Problem statement Analysis of financial statements of Hindustan Unilever Limited Research objective To study and analyze the financial

statements of the company To study the growth and profitability of the company To determine the credibility of the company Limitations The study is based on annual reports published by the firm. The study is quantitative in nature.

Introduction Financial statement Meaning Financial statements mean the statements showing the financial affairs of an enterprise. It refers to that statement which reflects collection of fund from various sources, cost of using such funds, investment of such funds in various assets, return accrued from such resources and similar bits of information. Objectives The objectives of financial statements are to: Provide information needs of various present and prospective stakeholders about the net results of the business activities at regular intervals. Make the affairs of the company transparent to the parties external to the day-today activities of the enterprise. Safeguard the interests of the stakeholders who do not have access to the day-today affairs of the company. Keep the management under pressure so that the scope of manipulation can be minimized as they are to measure and report the financial results of the business adhering to certain rules and regulations promulgated by the regulatory authorities.

 Enhance credibility of the enterprise and increase its market acceptability. What is Financial Statement Analysis? Financial statements present facts, but some facts do not convey the same bearing to all. Needs and situations of users vary. Hence, the statements describing facts need to be analyzed and interpreted in the light of the needs of the specific users. Anyway, financial statements and FSA are two parts of a continuous process. Their relation needs clarification.

METHODS OF ANALYSIS
Financial statement analysis should focus primarily on isolating information useful for making a particular decision. The information required can take many forms but usually involves comparisons, such as comparing changes in the same item for the same company over a number of years, comparing key relationships within the same year, or comparing the operations of several different companies in the same industry.

Horizontal Analysis
Horizontal analysis, also called trend analysis, refers to studying the behavior of individual financial statement items over several accounting periods. These periods may be several quarters within the same fiscal year or they may be several different years. The analysis of a given item may focus on trends in the absolute dollar amount of the item or trends in percentages.

Absolute Amounts
The absolute amounts of particular financial statement items have many uses. Various national economic statistics, such as gross domestic product and the amount spent to replace productive capacity, are derived by combining absolute amounts reported by businesses. Financial statement users with expertise in particular industries might evaluate amounts reported for research and development costs to judge whether a company is spending excessively or conservatively. Users are particularly concerned with how amounts change over time. For example, a user might compare a pharmaceutical companys revenue before and after the patent expired on one of its drugs. Comparing only absolute amounts has drawbacks, however, because materiality levels differ from company to company or even from year to year for a given company. The materiality of information refers to its relative importance. An item is considered material if knowledge of it would influence the decision of a reasonably informed user. Generally accepted accounting principles permit companies to account for immaterial items in the most convenient way, regardless of technical accounting rules. For

example, companies may expense, rather than capitalize and depreciate, relatively inexpensive long-term assets like pencil sharpeners or waste baskets even if the assets have useful lives of many years. The concept of materiality, which has both quantitative and qualitative aspects, underlies all accounting principles. It is difficult to judge the materiality of an absolute financial statement amount without considering the size of the company reporting it. Vertical Analysis Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. Horizontal analysis compares items over many time periods; vertical analysis compares many items within the same time period. Vertical Analysis of the Income Statement Vertical analysis of an income statement (also called a common size income statement) involves converting each income statement component to a percentage of sales. Although vertical analysis suggests examining only one period, it is useful to compare common size income statements for several years. Exhibit 13.4 presents Milavecs income statements, along with vertical percentages, for 2010 and 2009. This analysis discloses that cost of goods sold increased significantly as a percentage of sales. Operating expenses and income taxes, however, decreased in relation to sales. Each of these observations indicates a need for more analysis regarding possible trends for future profits. Ratio analysis involves studying various relationships between different items reported in a set of financial statements. For example, net earnings (net income) reported on the income statement may be compared to total assets reported on the balance sheet. Analysts calculate many different ratios for a wide variety of purposes. The remainder of this chapter is devoted to discussing some of the more commonly used ratios. Objectives of Ratio Analysis As suggested earlier, various users approach financial statement analysis with many dif- ferent objectives. Creditors are interested in whether a company will be able to repay its debts on time. Both creditors and stockholders are concerned with how the company is financed, whether through debt, equity, or earnings. Stockholders and potential inves- tors analyze past earnings performance and dividend policy for clues to the future value of their investments. In addition to using internally generated data

to analyze opera- tions, company managers find much information prepared for external purposes useful for examining past operations and planning future policies. Although many of these objectives are interrelated, it is convenient to group ratios into categories such as measures of debt-paying ability and measures of profitability. Liquidity Ratios Liquidity ratios indicate a companys ability to pay short-term debts. They focus on current assets and current liabilities.