Definition of Financial Statement Analysis
Financial Statement Analysis is defined as the process of reviewing the Financial Statements in order to give an opinion to the Financial Statement users whether the company financial position is as per the industry standards or not. It helps users in making sound economics decision. Financial Statement Analysis Assignment Help is one of the most complex homework help requirements as it involves various data and figures. Students often get confused regarding how to start the interpretation of the work given.
Financial Statements are the end results of the accounting transactions of any company. Financial Statements consist of:
- Balance Sheet
- Profit and Loss Account
- Statement of Cash Flows
- Notes adhering to Financial Statements
The owners as well the investors of any company pay high attention to the Financial Statements of the company as it gives detailed information regarding the operational and financial performance of the company. Financial Statement Analysis is done using four methods namely Trend Analysis, Financial Ratio Analysis, Vertical Analysis, and Horizontal Analysis.
Objectives of Financial Statement Analysis
- Preparation of Financial Statement for the purpose of interpreting and analysing it.
- Computation of Various Types of Financial Ratios which are useful to Shareholder, Creditor, Long-term Debt Provider for knowing the Financial, Liquidity and Operational condition of an entity.
- To review the financial Statement.
- To study the liquidity position of the company.
- To study the profitability and long-term solvency position of the company.
- To analyze the cash flow statement.
- To make the trend analysis for growth prospects.
Purpose of Financial Statement Analysis
The purpose of financial statements is investment analysis using the financial position, profitability and operating, investing, and financing activities of a company. Financial statements are used by shareholders, executives, employees, investors, potential lenders such as banks or vendors, and any other person or institution that needs to analyze a company.
Methods of Financial Statement Analysis
- Trend Analysis: Trend Analysis is done to determine how the business is going to perform in future by comparing data of Past Periods. Trend Analysis is just an estimation and can never give exact Information. For Example; Sales of the Company is increasing year after year at the rate of 8%, so as per Trend Analysis it will be assumed that next year growth of Sales would also vary in the same area. Another way of doing Trend Analysis is by using the Financial Ratio Analysis.
- Vertical Analysis: Vertical Analysis is done of any Financial Statement to know the present Financial Condition of the business compared with the other Industry working in the same line of business. It is the technique of Financial Statement Analysis which is done using Common Size Financial Statements. A Common Size Financial Statements shows each item of a Financial Statement in the form of percentage by comparing it with another Line item.
- Horizontal Analysis: This analysis is done by Comparing the Current Year Financial Statement of a Company with Previous Year Financial Statements. Horizontal Analysis enables the Management to compare the same period with several years past period to determine the increase or decrease in revenues, expenses, assets, and Liabilities.
- Financial Ratio Analysis: Financial Ratio analysis is done to make the management aware about the Liquidity, Operational, and Financial Conditions of the Company. It is done using the Financial Information present in the Financial Statements. Some of the examples of Financial Ratio Analysis are Liquidity Ratios, Financial Ratios, Financial Leverage Ratios, Debt-Equity Ratios etc.
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