Financial Statement Analysis
- 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.
Balance sheet provides information about financial position of the enterpriseMarks:1
at a point of time.
Explanation:Balance sheet provides information at a point of time. It shows classified properties and assets on the right hand side and obligations on the left hand side.
Analysis of financial statements meansMarks:1
simplification of data.
Explanation:Analysis of financial statement means simplification of data. It helps in comparision.
Financial analysis includes both analysis andMarks:1
Financial analysis includes both analysis and interpretation.
Interpretaion includes suggestions for further improvement.
Use of financial analysis does not includeMarks:1
Explanation:Uses of financial analysis include security analysis, credit analysis, debt analysis, dividend decision and general business analysis.
The analysis of financial statements is a study of relationships amongMarks:1
The analysis of financial statements is a study of relationships among various financial figures as set out in financial statements.