Analysis of Financial Statement
Financial Statements present large volume of complex data. Analytical techniques are used to establish relation among the various items of Financial Statements. Analysis of Financial Statements is the process of identifying, financial strength and weakness of a business by establishing the relationship between the items of Balance Sheet and Profit & Loss account. It judges the earning capacity/profitability and managerial efficiency of a business, measures financial strength, provides useful information to external and internal users and facilitates comparison with other business. The limitations of Financial Statements Analysis are that it ignores qualitative elements, suffers from limitations of Financial Statements, ignores price level changes and is affected by window dressing. Intra firm analysis compares the financial variables of an enterprise over a period of time whereas inter firm analysis compares the financial variables of two or more variables. The parties interested in Financial Statements Analysis are shareholders, potential investors, suppliers, bankers, management, tax authorities, etc. Tools of Financial Statements Analysis are Comparative Statements, Common Size Statements, Ratio Analysis, Trend Analysis, etc. In Comparative Statements, figures of two or more years are placed side by side to facilitate comparison. Comparative Balance Sheet is used for comparing assets, liabilities and capital of a business. This depicts the impact of business operations on assets, liabilities and capital. Comparative Income Statements are used to show company’s Income and expenses over a given period. It facilitates comparison of various items of income and expenditure for two or more years.
Common Size Statements uses percentage to express the relationship of individual components to a total within a single period. It is also known as Vertical analysis. Common size Income Statement is the Statement in which Net sales is assumed to be 100 and other figures are expressed as percentage of revenue from operations. In Common Size Balance Sheet, total assets/liabilities are taken as 100 and all other individual items of assets and liabilities are expressed as percentage of total.