Following are the commonly used tools of financial statement analysis
(i) Comparative statement
(ii) Common-size statement
(iii) Trend analysis
(iv) Funds flow analysis
(v) Cash flow analysis

Financial statements are the statements prepared by the business concern at the end of the accounting period to ascertain the operating results and the financial position. The basic financial statements prepared by business concerns are income statement and balance sheet.

Comparative income statement of Daniel Ltd for the year ended 2016 and 2017

Particulars	2015-16 Rs.	2016-17 Rs.	Absolute amount of increase (+) or decrease (-) Rs.	Percentage increase (+) or decrease (-)
Revenue from Operations	40,000	50,000	+ 10,000	+ 25
Less: Operating expenses	25,000	27,500	+ 2,500	+ 10
Profit before tax	15,000	22,500	+ 7,500	+ 50
Less: Income tax	4,500	6750	+ 2,250	+ 50
Profit after tax	10,500	15,750	+ 5,250	+ 50

Note:
Percentage increase for revenue from operations = \(\frac{10,000}{40,000}\) x 100 = 25%
Percentage increase for operating expenses = \(\frac{2,500}{25,000}\) x 100 = 10%
Percentage increase for profit before tax = \(\frac{7,500}{15,000}\) x 100 = 50%
Percentage increase for income for Income tax = \(\frac{2250}{4500}\) x 100 = 50%
Percentage increase for profit after tax = \(\frac{5250}{10,500}\) x 100 = 50%

Quick ratio = \(\frac { Quick\quad assets }{ Current\quad liabilities } \)
Quick assets = Current assets - Inventories - Prepaid expenses
= Rs.4,50,00 + Rs.70,000 - Rs.20,000
= Rs.3,60,000
Quick ratio = \(\frac { 3,60,000 }{ 2,40,000 } \) = 1:5:1

(i) Debt equity ratio is calculated to assess the long term solvency position of a business concern.
(ii) Debt equity ratio expresses the relationship between long term debt and shareholders' funds.
(iii) It is computed as follows:
Debt enquity ratio = \(\frac { Long\ term\ debt }{ Shareholders\ funds } \)
Long term debt = Debentures, bonds, long term loans, other long term borrowing. Share holder's fund = Equity share capital + Preference share capital + reserves and surplus

(i) Quick ratio gives the proportion of quick assets to current liabilities.
(ii) It indicates whether the business concern is in a position to pay its current liabilities as and when they become due, out of its quick assets.
(iii) It is otherwise called liquid ratio or acid test ratio.
(iv) It is calculated as follows:
Quick ratio = \(\frac { Quick\ assets }{ Current\ liabilities } \).
Quick assets = Current assets - Inventries - prepaid expenses. higher the Quick ratio better is the short - term financial position of an enterprises.  

Super profit is the excess of average profit over the normal profit. Average profit is calculated by dividing the total adjusted actual profit of certain number of years by the total number of such years. Normal profit is the profit earned by the similar business, firms under normal conditions.
Normal profit = Capital employed \(\times\) Normal rate of return.
Capital employed = Fixed assets + Current assets - Current liabilities.

Goodwill is the good name or reputation of the business which brings benefit to the business. It enables the business to earn more profit. It is the present value of a firm's future excess earnings. It is an intangible asset as it has no physical existence.

Goodwill = Average profit \(\times\) Number of years of purchase
Average profit = \(\frac { Total\ profit }{ Number\ ofyear } \)
= \(\frac { 4,000+3,000+5,000+4,500+3,500 }{ 5 } \)
= \(\frac { 20,000 }{ 5 } \)= Rs. 4,000
Goodwill =  Average profit \(\times\) Number of years of purchase
= 4,000 \(\times\) 3 = Rs.12,000

(i) Inventory turnover ratio = \(\frac{Cost\ of\ revenue\ from\ operations}{Average\ inventory}\) = \(\frac{6,00,000}{1,20,000}\) = 5 times
Average inventory = \(\frac{Opening\ inventory + Closing\ inventory}{2}\)
= \(\frac{1,40,000 + 1,00,000}{2}\)= \(\frac{2,40,000}{2}\)= Rs. 1,20,000
(ii) Trade receivables turnover ratio = \(\frac{Credit\ revenue\ from\ operations}{Average\ trade\ receivables}\)
= \(\frac{10,50,000}{70,000}\) = 15 times
Average trade receivables = \(\frac{Opening\ trade\ receivables + Closing\ trade\ receivables}{2}\)
= \(\frac{80,000 + 60,000}{2}\) =\(\frac{1,40,000}{2}\)= Rs.70,000
(iii) Creditors payables turnover ratio = \(\frac{Net\ credit purchases}{Average\ trade\ payables}\) = \(\frac{4,50,000}{45,000}\)= 10 times
Average trade payables = \(\frac{Opening\ trade\ payables + Closing\ trade\ payables}{2}\)
= \(\frac{40,000 + 50,000}{2}\) = \(\frac{90,000}{2}\) = Rs. 45,000
(iv) Fixed assets turnover ratio = \(\frac{Revenue\ from\ operations}{Average\ xed\ assets}\)= \(\frac{10,50,000}{5,25,000}\) = 2 times
Average fixed assets = \(\frac{Opening\ fixed\ assets + Closing\ fixed\ assets}{2}\)
= \(\frac{5,50,000 + 5,00,000}{2}\) = \(\frac{10,50,000}{2}\)= Rs. 5,25,000

Gross profit ratio = \(\frac { Gross\ profit }{ Revenue\ from\ operations } \) x 100
Gross profit = Revenue from operations - Cost of revenue from operations
Cost of revenue from operations = Purchases of stock-in-trade + Change in inventories
= 18,80,000 + (-80,000)
= Rs.18,00,000
Gross profit = 24,00,000 - 18,00,000 = Rs.6,00,000
∴ Gross profit ratio = \(\frac { 6,00,000 }{ 24,00,000 } \) x 100 = 25%
(ii) Net profit ratio = \(\frac { Net\ profit\ after\ tax }{ Revenue\ from\ operations } \) x 100
= \(\frac { 2,40,000 }{ 24,00,000 } \) x 100 = 10%

(i) Debt equity ratio =  \(\frac { Long\quad term\quad debt }{ Shareholders\quad funds } \)
Long term debt = Debentures
= Rs.3,00,000
Shareholder's funds = Equity share capital + Reserves and surplus + Preference share capital
= Rs.2,50,000 + 1,50,000 + Rs.2,00,000 = Rs.6,00,000
∴ Debt equity ratio = \(\frac { 3,00,000 }{ 6,00,000 } \) = 0.5 : 1
(ii) Proprietary ratio = \(\frac { Shareholder's\quad funds }{ Total\quad assets } \)
Shareholder's funds = Rs.6,00,000
Total assets = Rs.12,00,000
∴ Proprietary ratio = \(\frac { 6,00,000 }{ 12,00,000 } \) = 0.5 : 1
(iii) Capital gearing ratio =  \(\frac { Funds\quad bearing\quad fixed\quad interest\quad and\quad fixed\quad dividend }{ Equity\quad Shareholder's\quad funds } \)
Funds bearing fixed = 6% Preference capital + 8% Debentures
interest and fixed dividend = Rs.2,00,000 + Rs.3,00,000 = Rs.5,00,000
Equity shareholder's funds = Equity share capital + General reserve and Surplus
= Rs.2,50,000 + Rs.1,50,000 = Rs.4,00,000
∴ Capital gearing ratio = \(\frac { 5,00,000 }{ 4,00,000 } \)  = 1.25 : 1

Trend analysis for Neithal Ltd

Particulars	Rs.in lakhs			Trend percentages
	2015-16	2016-17	2017-18	2015-16	2016-17	2017-18
Revenue from operations	150	135	90	100	90	60
Add: Other income	25	5	15	100	20	60
Total revenue	175	140	105	100	80	60
Less: Expenses	125	75	50	100	60	40
Profit before tax	50	65	55	100	130	110
Less: Income tax (40%)	20	26	22	100	130	110
Profit after tax	30	39	33	100	130	110

Common-size balance sheet of Maria Ltd as on 31^st March, 2018

Particulars	Absolute amount	Percentage of total assets
	Rs.
I EQUITY AND LIABILITIES
Shareholders’ funds	4,00,000	50
Non-current liabilities	3,20,000	40
Current liabilities	80,000	10
Total	8,00,000	100
II ASSETS
Non-current assets	6,00,000	75
Current assets	2,00,000	25
Total	8,00,000	100

Comparative balance sheet of Chandra Ltd as on 31^st March 2016 and 31^st March 2017

Particulars	2015-16	2016-17	Absolute amount of increase ( +) or decrease (–)	Percentage increase (+) or decrease (–)
	Rs.	Rs.	Rs.
I EQUITY AND LIABILITIES
Shareholders’ fund	1,00,000	2,60,000	+1,60,000	+160
Non-current liabilities	50,000	60,000	+10,000	+20
Current liabilities	25,000	30,000	+5,000	+20
Total	1,75,000	3,50,000	+1,75,000	+100
II ASSETS
Non-current assets	1,00,000	2,00,000	+1,00,000	+100
Current assets	75,000	1,50,000	+75,000	+100
Total	1,75,000	3,50,000	+1,75,000	+100

Super profit = Average profit - Normal profit
= 14,000 - 4,000 = Rs. 10,000
Goodwill = Super profit \(\times\) Value of annuity
= 14,000 \(\times\) 3.352
Goodwill = Rs. 33,520

Average profit = \(\frac { Total\ profit }{ Number\ of\ year } \)
Average profit = \(\frac { 30,000+32,000+35,000+37,000+40,000 }{ 5 } \)
Average profit = \(\frac { 1,74,000 }{ 5 } \)

Particulars	Rs.
Average profit before fair remuneration to the partners	34,800
Less: Fair remuneration to the partners	2,800
Average profit	32,000

Normal profit = Capital employed \(\times\) Normal rate of return
= 1,20,000 × 20%
= Rs. 24,000
Super profit = Average profit - Normal profit
= 32,000 – 24,000
= Rs. 8,000
Goodwill = Super profit \(\times\) Number of years of purchase
= 8,000 \(\times\) 5
= Rs. 40,000

Normal profit = Capital employed \(\times\) Normal rate of return
= 2,00,000 \(\times\) 15% = Rs. 30,000
Super profit = Average profit - Normal profit
= 42,000 - 30,000
= Rs. 12,000
Goodwill = Super profit \(\times\) Number of years of purchase
= 12,000 \(\times\) 3
= Rs. 36,000

Trend analysis for Kurinji Ltd

Particulars	Rs.in thousands			Trend percentages
	2015-16	2016-17	2017-18	2015-16	2016-17	2017-18
Revenue from operations	120	132	156	100	110	130
Add: Other income	50	38	65	100	76	130
Total revenue	170	170	221	100	100	130
Less: Expenses	100	135	123	100	135	123
Profit	70	35	98	100	50	140

Computation of trend percentage for revenue from operations:
For 2016-17: \(\cfrac { 132 }{ 120 } \times 100=110\)%
For 2017-18: \(\cfrac { 156 }{ 120 } \times 100=130\)%

Proprietary ratio = \(\frac { Shareholder's\ funds }{ Totalassets } \)
Shareholder's funds = Equity share capital + Preference share capital + Reserves and surplus
= Rs.2,50,000 + Rs.1,50,000 + Rs.50,000 = Rs.4,50,000
Total assets = Rs.6,00,000
∴ Proprietary ratio = \(\frac { 4,50,000 }{ 6,00,000 } \) = 0.75 : 1

Debit equity ratio = \(\frac { Long\ term\ debt }{ Shareholders\ funds } \ \)
Long term debt = Debentures
= Rs.6,00,000
Shareholder's funds = Equity share capital + Reserves and surplus
= Rs.6,00,000 + Rs.2,00,000 = Rs.8,00,000
∴ Debt equity ratio = \(\frac { 6,00,000 }{ 8,00,000 } \) = 0.75:1

(i) Current ratio = \(\frac { Current\quad assets }{ Current\quad liabilities } \)
Current assets = Inventories + Trade debtors + Cash and cash equivalents + Prepaid expenses
= Rs.1,60,0,000 + Rs.3,20,000 + Rs.80,000 + Rs.40,000 = Rs.6,00,000
Current liabilities = Short term borrowings + Trade payables + Expenses payable + Short term provisions
= Rs.50,000 + Rs.,10,000 + Rs.15,000 + Rs.25,000 = Rs.4,00,000
Current ratio = \(\frac { 6,00,000 }{ 4,00,000 } \) = 1.5:1
(ii) Quick ratio = \(\frac { Quick\quad assets }{ Current\quad liabilities } \)
Quick assets = Current assets - Inventories - Prepaid expenses
= Rs.6,00,000 - Rs.1,60,000 - Rs.40,000 = Rs.4,00,000
Quick ratio = \(\frac { 4,00,000 }{ 4,00,000 } \) =1:1

Common-size income statement for the year ended 31^st March, 2019

Particulars	Mani Ltd		Kani Ltd
	Absolute amount	Percentage of revenue from operations	Absolute amount	Percentage of revenue from operations
	Rs.	Rs.	Rs.
Revenue from operations	2,00,000	100	2,50,000	100
Add: Other income	30,000	15	25,000	10
Total revenue	2,30,000	115	2,75,000	110
Less: Expenses	1,10,000	55	1,25,000	50
Profit before tax	1,20,000	60	1,50,000	60

Comparative income statement of Abdul Co. Ltd for the years ended 31^st March, 2016 and 31^st March, 2017

Particulars	2015-16	2016-17	Absolute amount of increase (+) or decrease (–)	Percentage increase (+) or decrease (–)
	Rs.	Rs.	Rs.
Revenue from operations	3,00,000	3,60,000	+60,000	+20
Add: Other income	1,00,000	60,000	–40,000	–40
Total revenue	4,00,000	4,20,000	+20,000	+5
Less: Expenses	2,00,000	1,80,000	–20,000	–10
Profit before tax	2,00,000	2,40,000	+40,000	+20
Less: Tax (30%)	60,000	72,000	+12,000	+20
Profit after tax	1,40,000	1,68,000	+28,000	+20

Capitalised value of the business = \(\frac{Average\ profit}{Normal\ rate\ of\ return}\times100\)
= \(\frac{20,000}{10}\times100\)
= Rs. 2,00,000
Capital employed = Fixed assets (excluding goodwill) + Current assets - Current Liabilities
Capital employed = Tangible assets of the firm - Liabilities of the firm
Net tangible assets = 2,20,000 - 70,000 = Rs. 1,50,000
Goodwill = Total capitalised value of the average profit - Capital employed
= 2,00,000 - 1,50,000
= Rs. 50,000

Calculation of weighted average profit

Year	Profits(a) Rs.	Weight(b)	Weighted profit (axb) Rs.
2015	10,000	1	10,000
2016	12,000	2	24,000
2017	16,000	3	48,000
2018	18,000	4	72,000
Total		10	1,54,000

Weighted average profit = \(\frac{Total\ of\ weighted\ profit}{Total\ of\ weights}\)
=\(\frac{1,54,000}{10}=Rs.15,400\)

Weighted average profit = 15,400
Goodwill = Weighted average profit \(\times\) Number of years of purchase
= 15,400 \(\times\) 3 = 46,200
Goodwill = Rs. 46,200

Calculation of adjusted profit

Particulars	2016 Rs.	2017 Rs.	2018 Rs.
Profit	1,75,000	1,50,000	2,00,000
Less: Non - recurring-income	45,000	-	-
	1,30,000	1,50,000	2,00,000
Less: Over valuation of closing stock	-	30,000	-
	1,30,000	1,20,000	2,00,000
Add: Over valuation of Opening stock	-	-	30,000
Profit after adjustments	1,30,000	1,20,000	2,30,000

Average profit \(=\frac{Total\ profit}{Number\ of\ years}\)
\(=\frac{1,30,000+1,20,000+2,30,000}{3}\)
\(=\frac{4,80,000}{3}\) = Rs. 1,60,000
Goodwill = Average profit \(\times\) Number of years of purchase
= 1,60,000 \(\times\) 4
= Rs. 6,40,000