AFM Analysis of Balance Sheet Part 1: JAIIB Notes

IIBF 18 June 2026 · 11 min read

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Jaiib afm analysis of balance sheet — this guide gives you the latest 2026 information, key dates, eligibility, fees and study tips for the JAIIB exam.

Analysis of Balance Sheet (Part 1) — JAIIB AFM Study Notes

The analysis of financial statements, particularly the balance sheet, is a core topic in the JAIIB Accounting and Financial Management for Bankers (AFM) paper. A balance sheet analysis equips banking professionals with the ability to evaluate a borrower's financial health and make sound credit decisions. This article covers the objectives of financial statement analysis. Who uses financial statements, the structure of the balance sheet, and the components of financial statements — all as per the JAIIB AFM syllabus.

JAIIB is conducted twice a year by IIBF; visit iibf.org.in for the latest exam schedule.

Key Points

Financial statement analysis helps lenders assess a company's short-term liquidity, long-term solvency, and earning capacity.
The five main users of financial statements are investors, employees, customers, government departments, and creditors.
For JAIIB purposes, the perspective of the creditor (bank as lender) is most important.
Financial statements typically include the Profit and Loss Account, Balance Sheet, Cash Flow Statement, and Explanatory Notes.
The Director's Report provides qualitative context to the quantitative data in the financial statements.

What are the Objectives of Financial Statement Analysis?

Banks and financial institutions analyse the financial statements of their borrowers to make informed credit decisions. The objectives of financial statement analysis are:

To understand the company's overall financial position at a given point in time
To understand the earning capacity of the company — its cash flow and profitability
To know the status of the company's solvency, i.e., its ability to meet both short-term and long-term obligations
To determine the sufficiency of Net Working Capital (NWC)
To determine the sufficiency of long-term resources available to the company
To be aware of the accumulation or disposal of long-term assets that impact Net Working Capital
To suggest appropriate strategies based on the entity's current year and prior years' financial data

Who are the Users of Financial Statements?

Financial statements are prepared keeping in mind different categories of stakeholders who have an interest in the financial performance of a company. The different categories of financial statement users are:

Investors
Employees
Customers
Government Departments
Creditors (including banks and financial institutions)

For the JAIIB AFM syllabus. The most important perspective is that of creditors or lenders — specifically, how a bank as a lender needs to analyse the financial statements of its borrowers.

Why Does a Bank (as Lender) Need to Analyse Financial Statements?

A bank as a lender needs to analyse the financial statements of its debtors so that it can:

Evaluate the company's short-term and long-term prospects and make an appropriate credit decision.
Verify the company's short-term liquidity prospects to ensure the borrower can service working capital loans.
Know the structure of the equity capital and debt, assess long-term solvency, and evaluate the company's long-term ability to repay debts. This is important because banks are no longer limited to financing only short-term requirements. Banks now provide a judicious mix of short-term and long-term loans and products.
Understand that the concept of a working capital loan as a strictly short-term financing option is undergoing rapid change. In many companies, a working capital loan is effectively a perpetual long-term loan.
Conduct a critical analysis of the financial statements because it directly affects the safety of funds lent. If the financial statement analysis presents acceptable financial results, the creditor can proceed with a credit decision.

Structure of the Balance Sheet

The balance sheet structure of a company varies according to:

Company law provisions applicable to the type of entity (public limited, private limited, partnership, etc.)
Banking standards applicable for the classification of individual items
Accounting standards (AS) issued by the Institute of Chartered Accountants of India (ICAI)

What is Financial Statement Analysis?

Financial Statements include financial information relating to a trading or manufacturing company as the case may be. These statements present information in a structured way that is easy to understand and are usually prepared by management after a definite period of time — typically at the end of each financial year.

When we normally say "Balance Sheet Analysis," we are actually referring to the analysis performed on the audited Financial Statements. Financial statements provide quantitative details about the company's operations during the given accounting period and its financial position at the end of that accounting period.

Typical Components of Financial Statements

The financial statements of a company typically consist of the following components:

Profit and Loss Statement (also called Income Statement)
Balance Sheet
Statement of Cash Flows
Explanatory Notes — Notes to Accounts, as part of the above statements
Director's Report
Earnings Per Share (EPS) Statement

Understanding Each Component During Balance Sheet Analysis

Profit and Loss Statement

The Profit and Loss Statement (P&L) is prepared for a period of usually 1 year. In most cases in India, this period is from April 1 to March 31 — the Indian financial year. It indicates the summary or net result of the business entity's operations for the specified accounting period. Showing whether the company made a profit or a loss.

Balance Sheet

The Balance Sheet is drawn up on a certain date — at the end of the period for which the Profit and Loss Statement is drawn up. I.e., typically March 31. It provides an overview of the company's assets and liabilities as on the mentioned date. Representing the financial position of the company at a point in time.

Statement of Cash Flows

Submission of a Cash Flow Statement is mandatory along with the financial statements in case it is a listed company. Or if the turnover of the unit exceeds Rs.50 Crores. The Cash Flow Statement provides a summary of cash flows — cash coming in (inflows) and cash going out (outflows) during the given period of accounting. It classifies cash flows into three categories: Operating Activities, Investing Activities, and Financing Activities.

Explanatory Schedules (Notes to Accounts)

Notes to Accounts are shown as part of the Profit and Loss Statement and the Balance Sheet. They contain any deviations from the accounting standards or norms that were observed when compiling the financial statements. It is very important to read these notes in order to draw meaningful comparisons with previous years' data and performance. Without understanding the Notes to Accounts, the analyst may misinterpret the financial statements due to accounting policy changes.

Director's Report

The Board's Report (Director's Report) is attached to the financial statements under Section 217 of the Companies Act. It contains details of non-financial aspects of the company's performance — the environment in which the unit operates. The level of competition the industry is facing, and other relevant facts. These qualitative details complement the quantitative financial data in the income statement and balance sheet. Helping the analyst form a complete picture of the company before making a credit decision.

The data to be included in the Director's Report under Section 217 of the Companies Act includes:

Company status and affairs
Proposed transfer amount to reserves
Amount of dividend payment
Significant changes and liabilities affecting the company's financial position between two balance sheet dates
Details of energy savings, technology absorption, and foreign currency income and expenditure
Disclosure of changes in the nature of the company's business or its subsidiaries during the year
Details of specific employees paid Rs.12,00,000 or more under full-time employment, or Rs.1,00,000 or more if employed for less than a year
Details of employee shareholders who, together with their spouse and dependent children, hold at least 2% of equity shares of the company
Company director or manager-employee particulars
Director's Responsibility Statement as per recent amendments

Earnings Per Share (EPS) Statement

The Earnings Per Share (EPS) Statement is submitted along with the Financial Statements. This statement reflects the net profit of the company per unit of equity share. It is calculated as:

EPS = Net Profit After Tax / Number of Equity Shares Outstanding

EPS is a key metric used by investors and analysts to assess the profitability of a company on a per-share basis.

Why Analyse Two Years of Balance Sheets?

It would be unfair and meaningless to analyse a single year's balance sheet in isolation. A meaningful analysis requires comparing financial statements of at least two different years so that trends can be identified — whether the company's financial position is improving. Stable, or deteriorating. Bankers typically analyse at least 3 years of financial data before making long-term credit decisions.

FAQ: Analysis of Balance Sheet (JAIIB AFM)

Q1. What is the difference between Financial Statement Analysis and Balance Sheet Analysis?

"Balance Sheet Analysis" is a common term. But in practice, it refers to the analysis of the complete set of audited Financial Statements — which includes the Profit and Loss Statement, Balance Sheet, Cash Flow Statement, and Notes to Accounts. A proper analysis requires all these documents, not just the Balance Sheet.

Q2. Why is the lender's perspective most important in the JAIIB AFM context?

Banks are one of the primary users of financial statements. As lenders. Banks need to assess whether a borrower can repay loans on time (liquidity), whether the business is profitable (profitability), and whether it can survive long-term (solvency). Credit decisions — whether to lend, how much to lend, and at what terms — are based on this analysis.

Q3. When is submission of a Cash Flow Statement mandatory?

Submission of a Cash Flow Statement is mandatory for listed companies and for companies whose turnover exceeds Rs.50 Crores. For other companies, it is optional but recommended as it provides important information about cash generation and usage.

Q4. What is the significance of Notes to Accounts?

Notes to Accounts explain the accounting policies adopted by the company, deviations from standard accounting practices, and any contingent liabilities or significant events. Without reading the Notes to Accounts, a raw comparison of financial figures across years may lead to incorrect conclusions if accounting policies have changed.

Q5. What is EPS and why is it important?

EPS (Earnings Per Share) = Net Profit After Tax / Number of Equity Shares Outstanding. It measures the company's profitability on a per-share basis. A higher and growing EPS indicates improving profitability. EPS is widely used by equity investors to assess and compare the earnings performance of companies.

Conclusion

The analysis of financial statements, particularly from a bank-lender's perspective, is one of the most practically relevant topics in the JAIIB AFM paper. Understanding the objectives of financial statement analysis. The structure of balance sheets, and the components of financial statements lays the groundwork for applying ratio analysis and other credit assessment tools covered in Part 2. For the official JAIIB exam schedule and syllabus, visit iibf.org.in.

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Source: Indian Institute of Banking & Finance — iibf.org.in

AFM Analysis of Balance Sheet Part 1: JAIIB Notes