Book 3 · T.S. Grewal — Analysis of Financial Statements

Financial Analysis Quick Reference

Schedule III vertical format, Comparative & Common-Size formulas, all 16 Accounting Ratios with formulas + ideal ranges + interpretation, and the complete Cash Flow Statement (indirect method) line-by-line template.

Schedule III · B/S Schedule III · P&L Comparative Common-Size Liquidity ratios Solvency ratios Activity ratios Profitability ratios Cash Flow Statement

Schedule III · Part I — Balance Sheet (vertical) Ch 10

Companies Act 2013 prescribes only the vertical format. Operating-cycle test for Current/Non-current = 12 months OR operating cycle, whichever is longer.

ParticularsNote
I. EQUITY AND LIABILITIES
(1) Shareholders' Funds
(a) Share CapitalNote 1
(b) Reserves and SurplusNote 2
(c) Money Received Against Share Warrants
(2) Share Application Money Pending Allotment
(3) Non-Current Liabilities
(a) Long-term BorrowingsNote 3
(b) Deferred Tax Liabilities (Net)
(c) Other Long-term Liabilities
(d) Long-term Provisions
(4) Current Liabilities
(a) Short-term Borrowings
(b) Trade Payables
(c) Other Current Liabilities
(d) Short-term Provisions
TOTAL EQUITY AND LIABILITIES
II. ASSETS
(1) Non-Current Assets
(a) Fixed Assets — Tangible / Intangible / Capital WIP
(b) Non-current Investments
(c) Deferred Tax Assets (Net)
(d) Long-term Loans and Advances
(e) Other Non-current Assets
(2) Current Assets
(a) Current Investments
(b) Inventories
(c) Trade Receivables
(d) Cash and Cash Equivalents
(e) Short-term Loans and Advances
(f) Other Current Assets
TOTAL ASSETS (= Total Equity & Liabilities)

Schedule III · Part II — Statement of Profit and Loss Ch 10

I. Revenue from OperationsA
II. Other IncomeB
III. Total Revenue (I + II)
IV. Expenses:
(a) Cost of Materials Consumed
(b) Purchases of Stock-in-Trade
(c) Changes in Inventories of FG / WIP / Stock-in-Trade
(d) Employee Benefits Expense
(e) Finance Costs
(f) Depreciation and Amortisation Expense
(g) Other Expenses
Total Expenses
V. Profit Before Tax (III − IV)
VI. Tax Expense
VII. Profit / (Loss) for the Period (V − VI)

Comparative Statements Ch 12

Horizontal analysis — compares same item across two years.

Absolute Change
Absolute Change = Current Year − Previous Year
Percentage Change
% Change = (Absolute Change ÷ Previous Year) × 100
If Previous Year = 0, % is "Not Applicable" (don't divide by zero). Round to 2 decimal places.

Format (5 columns)

ParticularsPrev Year ₹Curr Year ₹Abs Δ ₹% Δ
e.g. Revenue from Ops10,00,00012,00,000+2,00,000+20.00%

Common-Size Statements Ch 12

Vertical analysis — single period; each item expressed as % of a base.

StatementBase = 100%
Common-Size Balance SheetTotal Assets (= Total Equity & Liabilities)
Common-Size Statement of P&LRevenue from Operations
Common-Size Percentage
% = (Item ÷ Base) × 100

Liquidity Ratios Ch 13

1. Current Ratio Ideal 2:1
Current Assets ÷ Current Liabilities
Short-term liquidity. Higher = more cushion to meet current dues; too high = idle assets.
2. Quick / Acid-Test Ratio Ideal 1:1
Liquid Assets ÷ Current Liabilities
Stricter test. Liquid Assets = Current Assets − Inventory − Prepaid Expenses.

Solvency Ratios Ch 13

3. Debt-Equity Ratio Ideal 2:1 or less
Long-term Debt ÷ Shareholders' Funds
Long-term solvency. Higher = more risk; lower = more conservative capital structure.
4. Total Assets to Debt Ratio
Total Assets ÷ Long-term Debt
Asset cover for long-term debt. Higher = more security to lenders.
5. Proprietary Ratio
Shareholders' Funds ÷ Total Assets
Owners' stake in total assets. Higher = lower dependence on debt.
6. Interest Coverage Ratio
Net Profit before Interest & Tax ÷ Interest on Long-term Debt
Times interest is covered by profit. Higher = safer for lenders.

Activity / Turnover Ratios Ch 13

7. Inventory Turnover Ratio
Cost of Revenue from Operations ÷ Average Inventory
How often inventory turns. Higher = efficient stock management; too high may indicate stock-outs.
8. Trade Receivables Turnover Ratio
Net Credit Revenue from Operations ÷ Average Trade Receivables
Speed of collection from debtors. Higher = faster collection.
9. Trade Payables Turnover Ratio
Net Credit Purchases ÷ Average Trade Payables
Speed of payment to creditors. Higher = quicker payment; lower = longer credit period enjoyed.
10. Working Capital Turnover Ratio
Net Revenue from Operations ÷ Working Capital
Sales generated per ₹ of working capital. Higher = efficient WC utilisation.
Average = (Opening + Closing) ÷ 2 for each item. Days/months form: 365 ÷ Ratio (e.g., Avg Collection Period = 365 ÷ Receivables Turnover).

Profitability Ratios Ch 13

11. Gross Profit Ratio
(Gross Profit ÷ Revenue from Operations) × 100
Margin after direct cost of goods. Higher = better pricing/cost control.
12. Operating Ratio
((COGS + Operating Expenses) ÷ Revenue) × 100
Operating costs as % of revenue. Lower is better.
13. Operating Profit Ratio
(Operating Profit ÷ Revenue) × 100 = 100 − Operating Ratio
Profit before non-operating items + tax. Complement of Operating Ratio.
14. Net Profit Ratio
(Net Profit after Tax ÷ Revenue) × 100
Bottom-line margin. Higher = stronger overall profitability.
15. Return on Investment / Capital Employed (ROCE)
(Net Profit before Interest & Tax ÷ Capital Employed) × 100
Capital Employed = Shareholders' Funds + Long-term Borrowings (or Total Assets − Current Liabilities). Yardstick of overall efficiency.
16. Return on Net Worth / Return on Equity
(Net Profit after Tax ÷ Shareholders' Funds) × 100
Return to equity owners. Compare to alternative investment options.
Key derivations: COGS = Opening Inventory + Purchases + Direct Expenses − Closing Inventory · Operating Profit = Gross Profit + Other Operating Income − Operating Expenses · NPBT = NPAT + Tax Expense · NPBIT = NPBT + Interest on Long-term Debt.

Cash Flow Statement (Indirect Method) Ch 14

AS-3 Revised. Cash & Cash Equivalents = Cash + Bank + Cheques in hand + Short-term highly liquid investments (≤ 3 months).

Particulars
A. Cash Flows from Operating Activities
Net Profit before Tax + Extraordinary Itemsxxx
+ Depreciation & Amortisationxxx
+ Loss on sale of fixed assetxxx
− Gain on sale of fixed asset(xxx)
+ Interest paid (on long-term borrowings — back-add)xxx
− Interest received / Dividend received (back-deduct)(xxx)
+ Goodwill / Patents / Preliminary Expenses written offxxx
= Operating Profit before Working Capital changesxxx
− Increase in Current Assets / + Decrease in Current Assets±xxx
+ Increase in Current Liabilities / − Decrease in Current Liabilities±xxx
= Cash Generated from Operationsxxx
− Income Tax Paid(xxx)
Net Cash from / (used in) Operating Activities (A)XXX
B. Cash Flows from Investing Activities
+ Sale of Fixed Assets / Investments (proceeds)xxx
− Purchase of Fixed Assets / Investments(xxx)
+ Interest Received on Investmentsxxx
+ Dividend Receivedxxx
Net Cash from / (used in) Investing Activities (B)XXX
C. Cash Flows from Financing Activities
+ Issue of Shares / Debentures (proceeds)xxx
− Redemption of Debentures / Buy-back of Shares(xxx)
+/− Increase / (Decrease) in Long-term Borrowings (e.g. Bank Loan)±xxx
− Interest Paid on Long-term Borrowings(xxx)
− Dividend Paid (proposed of last year + interim of current year)(xxx)
Net Cash from / (used in) Financing Activities (C)XXX
= Net Increase / (Decrease) in Cash and Cash Equivalents (A + B + C)XXX
+ Opening Cash and Cash Equivalentsxxx
= Closing Cash and Cash EquivalentsXXX

Classification quick-cheat

ItemActivity
Interest paid on long-term debtFinancing
Interest received on investmentsInvesting (non-finance cos)
Dividend receivedInvesting
Dividend paidFinancing
Income Tax paidOperating (deducted at end of section A)
Proposed Dividend of last year (paid in current year)Financing
Proposed Dividend of current yearNOT in CFS — disclosed in Notes only
Interim Dividend (paid in current year)Financing
Bank Overdraft (per CBSE convention)Financing (treated as borrowing)