BBA/B.Com Financial Statement Analysis June 2024

Description

Financial Statement Analysis

June 2024 Examination

 

 

 

1. In a bustling corporate headquarters, Sarah, a financial analyst, faces a critical task: assessing the financial health of her company. With quarterly reports due, she delves into horizontal and vertical analysis to gain deeper insights. As Sarah compares successive financial statements, she employs horizontal analysis to track trends over time. This reveals patterns in revenue growth, expense management, and profit margins, helping her identify areas of strength or concern. Meanwhile, vertical analysis allows Sarah to dissect financial statements by expressing line items as proportions of a base figure, typically total revenue or assets. This helps her evaluate the relative significance of each component within the company’s operations. Ultimately, armed  with  the  insights  from  horizontal  and  vertical analysis, Sarah crafts a comprehensive report for stakeholders, empowering them to make informed decisions about investments, strategic direction, and resource allocation. Explain how in this dynamic world of finance, these two analytical tools prove indispensable.  (10 marks)

Ans 1.

Introduction:

In today’s fast-paced corporate environment, financial analysts like Sarah are indispensable for navigating the complexities of economic trends and organizational performance. As companies contend with volatile markets and competitive pressures, the ability to accurately assess financial health becomes crucial. Financial statement analysis, particularly through horizontal and vertical analysis, serves as a cornerstone in this evaluation process. These tools enable analysts to uncover vital trends and ratios from financial statements, translating complex data into actionable insights. This not only enhances the decision-making process for current operations but It is only half solved

 

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2. As the annual  general  meeting  approaches,  Lisa,  the  company  secretary  of  a thriving tech firm, finds herself immersed in preparing the directors’ report. With the Companies Accounts Rules 2014 guiding her, she meticulously crafts a comprehensive overview of the company’s performance and prospects. In essence, the directors’ report serves as a comprehensive narrative of the company’s performance, governance practices, and commitment to sustainable growth, providing shareholders and stakeholders with valuable insights into the company’s operations and prospects. Can you help Lisa identify the content of directors’ report as per the Rule 8 of the Companies (Accounts) Rule, 2014?  (10 marks)

Ans 2.

Introduction

In the corporate governance framework, the directors’ report is an essential document that offers stakeholders a detailed insight into a company’s operational, financial, and strategic performance over the fiscal year. Governed by Rule 8 of the Companies (Accounts) Rules, 2014, this report must comply with specific statutory requirements to ensure transparency, accountability, and informative communication to shareholders. For Lisa, the company secretary of a thriving tech firm, preparing the directors’ report as the annual general meeting (AGM) approaches is a task of paramount importance. The report not only reflects the company’s past achievements and future prospects but also aligns with regulatory mandates, reinforcing the

 

3. The two primary objectives of every business are profitability and solvency. Profits are often used as the basis for judging the performance of a business. However, there are other aspects too. Furthermore, owing to the summarized nature of financial statements, a lot of truths are hidden in them. Thus, they need to be analyzed and interpreted by means of financial ratios to enable the users understand the meaning of the absolute amounts shown in them, and make informed business decisions. Style Ltd. and Diva Ltd. are two manufacturing companies operating in the same industry with similar strategies. Both the companies are well-established with a long heritage of success. The following is an extract from the financial statements of Style Ltd. and Diva Ltd. for the year ending March 31, 2023

(₹ in million)

Particulars	Style Ltd.	Diva Ltd.
Net Sales	300	280
Other Income	20	10
Gross Profit	152	140
Operating Profit/EBITDA/EBIT	67	60
Interest Expense	14	13
Net Profit	27	24
Cash	19	11
Accounts receivable	32	20
Loans given to other companies	43	34
Other current assets	17	26
Inventory	121	99
Other non-current assets	4	1
Net Fixed Assets	94	79
Total Assets	330	270
Accounts Payable	32	21
Current maturities of long-term borrowings	26	21
Short-term borrowings	9	8
Interest accrued but not due	3	2
Short-term Provisions	35	28
Long-term borrowings	90	80
Paid-up Share Capital	37	37
Retained Earnings	98	73

 

You are required to compute the following ratios for both  the companies and comment:

1. Leverage- Debt to Equity and Interest Coverage Ratio (5 marks)

Ans 3a.

Introduction

Analyzing the financial health of a business requires more than just a glance at its profits and losses. Financial ratios provide a deeper insight into a company’s operational efficiency, financial stability, and overall performance. Specifically, leverage ratios like Debt to Equity and Interest Coverage Ratio are critical in assessing the financial structure and risk level of a company. For Style Ltd. and Diva Ltd., these ratios will highlight their financial

 

1. Profitability- Gross Profit Margin and Return on Equity (5 marks)

Ans 3b.

Introduction

Profitability ratios such as Gross Profit Margin and Return on Equity (ROE) provide critical insights into a company’s efficiency at generating profits and managing its resources to provide returns to shareholders. By examining these ratios for Style Ltd. and Diva Ltd., we can evaluate their ability to convert sales into profits and their effectiveness in using equity to generate earnings, respectively. These indicators are vital for assessing the overall