• Financial Statement analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between items of Balance Sheet and Statement of Profit & Loss.
  • The objectives of such analysis are tojudgeearning capacity and managerial efficiency, to measure financial strength, to provide useful information to the management, etc.
  • Its limitationsare: it ignores qualitative elements and price level, suffers from limitations of financial statements, etc. Financial Statement analysis is used for security analysis, credit analysis, debt analysis, etc.
  • The types of Financial Statement analysis are external analysis, internal analysis, horizontal analysis, vertical analysis, inter-firm analysis and intra-firm analysis.
  • External analysis is conducted by the persons who do not have access to the detailed record.
  • Internal Analysis is conducted by the management to know the financial position and operational efficiency of the organization.
  • Horizontal Analysis is used for reviewing and analysing financial statements for a number of years.
  • Vertical analysisis undertaken to review and analyse Financial Statements of one year only. Inter firm analysis means comparison of two or more firms in the same industry.
  • In intra firm analysisFigures of the same firm are compared over a period of time. It is also called ‘Trend Analysis’ or ‘Time SeriesAnalysis’.
  • In the process of Financial Statement analysis we rearrange Financial Statements into purposive classes, obtain comparative data of the past periods or of the same accounting period of similar or comparable enterprises, analysis of financial data collected with reference to financial parameters and Interpretation is done that should be precise and directed towards the movement of various financial parameters.
  • Various parties interested in Financial Statement analysis are shareholders, owners, potential investors, suppliers, employees, etc.
  • The tools of Financial Statement analysis are Comparative statements, Common size Statements, Cash Flow statement and ratio Analysis.

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