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What is Financial Statement Analysis?
Financial Statement Analysis Homework Help is the process of understanding the risk and profitability of an entity (business, sub-business, or project) through the analysis of reported financial information, particularly annual and quarterly reports.
It is also defined as the process of identifying the financial strengths and weaknesses of the entity by establishing a relationship between the items of the balance sheet and the profit and loss account.
There are various methods or techniques that are used in the analysis of financial statements, such as comparative statements, a statement of changes in working capital, funds analysis, trend analysis, and ratios analysis.
What are the tools and techniques of financial statement analysis?
1. Horizontal and Vertical Analysis:
Horizontal Analysis or Trend Analysis
A comparison of financial data over two or more years is known as horizontal analysis or trend analysis.
Trend Percentage
Trend percentage States several years' financial data in terms of a base year. The base year equals 100%, with all other years stated as some percentage of this base.
Vertical Analysis
Vertical analysis is the procedure of preparation and presentation of common-size statements. A common size statement is one that shows the items appearing on it in percentage form as well as in its current form. Each item is stated as a percentage of some total of which that item is a part.
2. Ratios Analysis:
Accounting Ratios Definition, Advantages, Classification, and Limitations:
It is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratio analysis is the technique of interpreting financial statements in order to assess the strengths and weaknesses of the business.
Business is mainly concerned with financial activities. In order to ascertain the financial status of the entity, every enterprise prepares certain statements which are known as financial statements. Financial statements are mainly prepared for the purpose of decision-making. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, effective analysis and interpretation of the financial statement are required to reach a proper conclusion.
Analysis means establishing a meaningful relationship between various items of the financial statements with each other in such a way that a conclusion can be drawn. By financial statements we mean two statements:
(i) Profit and loss Account (P & L Account) or Income Statement
(ii) Balance Sheet or Position Statement
These statements are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as the analysis and interpretation of financial statements. It refers to establishing a meaningful relationship between various items of the Income statement and position statement. It determines the financial strength and weaknesses of the firm.
Analysis of financial statements is done as an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements are essential to measuring the efficiency, profitability, financial soundness, and future prospects of the entity. The financial analysis serves the following purposes:
a) Measuring the profitability
b) Indicating the trend of Achievements
c) Assessing the growth potential of the business
d) Comparative position in relation to other firms
e) Assess overall financial strength
f) Assess the solvency of the firm