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8/3/2019 Comparative,Size and Trend Analysis
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Comparative, common size and trend
analysis.
By: Ankush Gupta
Vaibhav SrivastavaAnkesh.j. Dave
Abhinav Upadhyay
Mohit jain
Vivek Gupta
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` A financial statement is an organized collection of dataaccording to logical and consistent accounting
proceedures.
` Its purpose is to convey an understanding of some
financial aspects of a business firm.` It may show a position at a moment of time as in a case
of a balance sheet or may reveal a series of activities over
a given period of time, as in the case of an income
statement.
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Techniques of financial statement analysis
` Trend analysis
` Common size statement analysis
` Funds flow analysis
` Cash flow analysis
` Ratio analysis
` Value added analysis
` Comparative statement analysis
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Trend analysis
` Trend analysis seeks out and examines systematic
historical patterns in financial statements or other
quantitative data. Such analysis of data over time can vary
from primarily descriptive techniques to more complexcause-and-effect methods. Here we minimizes discussion
of cause-and-effect analysis and focuses on the descriptive
methods of trend analysis
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` Trend analysis usually involves choosing one fiscal periodas a base period and then expressing subsequent
quantities as a percentage of the data associated with this
base period. In the case of an income statement, changes
in all items could be assessed in relation to the baseperiod.
` Note that trend analysis can be performed to determine
changes in the number of physical units as well as of
amounts.
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` T
hese techniques generally compare the entity to itself.However, it is also possible to compare the entity to externalpoints of reference through cross sectional analysis. This typeof analysis compares the data being audited to an externalnorm or data generated by a similar external entity. However,examining data over time is generally not part of cross-
sectional analysis.` Trend analysis as described here is related to a broader
discipline called time series analysis. Time-series analysis mayinvolve more advanced analysis techniques such as:
` ARIMA, which aids in detecting seasonal patterns and
fluctuations` Fourier, which reduces time-series information into underlying
wave forms
` Time-lagged correlation, when a time lag exists between thepredictor and dependent variables -- for example, betweenadvertising and sales
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` Trend analysis is valuable when one wants to usehistorical data to predict future values or to calculate
expected values for comparison to actual current values.
Trend analysis is also useful for identifying unexpected
variances that may indicate strategic or operationalchanges or entity weaknesses worthy of additional
exploration and analysis.
` See more example at pg no 385 ( Ravi M. Kishore)
The following is an example of a simple trend analysis:
1990 1991 1992 1993 1994Fund Equity 335,398 366,044 361,704 234,666 192,921
% Change -- 8.37% -1.20% -54.14% -21.64%
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Advantages
Trend analysis can:
` reveal potentially fruitful areas of audit investigation
` detect significant variations over time
` be easily understood and communicated
` be readily accepted due to its widespread use
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Disadvantages
Trend analysis can:
` provide little insight into the root causes of variations
` fail to indicate what the entitys normal or benchmark
position is
` be undermined by frequent changes in financial reporting
formats
` be heavily influenced by the choice of the base fiscal
period
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Common size statement analysis
` A company financial statement that displays all itemsas percentages of a common base figure.This type of financial
statement allows for easy analysis between companies or
between time periods of a company.
`
While most firms don't report their statements in commonsize, it is beneficial to compute if you want to analyze two or
more companies of differing size against each other.
` Common-size statements analysis expresses balance sheet
components as a percentage of total assets and income
statement components as a percentage of total revenue. Thisapproach facilitates identifying deviations in the components of
statements by focusing on relative differences through time.
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` Figures shown in financial statements- P&L account andbalance sheet, income statement are converted to
percentages so as to establish each element to the total
figure of the statement.
` This statement will also assist in analyzing theperformance over years and also with the figures of
competitive firm in the industry for making analysis of
relative efficiency.
` Common size ratio = item of interestReference item
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Example
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See more example at pg no 383 ( Ravi M. Kishore)
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Comaparative statement analysis
` In brief, comparative study of financial statements is thecomparison of the financial statements of the business
with the previous years financial statements.
` It enables identification of weak points and applying
corrective measures.` Practically, two financial statements (balance sheet and
income statement) are prepared in comparative form for
analysis purposes.
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` The comparative balance sheet shows the different assetsand liabilities of the firm on different dates to make
comparison of balances from one date to another.
` The comparative balance sheet has two columns for the
data of original balance sheets. A third column is used toshow change (increase/decrease) in figures.The fourth
column may be added for giving percentages of increase
or decrease.
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` While interpreting comparative Balance sheet theinterpreter is expected to study the following aspects :
` (i) Current financial position andLiquidity position
` (ii) Long-term financial position
` (iii) Profitability of the concern
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Interpretation
` The comparative income statement given above showsthat there has been an increase in net sales of 14.65%.
The cost of goods sold has increased by 11%.This has
resulted in increase of gross profit by 19.4%.
` Operating expenses have increased by 8%.The increase ingross profit is sufficient to cover the operating expenses.
There is also an increase in net profit after tax of Rs
38000 i.e. 42.22%.
` It is concluded from the above analysis that there issufficient progress in the performance of the company
and the overall profitability of the company is good.
See more example at pg no 380 ( Ravi M. Kishore)
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Thank u.