Analyzing common size balance sheets

In analyzing a common size balance sheet, emphasis is laid on these aspects:

• Sources of financing, including the distribution of financing among current liabilities, non-current liabilities and equity capital.

• Composition of investments, including current and non-current assets.

• Composition of cash and cash equivalents in current assets.

Common-size balance sheet analysis is often extended to examine the proportions comprising particular sub-groups. For example, in assessing liquidity of current assets, it is often important to know what proportion of current assets comprises inventories, and not simply what proportion of inventories are total assets.

The common-size balance sheet can be used for cross-sectional analysis by comparing it with the common-size balance sheets of other similar firms or companies.

Let us undertake a cross-sectional analysis of common-size balance sheets of Infosys Technologies with the statements of TCS and Satyam Computer Services.

Cross-sectional Analysis using Common-size Balance Sheet as at March 31, 2007

                                                                                                                                                                                                        (Rs. in crore)

Common-size balance sheet of TCS, Satyam and Infosys can be compared from the following perspectives:

• Short-term Liquidity: The short-term liquidity can be assessed by looking at the proportion of net current assets to total assets. This percentage is relatively very high for Satyam Computer Services when compared to others. This can be attributed to two factors - one, the large composition of cash in current assets (68.24%) and the relatively lower percentage of current liabilities (17.54%). On the other extreme, the net current assets percentage to total assets is less in TCS, because of the relatively meager proportion of cash balances which are only 6.85% of total assets.

• A closer look at the cash flow information of Satyam Computer Services reveals that the actual net increase in absolute cash is only Rs.907.49 crore which means that the cash balance at the end of the year is only Rs.593.16 crore. The remaining balance in "cash and bank balances" represents a           long-term fixed deposit of Rs.3,366.66 crore.

• Long-term Solvency: All the three software companies are financed mostly through internal funds (i.e., reserves and surplus) and hence the proportion of debt-to-equity is very negligible. As such they have a satisfactory long-term financial position.

• Composition of Fixed Assets: Since all the three companies are software companies, their major fixed assets comprise land and buildings and computer equipment. A look at the notes to accounts and the schedules to balance sheet reveals that in case of TCS, out of the gross block of assets, 60% are buildings and computer equipment, while in case of Satyam and Infosys the composition of these two assets is 76% and 62% respectively.

• While buildings have been depreciated on straight line basis over their useful life in case of TCS and Infosys, in case of Satyam, they have WDV method. The proportion of accumulated depreciation to gross block of assets is more in case of Satyam (72%) which suggests that the company must have adopted a faster depreciation of its assets in their initial years. On the other hand, the proportion of accumulated depreciation to gross block of assets is considerably low for TCS (37%).

• Investments: The proportion of investments also shows considerable variation with TCS having a higher percentage (39.99%) while Satyam has the lowest percentage in investments (3.47%). But, Satyam has a major portion (58% of total assets) invested in long-term fixed deposit which is included in cash and bank balances.

Email based Accounting assignment help - homework help at Expertsmind

Are you searching Accounting expert for help with Analyzing common size balance sheets questions? Analyzing common size balance sheets topic is not easier to learn without external help?  We at www.expertsmind.com offer finest service of Accounting assignment help and Accounting homework help. Live tutors are available for 24x7 hours helping students in their Analyzing common size balance sheets related problems. We provide step by step Analyzing common size balance sheets question's answers with 100% plagiarism free content. We prepare quality content and notes for Analyzing common size balance sheets topic under  Accounting theory and study material. These are avail for subscribed users and they can get advantages anytime.

Why Expertsmind for assignment help

1. Higher degree holder and experienced experts network
2. Punctuality and responsibility of work
3. Quality solution with 100% plagiarism free answers
4. Time on Delivery
5. Privacy of information and details
6. Excellence in solving Accounting questions in excels and word format.
7. Best tutoring assistance 24x7 hours