ACCOUNTING TECHNIQUES

A. ACCOUNTING TECHNIQUES
It is also known as financial techniques. Various accounting techniques such as Comparative Financial
Analysis, Common-size Financial Analysis, Trend Analysis, Fund Flow Analysis, Cash Flow Analysis, CVP
Analysis, Ratio Analysis, Value Added Analysis etc. may be used for the purpose of financial analysis.
Some of the important techniques which are suitable for the financial analysis of GSRTC are discussed
hereunder:
1. R atio Analysis
In order to evaluate financial condition and performance of a firm, the financial analyst needs certain
tools to be applied on various financial aspects. One of the widely used and powerful tools is ratio or
index. Ratios express the numerical relationship between two or more things. This relationship can be
expressed as percentages (25% of revenue), fraction (one-fourth of revenue), or proportion of numbers
(1:4). Accounting ratios are used to describe significant relationships, which exist between figures
shown on a balance sheet, in a profit and loss account, in a budgetary control system or in any other
part of the accounting organization. Ratio analysis plays an important role in determining the financial
strengths and weaknesses of a company relative to that of other companies in the same industry. The
analysis also reveals whether the company’s financial position has been improving or deteriorating
over time. Ratios can be classified into four broad groups on the basis of items used: (1) Liquidity Ratio,
(ii) Capital Structure/Leverage Ratios, (iii) Profitability Ratios, and (iv) Activity Ratios.
2. Common-Size Financial Analysis
Common-size statement is also known as component percentage statement or vertical statement. In
this technique net revenue, total assets or total liabilities is taken as 100 per cent and the percentage
of individual items are calculated like wise. It highlights the relative change in each group of expenses,
assets and liabilities.
Common Size Financial Statements
Common size ratios are used to compare financial statements of different-size companies or of the
same company over different periods. By expressing the items in proportion to some size-related
measure, standardized financial statements can be created, revealing trends and providing insight
into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:
Common Size Ratio = Item of Interest/ Reference Item
For example, if the item of interest is inventory and it is referenced to total assets (as it normally would
be), the common size ratio would be:
Common Size Ratio for Inventory = Inventory /Total Assets
The ratios often are expressed as percentages of the reference amount. Common size statements
usually are prepared for the income statement and balance sheet, expressing information as follows:
• Income statement items - expressed as a percentage of total revenue.
• Balance sheet items - expressed as a percentage of total assets

Types Of Financial Performance Analysis

Financial performance analysis can be classified into different categories on the basis of material used
and modes operandi as under:
A. Material used: On the basis of material used financial performance can be analyzed in following
two ways:
1. E xternal analysis
This analysis is undertaken by the outsiders of the business namely investors, credit agencies,
government agencies, and other creditors who have no access to the internal records of
the company. They mainly use published financial statements for the analysis and as it serves
limited purposes.
2. Internal analysis
This analysis is undertaken by the persons namely executives and employees of the
organization or by the officers appointed by government or court who have access to the
books of account and other information related to the business.
B. Modus operandi: On the basis of modus operandi financial performance can be analyze in the
following two ways:
1. Horizontal Analysis
In this type of analysis financial statements for a number of years are reviewed and analyzed.
The current year’s figures are compared with the standard or base year and changes are
shown usually in the form of percentage. This analysis helps the management to have an
insight into levels and areas of strength and weaknesses. This analysis is also called Dynamic
Analysis as it based on data from various years.
2. Vertical Analysis
In this type of Analysis study is made of quantitative relationship of the various items of financial
statements on a particular date. This analysis is useful in comparing the performance of
several companies in the same group, or divisions or departments in the same company. This
analysis is not much helpful in proper analysis of firm’s financial position because it depends
on the data for one period. This analysis is also called Static Analysis as it based on data from
one date or for one accounting period.

Significance Of Financial Performance Analysis

Interest of various related groups is affected by the financial performance of a firm. Therefore, these
groups analyze the financial performance of the firm. The type of analysis varies according to the
specific interest of the party involved.
Trade creditors: interested in the liquidity of the firm (appraisal of firm’s liquidity)
Bond holders: interested in the cash-flow ability of the firm (appraisal of firm’s capital structure, the
major sources and uses of funds, profitability over time, and projection of future profitability)
Investors: interested in present and expected future earnings as well as stability of these earnings
(appraisal of firm’s profitability and financial condition)
Management: interested in internal control, better financial condition and better performance
(appraisal of firm’s present financial condition, evaluation of opportunities in relation to this current
position, return on investment provided by various assets of the company, etc).

Areas Of Financial Performance Analysis

Financial analysts often assess firm’s production and productivity performance, profitability performance,
liquidity performance, working capital performance, fixed assets performance, fund flow performance
and social performance. However in the present study financial health of GSRTC is measured from the
following perspectives:
1. Working capital Analysis
2. Financial structure Analysis
3. Activity Analysis
4. Profitability Analysis

FINANCIAL PERFORMANCE ANALYSIS

FINANCIAL PERFORMANCE ANALYSIS


Financial Performance
The word ‘Performance is derived from the word ‘parfourmen’, which means ‘to do’, ‘to carry out’
or ‘to render’. It refers the act of performing; execution, accomplishment, fulfillment, etc. In border
sense, performance refers to the accomplishment of a given task measured against preset standards
of accuracy, completeness, cost, and speed. In other words, it refers to the degree to which an
achievement is being or has been accomplished. In the words of Frich Kohlar “The performance is a
general term applied to a part or to all the conducts of activities of an organization over a period of time
often with reference to past or projected cost efficiency, management responsibility or accountability
or the like. Thus, not just the presentation, but the quality of results achieved refers to the performance.
Performance is used to indicate firm’s success, conditions, and compliance.
Financial performance refers to the act of performing financial activity. In broader sense, financial
performance refers to the degree to which financial objectives being or has been accomplished. It is
the process of measuring the results of a firm’s policies and operations in monetary terms. It is used to
measure firm’s overall financial health over a given period of time and can also be used to compare
similar firms across the same industry or to compare industries or sectors in aggregation.
Financial Performance Analysis
Financial performance analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing the relationship between the items of balance sheet and profit and
loss account. It also helps in short-term and long term forecasting and growth can be identified with the
help of financial performance analysis. The dictionary meaning of ‘analysis’ is to resolve or separate
a thing in to its element or components parts for tracing their relation to the things as whole and to
each other. The analysis of financial statement is a process of evaluating the relationship between the
component parts of financial statement to obtain a better understanding of the firm’s position and
performance. This analysis can be undertaken by management of the firm or by parties outside the
namely, owners, creditors, investors.
In short, the firm itself as well as various interested groups such as managers, shareholders, creditors, tax
authorities, and others seeks answers to the following important questions:
1. What is the financial position of the firm at a given point of time?
2. How is the Financial Performance of the firm over a given period of time?
These questions can be answered with the help of financial analysis of a firm. Financial analysis involves
the use of financial statements. A financial statement is an organized collection of data according
to logical and consistent accounting procedures. 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 the 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. Thus, the term ‘financial statements’ generally refers to two basic statements: the
Balance Sheet and the Income Statement.
The Balance Sheet shows the financial position (condition) of the firm at a given point of time. It provides
a snapshot and may be regarded as a static picture.
“Balance sheet is a summary of a firm’s financial position on a given date that shows Total assets = Total
liabilities + Owner’s equity.”
The Income Statement (referred to in India as the profit and loss statement) reflects the performance of
the firm over a period of time. “Income statement is a summary of a firm’s revenues and expenses over
a specified period, ending with net income or loss for the period.”
However, financial statements do not reveal all the information related to the financial operations
of a firm, but they furnish some extremely useful information, which highlights two important factors
profitability and financial soundness. Thus analysis of financial statements is an important aid to financial
performance analysis. Financial performance analysis includes analysis and interpretation of financial
statements in such a way that it undertakes full diagnosis of the profitability and financial soundness of
the business.
“The analysis of financial statements is a process of evaluating the relationship between component
parts of financial statements to obtain a better understanding of the firm’s position and performance.
The financial performance analysis identifies the financial strengths and weaknesses of the firm by
properly establishing relationships between the items of the balance sheet and profit and loss account.
The first task is to select the information relevant to the decision under consideration from the total
information contained in the financial statements. The second is to arrange the information in a way to
highlight significant relationships. The final is interpretation and drawing of inferences and conclusions.
In short, “financial performance analysis is the process of selection, relation, and evaluation.” 9