MEANING OF FINANCIAL STATEMENT ANALYSIS
Analysis of Financial Statements is a systematic process of analysing the financial information in the financial statements to understand and take economic decisions.
The term ‘Financial Analysis’ includes both ‘Analysis’ and ‘Interpretation’. ‘Analysis’ is concerned with simplification of financial data given in the financial statements by proper classification. ‘Interpretation’ is concerned with explaining the meaning and significance of the financial data. These two terms are complementary to each other, i.e., analysis is not of much use without interpretation of analysis. Financial Statement Analysis is undertaken by creditors, investors and other users of financial statements to assess credit worthiness, financial soundness and earning potential of the business.
TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
Comparative Statements
Comparative Statements or Comparative Financial Statements mean a comparative study of individual items or components of financial statements, i.e., Balance Sheet and Statement of Profit and Loss of two or more years of the enterprise itself
This technique of financial analysis is also known as Horizontal Analysis. This technique is used for intra-firm analysis (i.e., comparison of actual values of one period with those of another period for the same firm) as well as for inter-firm analysis (i.e., comparison of actual values of one firm with another firm of similar nature and size).
Common-size Statements
Common-size Statements or Common-size Financial Statements mean statements in which individual items of financial statements of two or more years are placed side by side and thereafter converted into percentages taking a common base. Common base taken is Total Assets or Total of Equity and Liabilities, in the case of Common-size Balance Sheet and Revenue from Operations, in the case of Common-size Statement of Profit and Loss.
This technique of financial analysis is also known as Vertical Analysis.
Ratio Analysis
Ratio is an arithmetical expression of relationship between two related components of financial statements of an accounting period. An analysis of financial statements with the help of accounting ratios is termed as Ratio Analysis. Ratio Analysis is an important tool or technique for analysing financial statements, i.e., Balance Sheet and Statement of Profit and Loss. It helps in assessing the profitability, solvency, liquidity and efficiency of an enterprise.
Cash Flow Statement
Cash Flow Statement is a statement showing flow of Cash and Cash Equivalents during the accounting period, classified under Operating Activities, Investing Activities and Financing Activity.