Basic understanding of Financial Statement Spreading

Spreading-Introduction:

There are three primary financial statements. They are the income statement, balance sheet, and cash flow statement. All three are reported on a quarterly and annual basis. Financial and investment analysts like to examine these statements for trends and insights about the nature of operations. One method used to help analyze statements is referred to as "spreading."

Spreading financing statements means using percentages to forecast future financial statements. Each financial statement is spread differently. The income statement is based on a percentage of total sales or revenues. The balance sheet is based on a percentage of total assets. The cash flow statement is a combination of the income statement and the balance sheet and therefore does not need to be spread.

Financial Statement Spreading-

Detailed Financial Report consist of the followings:

1. Balance Sheet 2. Statement of Income 3. Statement of Cashflow

Financial Statement Analysis-

1.??????Common Size Statement Analysis

Common Size Income Statement Analysis: Where the total turnover is considered as the base figure and is pretended to be 100% and each of the line items is analyzed in a percentage of the same above base.

Common Size B/s Analysis: Here the Total Assent/Total liabilities is considered as the base figure and taken as 100%. Again, the line items of the balance sheet are compared on a percentage basis.

2.??????Comparative Statement Analysis/Trend Analysis

Trend Analysis is the practice of collecting information and attempting to spot a pattern, or trend, in the information.?It evaluates financial information for an organization over a period of time and is typically presented as a unit amount change and a percentage change, evaluates an organization’s financial information over a period of time. Periods may be measured in months, quarters, or years, depending on the circumstances. The goal is to calculate and analyze the amount of change, and percent change from one period to the next.

Cash Flow Statement Preview-

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. It is being analyzed to find out the liquidity and the credibility of a firm in terms of its obligation towards its stakeholder. The three distinct activities in the Cash Flow Statement are

?1. Cash flow from Operating Activities 2. Cash flow from Investing Activities 3. Cash flow from Financing Activities

Objective/Need of Spreading-

1.??????The ever-changing nature of financial regulations, credit policy updates, and high, cost of operations is forcing banks and financial institutions to increase process efficiency and reduce the cost of ownership. This is important to manage client portfolios and client relationships successfully as well as to monitor inputs and outputs to comply with regulatory requirements.

2.??????Our industry-best credit analysis applications along with cost-effectiveness provide

"credit utility" for clients delivering financial spreading and credit analysis services. These applications help credit institutions improve the quality of the financial analysis process, reduce costs of credit appraisal, and monitoring and, improve overall efficiency.

Line of Business-

1. ?Middle Market 2. Business Banking 3. Capital Market 4. Commercial Real Estate

?Financial Statement Analysis-

?Ratio Analysis

Ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise, intelligible, and understandable form.

“Ratio analysis is a study of the relationship among various financial factors in a business”

Objectives of Financial Ratio Analysis-

The objective of ratio analysis is to judge the earning capacity, financial soundness, and operating efficiency of a business organization. The use of ratios in accounting and financial management analysis helps the management to know the profitability, financial position, and operating efficiency of an enterprise.

Advantages of Ratio Analysis-The advantages derived by an enterprise by the use of accounting ratios are:

1. Useful in the analysis of financial statements. 2. Useful in simplifying accounting figures. 3. ?Useful in judging the operating efficiency of the business. 4. Useful for forecasting. 5. Useful in locating weak spots.

Limitations of Financial Ratio Analysis-

1. Different meanings are put on different terms. 2. ?Not comparable if different firms follow different accounting Policies. 3. Effect of Price level changes. 4. Ignores qualitative factors. 5. Ratios may be worked out for insignificant and unrelated figures.

Advantages of Financial Spreading-

1. Access all your financial information of borrower and guarantor from one central location 2. Easy to analyze the creditworthiness of borrowers 3. Helping in trend analysis and ratios analysis from one report
2. Limitation of spreading-The major limitations of financial analysis are as under:

?Not free from bias – In many situations, the account has to make choice out of various alternatives available, e.g., choice in the method of depreciation, choice in the method of inventory valuation, etc. since the subjectivity is inherent in personal judgment, the financial statement is therefore not free from bias.

Limitation on its use- Financial Analysis can help the company for expecting the future happening, but not guarantee its execution.

Summary-

Credit analysis applications along with cost-effective operations provide "credit utility" for clients delivering financial statement spreading and credit analysis services. These applications help credit institutions improve the quality of the financial analysis process, reduce costs of credit appraisal, and monitor and improve overall efficiency.