ___________ years.
A. 4
B. 6
C. 8
D. 10
E. 12

12. Increased consumer spending will usually cause:
A. lower consumer prices.
B. reduced employment levels.
C. lower tax revenues.
D. lower interest rates.
E. higher employment levels.

13. The main economic influence that determines prices is:
A. the stock market.
B. interest rates.
C. employment.
D. government spending.
E. supply and demand.

14. As Jean Tyler plans to set aside funds for her young children's college education, she is setting a(n) ____________ goal.
A. intermediate
B. long-term
C. short-term
D. intangible
E. durable

15. Brad Opper has a goal of "saving $50 a month for vacation." Brad's goal lacks:
A. measurable terms.
B. a realistic perspective.
C. specific terms.
D. the type of action to be taken.
E. a time frame.

16. Opportunity cost refers to:
A. money needed for major consumer purchases.
B. what a person gives up by making a choice.
C. the amount paid for taxes when a purchase is made.
D. current interest rates.
E. evaluating different alternatives for financial decisions.

17.If a person deposited $50 a month for 6 years earning 8 percent, this would involve what type of computation?
A. simple interest
B. future value of a single amount
C. future value of a series of deposits
D. present value of a single amount
E. present value of a series of deposits

18. Which type of computation would a person use to determine current value of a desired amount for the future?
A. simple interest
B. future value of a single amount
C. future value of a series of deposits
D. present value of a single amount
E. present value of a series of deposits

19. If inflation is increasing at 3 percent per year, and your salary increases at the same rate, how long will it take your salary to double?
A. 30 years
B. 24 years
C. 18 years
D. 12 years
E. 6 years

20. When prices are increasing at a rate of 6 percent, the cost of products would double in about how many years?
A. 7.2 years
B. 10 years
C. 6 years
D. 12 years
E. 18 years

21. If you put $1,000 in a saving account and make no further deposits, what type of calculation would provide you with the value of the account in 20 years?
A. future value of a single amount
B. simple interest
C. present value of a single amount
D. present value of a series of deposits
E. future value of a series of deposits

22. The financial planning process concludes with efforts to
A. develop financial goals.
B. create a financial plan of action.
C. analyze your current personal and financial situation.
D. review the financial plan.
E. review and revise your actions.

23. A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect their expenses to be approximately _______ in three years.
A. $40,300
B. $41,200
C. $42,000
D. $43,700
E. $46,000

24. Barb Hotchkins is in the 28 percent tax bracket. A tax-exempt employee benefit with a value of $500 would have a tax-equivalent value of:
A. $694.
B. $528.
C. $500.
D. $360.
E. $140.

25. Tax-deferred employee benefits are
A. not subject to federal income tax.
B. not subject to state income tax.
C. taxed at some future time.
D. are taxed at a special rate.

True / False Questions
26. Opportunity costs are only associated with money management decisions involving long-term financial security. FALSE

27. A budget is a specific plan of how a person or family will spend their money.
TRUE

28. A personal balance sheet reports your income and expenses. FALSE

29. A person's net worth is the difference between the value of the items owned and the amounts owed to others. TRUE

30. Furniture, jewelry, and an automobile are examples of liquid assets.
FALSE

31. Current liabilities are amounts that must be paid within a short period of time, usually less than a year. TRUE

32. A personal cash flow statement presents income and outflows of cash for a given time period, such as a month. TRUE

33. If expenses for a month are greater than income, an increase in net worth will result.
FALSE

Multiple Choice Questions

34. A personal balance sheet presents:
A. amounts budgeted for spending.
B. income and expenses for a period of time.
C. earnings on savings and investments.
D. items owned and amounts owed.
E. family financial goals.

35. The current financial position (including net worth) of an individual or family is best presented with the use of a(n):
A. budget.
B. cash flow statement.
C. balance sheet.
D. bank statement.
E. time value of money report.

36. A family with $45,000 in assets and $22,000 of liabilities would have a net worth of:
A. $45,000.
B. $23,000.
C. $22,000.
D. $67,000.
E. $41,000.

37. Items that you own with a monetary worth are referred to as:
A. liabilities.
B. variable expenses.
C. net worth.
D. income.
E. assets.

38. Items of value minus the amounts owed to others equals:
A. net assets.
B. net worth.
C. total liabilities.
D. total income.
E. budgeted expenses.

39. Liabilities are amounts representing:
A. debts.
B. items of value.
C. living expenses.
D. taxable income.
E. current assets.

40 . A person's net worth is computed by:
A. adding assets and liabilities.
B. deducting current living expenses from total assets.
C. subtracting total liabilities from total assets.
D. subtracting assets from current liabilities.
E. adding liabilities and budgeted expenses.

41. A cash flow statement reports a person's or a family's:
A. net worth.
B. current income and payments.
C. plan for spending.
D. value of investments.
E. balance of savings.

42. Which of the following presents a summary of income and outflows for a period of time?
A. A balance sheet
B. A bank statement
C. An investment summary
D. A cash flow statement
E. An asset report

43. A common deduction from a person's paycheck is for:
A. interest.
B. taxes.
C. rent.
D. unemployment.
E. current liabilities.

44. A decrease in net worth would be the result of:
A. income greater than expenses for a month.
B. expenses greater than income for a month.
C. assets greater than expenses.
D. increased earnings on the job.
E. income and expenses equal for a month.

45. The difference between the amount budgeted and the actual amount is called a:
A. financial plan.
B. current liability.
C. change in net worth.
D. budget variance.
E. variable living expense.

46. Patricia McDonald has determined that the value of her liquid assets is $4,500, the value of her real estate is $128,000, the value of her personal possessions is $62,000 and the value of her investment assets is $73,000. She has also determined the value of her current liabilities is $7,500 and the value of her long term liabilities is $98,000. What is Jamie's net worth?
A. $267,500
B. $105,500
C. $162,000
D. $205,500
E. $132,000

47. A family has a net worth of $156,000 and liabilities of $167,000, what is the amount of their assets?
A. $11,000
B. $156,000
C. $167,000
D. $323,000

48. In a recent month, Ken Grossman has cash inflows of $3,100 and cash outflows of $2,950, resulting
A. a balanced budget.
B. a surplus of $150.
C. a deficit of $150.
D. a surplus of $3,100.
E. a deficit of $2,950.

49. An investment account that increases from $3,000 to $3,271 in one year is earning about ___ percent.
A. 3
B. 5
C. 7
D. 9
E. 11

True / False Questions
50. Taxes are only considered as financial planning activities in April. FALSE

51. A state may impose a personal property tax. TRUE

52. Real-estate property taxes are a major source of revenue for local governments.
TRUE

53. A general sales tax is also referred to as an excise tax. FALSE

54. A tax on the value of automobiles, boats, or furniture is referred to as a personal property tax. TRUE

55. Taxable income is the total earnings of a person. FALSE

56. Exemptions are deductions for yourself, your spouse and qualified dependents that you can deduct from adjusted gross income. TRUE

Multiple Choice Questions

57. The main purpose of taxes is to:
A. generate revenue for funding government programs.
B. reduce the chances of inflation.
C. create jobs.
D. discourage use of certain goods and services.
E. decrease competition from foreign companies.

58. Which type of tax is imposed on specific goods and services at the time of purchase?
A. estate
B. inheritance
C. excise
D. general sales
E. value-added

59. The ______________ property tax is based on the value of land and buildings at some point in time.
A. personal
B. real estate
C. direct
D. proportional
E. regressive

60. Interest earnings of $1,600 from a taxable investment for a person in a 28 percent tax bracket would result in after-tax earnings of
A. $1,600
B. $1,152
C. $1,100
D. $448
E. $152

61. A $2,000 deposit to a tax-deferred retirement account for a person in a $25 percent tax bracket would result in a reduced tax bill of
A. $2,000
B. $1,500
C. $1,200
D. $500
E. $300

62. A taxpayer with a taxable income of $47,856 and a total tax bill of $5,889 would have an average tax rate of ____ percent.
A. 8.6
B. 10.3
C. 12.3
D. 14.2
E. 16.7

63. Which of the following would be deducted from gross income to obtain adjusted gross income?
A. alimony payments
B. mortgage interest
C. medical expenses
D. foreign income exclusion
E. charitable contributions

64. Reductions from gross income for such items as individual retirement account contributions and alimony payments will result in:
A. adjusted gross income.
B. taxable income.
C. earned income.
D. passive income.
E. total exclusions.

65. Which of the following items is a set amount on which no taxes are paid?
A. itemized deductions
B. the standard deduction
C. an earned tax credit
D. withholding
E. capital gains

66. An expense that would be included in the itemized deductions of a taxpayer is:
A. travel to work.
B. life insurance premiums.
C. real estate property taxes.
D. a driver's license fee.

67. A deduction from adjusted gross income for yourself, your spouse, and qualified dependents is:
A. the standard deduction.
B. a tax credit.
C. an itemized deduction.
D. an exclusion.
E. an exemption.

68. Michele Barbour is considering an additional charitable contribution of $2,000 to a tax-deductible charity, bringing her total itemized deductions to $16,000. If Michelle is in a 28 percent tax bracket, and is not subject to a phase out of deductions, how much will this $2,000 contribution reduce her taxes?
A. nothing
B. $560
C. $1,600
D. $2,000
E. $4,480

69. Which of the following would qualify a person for an exemption when computing taxable income?
A. mortgage interest
B. a tax shelter
C. a dependent
D. charitable contributions
E. passive income

70. A tax ____________ is an amount subtracted directly from the amount of taxes owed.
A. credit
B. exemption
C. deduction
D. exclusion
E. shelter

71. A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by:
A. $10.
B. $28.
C. $14.
D. $50.
E. $35.

72. A person with a total tax liability of $4,350 and withholding of federal taxes of $3,975 would:
A. receive a refund of $3,975.
B. owe $4,350.
C. owe $375.
D. receive a refund of $4,350.
E. receive a refund of $375.

73. An example of an itemized deduction is:
A. interest on a credit card or charge account.
B. certain job-related travel expenses.
C. the cost of commuting to work.
D. life insurance premiums.
E. a traffic violation fee.

74. The state of Oklahoma imposes a tax of $.17 per gallon on gasoline. What type of tax is this most likely to be?
A. General sales tax
B. Excise tax
C. Personal property tax
D. Income tax
E. Estate tax

75. Tim Bridges purchases a bass fishing boat in the state of Oklahoma. The state imposes a 3.25% tax on the value of this purchase. What type of tax is this most likely to be?
A. General sales tax
B. Excise tax
C. Personal property tax
D. Income tax
E. Estate tax

76. Drew Davis earns $4500 per month from his job at Cisco Systems; $900 is withheld from this amount each month for taxes. What type of tax is this most likely to be?
A. General sales tax
B. Excise tax
C. Personal property tax
D. Income tax
E. Estate tax

77. Kim Ye is single and earns $40,000 in taxable income. He uses the following tax rate schedule to calculate the taxes he owes.

Calculate the dollar amount of estimated taxes that Kim owes.
A. $2,737.50
B. $6,747.50
C. $10,000.00
D. $17,587.50

78. If Edward received a $1,600 raise to increase his annual salary from $37,000 to $38,600 during a year with an annual inflation of 4%, what would his personal increase be in nominal terms?

A. .3%
B. 4.15%
C. 4.3%
D. 6%

79. Using the same information as problem 93, what is his real personal increase?

A. .3%
B. 4.15%
C. 4.3%
D. 6%

What can data mining do?

Data mining is primarily used today by companies with a strong consumer focus - retail, financial, communication, and marketing organizations. It enables these companies to determine relationships among "internal" factors such as price, product positioning, or staff skills, and "external" factors such as economic indicators, competition, and customer demographics. And, it enables them to determine the impact on sales, customer satisfaction, and corporate profits. Finally, it enables them to "drill down" into summary information to view detail transactional data.
With data mining, a retailer could use point-of-sale records of customer purchases to send targeted promotions based on an individual's purchase history. By mining demographic data from comment or warranty cards, the retailer could develop products and promotions to appeal to specific customer segments.
For example, Blockbuster Entertainment mines its video rental history database to recommend rentals to individual customers. American Express can suggest products to its cardholders based on analysis of their monthly expenditures.
WalMart is pioneering massive data mining to transform its supplier relationships. WalMart captures point-of-sale transactions from over 2,900 stores in 6 countries and continuously transmits this data to its massive 7.5 terabyte Teradata data warehouse. WalMart allows more than 3,500 suppliers, to access data on their products and perform data analyses. These suppliers use this data to identify customer buying patterns at the store display level. They use this information to manage local store inventory and identify new merchandising opportunities. In 1995, WalMart computers processed over 1 million complex data queries.
The National Basketball Association (NBA) is exploring a data mining application that can be used in conjunction with image recordings of basketball games. The Advanced Scout software analyzes the movements of players to help coaches orchestrate plays and strategies. For example, an analysis of the play-by-play sheet of the game played between the New York Knicks and the Cleveland Cavaliers on January 6, 1995 reveals that when Mark Price played the Guard position, John Williams attempted four jump shots and made each one! Advanced Scout not only finds this pattern, but explains that it is interesting because it differs considerably from the average shooting percentage of 49.30% for the Cavaliers during that game.

By using the NBA universal clock, a coach can automatically bring up the video clips showing each of the jump shots attempted by Williams with Price on the floor, without needing to comb through hours of video footage. Those clips show a very successful pick-and-roll play in which Price draws the Knick's defense and then finds Williams for an open jump shot.

Data warehouses & applications of warehouses

Data Warehouses

Dramatic advances in data capture, processing power, data transmission, and storage capabilities are enabling organizations to integrate their various databases into data warehouses. Data warehousing is defined as a process of centralized data management and retrieval. Data warehousing represents an ideal vision of maintaining a central repository of all organizational data. Centralization of data is needed to maximize user access and analysis. Dramatic technological advances are making this vision a reality for many companies. And, equally dramatic advances in data analysis software are allowing users to access this data freely. The data analysis software is what supports data mining.

Data

Data are any facts, numbers, or text that can be processed by a computer. Today, organizations are accumulating vast and growing amounts of data in different formats and different databases. This includes:

operational or transactional data such as, sales, cost, inventory, payroll, and accounting

nonoperational data, such as industry sales, forecast data, and macro economic data

meta data - data about the data itself, such as logical database design or data dictionary definitions

Information

The patterns, associations, or relationships among all this data can provide information. For example, analysis of retail point of sale transaction data can yield information on which products are selling and when.

Knowledge

Information can be converted into knowledge about historical patterns and future trends. For example, summary information on retail supermarket sales can be analyzed in light of promotional efforts to provide knowledge of consumer buying behavior. Thus, a manufacturer or retailer could determine which items are most susceptible to promotional efforts.

What is DATA mining?how it works in financial analysis?

Generally, data mining (Also called knowledge discovery) is the process of analyzing data from different perspectives and summarizing it into useful information - information that can be used to increase revenue, cuts costs, or both. Data mining software is one of a number of analytical tools for analyzing data. It allows users to analyze data from many different dimensions or angles, categorize it, and summarize the relationships identified. Technically, data mining is the process of finding correlations or patterns among dozens of fields in large relational databases.

Although data mining is a relatively new term, the technology is not. Companies have used powerful computers to sift through volumes of supermarket scanner data and analyze market research reports for years. However, continuous innovations in computer processing power, disk storage, and statistical software are dramatically increasing the accuracy of analysis while driving down the cost.

Example

For example, one Northindian grocery chain used the data mining capacity of Oracle software to analyze local buying patterns. They discovered that when men bought diapers on Thursdays and Saturdays, they also tended to buy beer. Further analysis showed that these shoppers typically did their weekly grocery shopping on Saturdays. On Thursdays, however, they only bought a few items. The retailer concluded that they purchased the beer to have it available for the upcoming weekend. The grocery chain could use this newly discovered information in various ways to increase revenue. For example, they could move the beer display closer to the diaper display. And, they could make sure beer and diapers were sold at full price on Thursdays.

Derivative Instruments?

Derivative Instruments?

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc.

4 most common examples of derivative instruments are Forwards, Futures, Options and Swaps.

Forward Contracts?

A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today. The main features of forward contracts are

· They are bilateral contracts and hence exposed to counter-party risk.

· Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.

· The contract price is generally not available in public domain.

· The contract has to be settled by delivery of the asset on expiration date.

· In case the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.

Futures?

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller. To make trading possible, BSE specifies certain standardized features of the contract.

Difference between Forward Contracts and Futures Contracts?

Sr.No	Basis	Futures	Forwards
a	Nature	Traded on organized exchange	Over the Counter
b	Contract Terms	Standardized	Customised
c	Liquidity	More liquid	Less liquid
d	Margin Payments	Requires margin payments	Not required
e	Settlement	Follows daily settlement	At the end of the period.
f	Squaring off	Can be reversed with any member of the Exchange.	Contract can be reversed only with the same counter-party with whom it was entered into.

Options :

an option is a contract which gives the buyer (the owner or holder) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.

The seller has the corresponding obligation to fulfill the transaction, that is to sell or buy – if the buyer (owner) "exercises" the option. An option that conveys to the owner the right to buy something at a specific price is referred to as a Call; an option that conveys the right of the owner to sell something at a specific price is referred to as a Put.

Option trading

Exchange-traded options : also called "listed options. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the Options Clearing Corporation (OCC).

· stock options,

· bond options and other interest rate options

· stock market index options or, simply, index options and

· options on futures contracts

· callable bull/bear contract

Over-the-counter options : OTC options, also called "dealer options.are traded between two private parties, and are not listed on an exchange.

· nterest rate options

· currency cross rate options, and

· options on swaps or swaption

Profitability analysis

Profitability analysis is a component of enterprise resource planning (ERP) that allows administrators to forecast the profitability of a proposal or optimize the profitability of an existing project. Profitability analysis can anticipate sales and profit potential specific to aspects of the market such as customer age groups, geographic regions, or product types.

Profitability analysis can help key personnel in an enterprise to

Ø Identify the most and least profitable clients.

Ø Identify the most and least profitable products or services.

Ø Discover which sources of information offer the most reliable facts.

Ø Optimize responses to changing customer needs.

Ø Evolve the product mix to maximize profits in the medium and long term.

Ø Isolate and remedy the causes of decreasing profit margins.

RESEARCH METHODOLOGY

FINANCIAL PERFORMANCE ANALYSIS

Financial performance analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of balance sheet and profit and loss account. It also helps in short-term and long term forecasting and growth can be identified with the help of financial performance analysis.The dictionary meaning of ‘analysis’ is to resolve or separate a thing in to its element or components parts for tracing their relation to the things as whole and to eachother.The analysis of financial statement is a process of evaluating the relationship between the component parts of financial statement to obtain a better understanding of the firm’s position and performace.This analysis can be undertaken by management of the firm or by parties outside the namely, owners,creditors,investors.

The analysis of financial statement represents three major steps:

Ø The first step involves the re-organization of the entire financial data contained the financial statements. Therefore the financial statements are broke down into individual components and re-grouped into few principle elements according to their resemblances and affinities. Thus the balance sheet and profit and loss accounts are completely re-casted and presented in the condensed form entirely different from their original shapeThe second step is the establishment of significant relationships between the individual components of balance sheet and profit and loss account. This is done through the application tools of financial analysis like Ratio analysis, Trend analysis, Common size balance sheet and comparative Balance sheet.

Ø Finally, the result obtained by means of application of financial tools is evaluated.

Ø In brief financial analysis is the process of selection, relation and evaluation of financial statements. The tools of analysis are used for determining the investment value of the business, credit rating and for testing efficiency of operation.

Thus financial analysis helps to highlight the facts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and credit worthiness of the company.

OBJECTIVES:

Ø To study the financial performance analysis of “Times Financials”.

Ø To analyze the financial changes over a period of five years.

Ø To analyze the financial statements of the company by using financial tools.

Ø To evaluate the financial position of the company in terms of solvency, profitability, activity and earning ratios.

Ø To suggest effective measures in the existing system of the company.

RESEARCH METHODOLOGY: Research means “know about new things”. Sometimes, it may refer to scientific and systematic search pertinent information on specific topic. In fact research is an art of scientific investigation.
According to Clifford Woody research comprises of. “define and redefining problem, formulating hypothesis or suggested solution, collecting, organizing and evaluating data; making deduction and reaching conclusion; and at last carefully testing the conclusion to determine whether they fit the formulating hypothesis”. Redman and Moray define research as a “systematic effort to gain new knowledge”.Research can be defined as the search of knowledge or any systematic investigation to establish fact. The primary purpose for applied research (as opposed to basic research) is discovering, interpreting, and thedevelopment of methods and systems for the advancement of humanknowledge on a wide variety of scientific matters of our world and the universe. Research can use the scientific method, but need not do so.Research can also be said as a process that is followed by a person to answer either his/her own queries or somebody else queries about a particular object, person, subject etc.Data collection: The data collections classified into two types are

v Primary data

v Secondary data

Secondary data

The secondary data are data are collected from information which is used by other. It is not direct information. This information is already collected and analysis by other and that information is used by others. The secondary data are collected from following:-

v Company’s annual report

v Company’s website

v Manual

Data analysis:

v The data’s analyzed using the following tools:-

v Comparative Balance sheet

v Common size balance sheet

v Ratio analysis

v Trend Analysis

NEED FOR THE STUDY:Financial statement analysis is an important tool for measuring the financial performance of any company. The main aspect of financial management is working capital management and it should be done on day-to-day basis. Hence the company permits me to do in the area of finance. This study helps to review the financial performance of the company.

LIMITATIONS OF THE STUDY:

v The study is restricted for a period of five years

v Assumed that 5 years are a responsible period to get fault accurate picture

policies and practices of management of the company.

v Due to the inadequate time it is not possible to analyze all respects relevant to the study.

v The analysis is based on annual reports of the company.

v Authorities were reluctant to reveal full information about the working of the Company.

REVIEW OF LITERATURE

FINANCIAL ACCOUNTING:

Financial accounting is the process of systematic recording of the business transactions in the various books of accounts maintained by the organization with the ultimate intention of preparing the financial statement there from. These financial statements are basically in two forms. One, profitability statement which indicates the result of operations carried out by the organization during a given period of time and second balance sheet which indicates the state of affairs of the organization at any given point of time in terms of its assets and liabilities.

Main purpose of financial accounting is to ascertain profit or loss and to indicate financial position of an enterprise. Two fundamental statements of financial accounting are income and expenditure statement and balance sheet. The profit and loss account or income and expenditure account is prepared for a particular period to find out the profitability of the firm and balance sheet is prepared on a particular date to determine the financial position of the firm.

Financial accounting summaries transactions taking place during a period with the objective of preparing the financial statement.

FINANCIAL PERFORMANCE ANALYSIS

The dictionary meaning of ‘analysis’ is to resolve or separate a thing in to its element or components parts for tracing their relation to the things as whole and to each other.

FINANCIAL STATEMENTS

‘FINANCIAL STATEMENT’ refers to formal ad original statements prepared by a business concern to disclose its financial information

According to John.N.Meyer, “The financial statement provides summary of accounts of a business enterprise, the balance sheet reflecting assets, liabilities and capital as on a certain date and the income statement showing the result of operation during a certain period”

The financial statements are prepared with a view to depict the financial position of the concern. They are based on the recorded facts and are usually expressed in monetary terms. The financial statement are prepared periodically that is generally for the accounting period

The term financial statement has been widely used to represent two statements prepared by accountants at the end of specific period. They are :

v Profit and loss a/c or income statement

v Balance sheet or statement of financial position

Limitation of Financial Statement:

v Information shown in financial statement is not precise since it is based on practical experience and the conventions and rules developed therefore

v Financial statements do not always disclose the correct financial position of the business concern as they are influenced by the personal opinions,judgement,subjective view and whims of accountant of each concern

v Balance sheet of a concern is a statics document it disclose the financial position of a concern on a particular date.

v Information disclosed by profit& loss a/c may not be the real profit as many items shown in the profit & loss a/c may not the real

v Financial statements are dumb, because they speak themselves. The statements require further detailed analysis and interpretation.

v Financial statement of the one period may not be comparable.

v Financial statement do not disclose the contribution of man towards the efficiency of the business.

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT

The various tools of financial statement are used for decision-making process. The financial statement becomes a tool for future planning and forecasting. The analysis of these statements involves their division according to similar groups and arranged in desired form. The interpretation involves the explanation of financial facts in a simplifiers manner.

Objectives of Analysis and Interpretation:

The users of financial statement have definite objectives to analysis and interpret .Therefore; there are variations in the objectives of interpretation by various classes of people. However, there are certain specific and common objectives which are listed below:

v To interpret the profitability and efficiency of various business activities with the help of profit and loss account;

v To measure managerial efficiency of the firm;

v To ascertain earning capacity in future period;

v To measure short-term and long -term solvency of the business;

v To determine future positional of the concern;

v To measure utilization of various assets during the period;

v To compare operational efficiency of similar concerns engaged in the same industry

Type of Analysis:

The process of financial statement analysis is of different types. The process of analysis is classified on the basis of information used and ‘modus operandi’ of analysis. The classification is as under:

Financial statement analysis

On the basis of information on basis of ‘modus operandi’ of

Used: analysis:

(a) External analysis (a) Horizontal analysis

(b) Internal analysis (b) Vertical analysis

LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a very important device but it has Certain limitation which are to be kept in mind. Following are the limitations of financial statement analysis.

1. Based on past data:

The nature of financial statements is historical. Past cannot be the index of future estimation, forecasting, budgeting and planning.

2 Financial statement analysis cannot be a substitute for judgment :

Analysis is a tools which can be utilized usefully by an expert may lead to erroneous conclusion by unskilled analysis. Thus the result analysis cannot be considered as judgment or conclusion.

Reliability of figures:

The accuracy and reliability of analysis depends on reliability of figures derived from financial statement.

Different interpretation:

Result of the analysis may be interpreted differently by different user

Change in accounting methods:

Analysis will be effective if the figures taken from financial statements comparable. If there are frequent change in accounting policies and method, figures of different periods will be different and comparable.

Price level change:

The ever rising inflation erodes the value of money in the present day economic situation, which reduces the validity of analysis.

Limitations of the tools of analysis:

Different techniques of analysis are used by an analyst. These tools are suitable for different type of analysis. Application of a particular tool or technique depends on the skill and expertise of the analyst. If an unsuitable technique is used, it give misleading result. It may lead to wrong conclusions and prove harmful to the business concern.

METHODS OF ANALYSIS AND INTERPRETATION

The analysis and interpretation of financial statement is used to determine the financial position and result of operation as well. The following are the tools that are used for analyzing the financial position of the company:

v Ratio Analysis

v Comparative balance sheet

v Common size balance sheet

v Trend analysis

RATIO ANALYSIS

Ratio analysis is an important and age-old technique. It is a powerful tool of financial Analysis. It is defined as “The indicated quotient of two mathematical expressions” and as “the relationship between two or more things” .Systematic use of ratio is to interpret the financial statement so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined.

A ratio is only comparison of the numerator with the denominator .The term ratio refers to the numerical or quantitative relationship between two figures. Thus, ratio is the relationship between two figures and obtained by dividing a former by the latter. Ratios are designed show how one number is related to another.

The data given in the financial statements are in absolute form and are dumb and are unable to communicate anything. Ratios are relative form of financial data and are very useful technique to check upon the efficiency of a firm. Some ratios indicate the trend or progress or downfall of the firm.

In the view of the requirements of the various users of ratio, it is divided in to the following important categories.

1. Liquidity ratios
2. Activity ratios
3. Profitability ratios
4. Earning ratios

LIQUIDITY RATIOS:

Liquidity ratios measure the ability of the firm to meet it’s a current obligation. In fact, analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements; but liquidity ratios, by establishing a relationship between cash and other current asset to current obligations provide a quick measure of liquidity.

A firm should ensure that it does not suffer From lack or liquidity, and it does not have excess liquidity .the failure of the company to meet its obligations due to its lack of liquidity, will result in a poor creditworthiness, loss of creditor’s confidence, or even in legal tangles resulting in the closure of the company a very high degree of liquidity is also bad idle assets earn nothing. The firms fund will be unnecessarily tied up in current assets. Therefore it is necessary to strike a proper balance between high liquidity and lack of liquidity.

ACTIVITY RATIO OR TURNOVER RATIO:

Activity Ratio highlights the activity and the operational efficiency of the business concern . The better managements of asserts the larger the amount of sales. Activity ratio measures the relationship between the sales and the assets. Turnover ratios are employed to evaluate the efficiency with which the firm manages and utilize s its assets. Their ratio indicates the speed with which assets are brought converted as turn over into sales.

PROFITABILITY RATIOS:

Profitability reflects the final result of the business operations. Profit earning is considered essential for the survival of the business. There are two types of profitability ratios profit margin ratio and the rate of return ratios. Profit margin ratio shows the relationship between profit and sales.

Popular profit margin ratios are gross profit margin and net profit margin ratio. Rate of return ratio reflects between profit and investment. The important rates of return measures are rate of return on total assets and rate in equity.

EARNINGS RATIOS:

Earnings are income to the shareholders of the share invested by them. Hence the earning ratio will be useful to the investors to the value of the shares that is been holding by them

COMPARATIVE BALANCE SHEET:

The comparative balance sheet is helpful in analysing and evaluating the financial position of the firm over a period of years. The comparative balance sheet analyse is the study of the trend of the same items, group of items, and computed items in two or more balance sheet of the same business enterprise on different dates.

The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of the period and these changes can help in forming an opinion about the progress of an enterprise

COMMON SIZE BALANCE SHEET:

Financial statements when read in absolute figure are not easily understandable. They are even miss leading. Each items of asset is converted in to percentage to total asset and each item of capital and liabilities is expressed to total liability and capital fund. Thus the whole balance sheet is converted in to percentage form i.e., every individual item stated as a percentage of total 100.such converted balance sheet is known as common size balance sheet. The percentage so calculated can be easily compared with the corresponding percentages in some other period.

TREND ANALYSIS:

The ‘trend’ signifies a tendency and as such the review and appraisal of tendency in accounting variables are nothing but the trend analysis. Trend analysis is carried out by calculating trend ratio. Trend analysis is significant for forecasting and budgeting. Trend analysis discloses the change in financial and the operating data between specific periods.