Caution in analysing statements

1. Submitted to:- Submitted by:-
Professor Meena Sharma Mohit Goyal
Vishal Vivek
Nikhila Kharab
Angad Singh
Ravneet Kaur

2.  Thou shalt not use financial statements in isolation, but only in
the context of other available information.
 Thou shalt not use financial statements as the only source of
firm-specific information.
 Thou shalt not avoid reading the footnotes.
 Thou shalt not focus on a single number.
 Thou shalt not overlook the implications of what is read.
 Thou shalt not ignore events subsequent to the financial
statements.
 Thou shalt not overlook the limitations of financial statements.
 Thou shalt not use financial statements without adequate
knowledge.
 Thou shalt not shun professional help.
 Thou shalt not take unnecessary risks.

3.  Common-size analysis data:
Common-size analysis is the restatement of
financial statement information in a standardized
form.
◦ Horizontal common-size analysis uses the amounts in
accounts in a specified year as the base, and subsequent
years’ amounts are stated as a percentage of the base
value.
 Useful when comparing growth of different accounts over
time.
◦ Vertical common-size analysis uses the aggregate value
in a financial statement for a given year as the base, and
each account’s amount is restated as a percentage of the
aggregate.
 Balance sheet: Aggregate amount is total assets.
 Income statement: Aggregate amount is revenues or sales

4.  Financial ratio analysis is the use of relationships among
financial statement accounts to gauge the financial condition
and performance of a company.
 We can classify ratios based on the type of information the
ratio provides:
 Predictor Ratios indicate the potential for growth or failure.
 Profitability Ratios which use margin analysis and show the
return on sales and capital employed.
 Asset Management Ratios which use turnover measures to
show how efficient a company is in its operations and use of
assets.
 Liquidity Ratios which give a picture of a company's short
term financial situation or solvency.
 Debt Management Ratios which show the extent that debt is
used in a company's capital structure

5.  A typical annual report contains more than the basic three
financial statements. This post focuses on one additional
piece of information in annual financial reports be called
“Footnotes To Financial Statements“. Footnotes
provide the so-called fine print. Without footnotes
financial statements would be incomplete, and
possibly misleading. Footnotes are an essential
supplement to financial statements.
 Top-level managers should never forget that they are
responsible for the company’s financial statements and
the accompanying footnotes. The footnotes are an
integral, inseparable part of the financial statements.

6.  The accompanying footnotes to the financial statements are an integral part of
these statements.
 The auditor’s report covers footnotes as well as the financial statements. In
short, footnotes are necessary for adequate disclosure in financial reports.
The over-arching concept of financial reporting is adequate disclosure, so that all
those who have a legitimate interest in the financial affairs of the business are
provided the relevant information they need to make informed decisions and to
protect their interests in the business.
The Two Types of Footnotes
 Footnotes are of two kinds:
 First, the main accounting methods used by the business are identified and
briefly explained. For instance, the particular accounting method used to
determine the company’s cost of goods sold expense and its ending inventory
cost is identified.
 The second type of footnotes provides additional disclosure that cannot be
placed in the main body of the financial statements. For example: the
maturity dates, interest rates, collateral, or other security provisions, and
many other details of the long-term debt of a business are presented in
footnotes.

7. Information for items that require:
a) Narrative descriptions or disaggregation of items recognized in financial
statements.
b) Information about items that do not qualify for recognition in financial
statements
Also, following information is given in footnotes:
1. Accounting policies followed.
2. Accounting changes
3. Investments
4. Leases
5. Goodwill and other intangibles
6. Segment Data

8.  The financial statement analyst should read
and understand all the material presented in
the financial statements. They are not
designed to be reduced to a single number.
For example, Net income should not be taken
to be the most important number to make an
investment decision.
 A user must also analyze growth and
leverage, among other factors, as well as
profitability.

9.  This statement means that investors or people tasked with
reading, analyzing and interpreting financial statements on
basis of which investment or other decisions are to be made,
should be competent enough to read , understand and
analyze these statements. They should have complete
knowledge of all the accounting terms used in the financial
statements.
 They should also have knowledge of how different values
given in these statements have applications in the real world
and should have foresight in predicting the future of the
company’s performance based on the available data. This is
possible only if he possesses sufficient knowledge and
experience .