An Understanding Of Financial Statement Analysis
Financial statement analysis is the process of examining the financial strengths and weaknesses of the company and other business organizations. Generally, it is done by establishing the accurate relationship between the variables of the balance sheets and the profit and loss of the businesses.
However, there are several techniques those are used for the financial statement analysis viz…
However, there are several techniques those are used for the financial statement analysis viz…
- Schedule of changes in working capital
- Comparative statements
- Common size percentages
- Ratios analysis
- Trend analysis
- Fund analysis
Basically, the purpose of preparing financial statements is to meet the external reporting obligations. It also assists in managerial decision making process. Nonetheless, the information collected and incorporated in the financial statements of particular business is not final in itself because merely on this basis no consequential conclusion can be drawn. But of course, the financial information provided in the statements is of great use in doing analysis and interpretation of financial statements.
Techniques and Methods of financial statement analysis
Some of the important techniques and methods of financial statement analysis are:
- Horizontal analysis: Under this technique, financial data of two or more years has been compared. Hence, it shows the changes in terms of dollar as well as percentage. It is also known as trend analysis. In fact, horizontal analysis can be also done by computing trend percentages. Trend percentage provides the financial data of many years in terms of a base year.
- Vertical analysis: Unlike horizontal analysis, vertical analysis prepares common size reports and presents the items in percentage form as well as dollar form. Likewise, important financial changes and trends can be highlighted by the use of common size reports.
- Ratio analysis: In fact, ratio shows how one number is related with another one; hence, this is a statistical tool by which the relationship of two more variables can be compared or even measured easily.
Benefits of financial statement analysis
There are following significant benefits of financial analysis:
- Financial statement analysis assists companies to analyze their own performance in given period of time.
- It gives sufficient idea to the investors that in which company they should invest their funds.
- It also helps the government authorities to analyze the taxes due on the companies.
- The regulatory authorities whether it is national or international get ensured that the respective company is following accounting standards.
So, financial statement analysis is very advantageous and efficient procedure that assists everyone including company, employees, and government authorities along with regulatory authorities.