WHAT TO INCLUDE IN FINANCIAL ANALYSIS

What is a Financial Analysis Report?

Comprehensive financial analysis reports accentuate the strengths and weaknesses of a
company. Communicating the companys strengths and weaknesses in an accurate and honest
manner is helpful in convincing the investors to invest in your business. A financial analysis report is,
basically, a document that attracts high interest of investors as it contains a detailed appraisal of a
companys financial health.
How to write a Financial Analysis Report
1. Start the report with an Executive Summary of important findings from the financial analysis.
Also state the time period focused by the study in addition to identifying the firm requesting the
report.
2. Set up an introduction emphasizing the objectives of the report. Also define financial terms
necessary for understanding those objectives.
3. Move on to a section with Resources title. Give a general description of the analyzed data and
where has it been sourced from. Some examples of resource include balance sheets, income
statements, operating costs, inventory ratios, and warehouse statistics.
4. Further describe the resources under the heading Method of Collecting Data. Mention whether
the data was received from different sources, like government agencies or departments within the
firm. Also explain each sources method for reporting data. Explain about the method of accounting
analysis for these distinct reporting methods.
5. Title the next section as Significant Financial Events and under this section, enlist the events
which occurred during the studied time period and which altered results.
6. Proceed with a section titled Detailed Results which includes a comprehensive analysis about
the investment returns, balance sheets, income statement, and productivity ratios. Also comment on
each of these factors in addition to providing support for your statements with graphs and tables.
7. Evaluate results from various quarters in a section titled Analysis of Variance.
8. Prepare an appendix for Financial Revenues defining how that term was used for preparing the
report. Tabulate the revenues over the analysis time period.

9. End the report with an appendix for Observations discussing any problems faced while
performing analysis and thereafter explaining about how research method handled problems.
Conclude the report with a statement projecting future performance on the basis of past years
performance.

Financial Statement Analysis

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Introduction to Financial Statement Analysis

Financial statement analysis can be referred as a process of understanding the risk and profitability
of a company by analyzing reported financial info, especially annual and quarterly reports. Putting
another way, financial statement analysis is a study about accounting ratios among various items
included in the balance sheet. These ratios include asset utilization ratios, profitability ratios,
leverage ratios, liquidity ratios, and valuation ratios. Moreover, financial statement analysis is a
quantifying method for determining the past, current, and prospective performance of a company.
Advantages of financial statement analysis
The different advantages of financial statement analysis are listed below:

The most important benefit if financial statement analysis is that it provides an idea to the

investors about deciding on investing their funds in a particular company.

Another advantage of financial statement analysis is that regulatory authorities like IASB can

ensure the company following the required accounting standards.

Financial statement analysis is helpful to the government agencies in analyzing the taxation

owed to the firm.

Above all, the company is able to analyze its own performance over a specific time period.

Limitations of financial statement analysis

In spite of financial statement analysis being a highly useful tool, it also features some limitations,
including comparability of financial data and the need to look beyond ratios. Although comparisons
between two companies can provide valuable clues about a companys financial health, alas, the
differences between companies accounting methods make it, sometimes, difficult to compare the
data of the two.
Besides, many a times, sufficient data are on hand in the form of foot notes to the financial
statements so as to restate data to a comparable basis. Or else, the analyst should remember the
lack of data comparability before reaching any clear-cut conclusion. However, even with this
limitation, comparisons between the key ratios of two companies along with industry averages often
propose avenues for further investigation.
Summary

To summarize, financial statement analysis is concerned with analyzing the balance sheet and the
income statement of a business to interpret the business and financial ratios of a business for
financial representations, business evaluation, in addition to financial forecasting.
Software
Users can analyze IFRS or US GAAP statement using such software as ReadyRatios financial
analysis software.

Horizontal Analysis of Financial Statements

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Horizontal analysis of financial statements involves comparison of a financial ratio, a benchmark,

or a line item over a number of accounting periods. This method of analysis is also known as trend
analysis. Horizontal analysis allows the assessment of relative changes in different items over time.
It also indicates the behavior of revenues, expenses, and other line items of financial statements
over the course of time.
Accounting periods can be two or more than two periods. Accounting period can be a month, a
quarter or a year. It will depend on the analysts discretion when choosing an appropriate number of
accounting periods. During the investment appraisal, the number of accounting periods for analysis
is based on the time horizon under consideration.
Horizontal analysis of financial statements can be performed on any of the item in the income
statement, balance sheet and statement of cash flows. For example, this analysis can be performed
on revenues, cost of sales, expenses, assets, cash, equity and liabilities. It can also be performed on
ratios such as earnings per share (EPS), price earning ratio, dividend payout, and other similar ratio.
Horizontal analysis can be performed in one of the following two different methods i.e. absolute
comparison or percentage comparison.

Absolute Comparison:
One way of performing horizontal analysis is comparing the absolute currency amounts of some
items over the period of time. For example, cash in hand at the end of an accounting period can be
compared to other accounting periods. This method is helpful in identifying the items which are
changing the most.

Percentage Comparison:
In the second method of horizontal analysis, percentage differences in certain items are compared
over a period of time. The absolute currency amounts are converted into the percentages for the
purpose of comparison. For example, a change in cash from $5,000 to $5,500 will be reported as
10% increase in cash. It can also be reported as 110%, which means that the cash is 110% of the
cash at the end of previous accounting period. This method is useful when comparing performance
of two companies of different scale and size.

Vertical Analysis of Financial Statements

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Vertical analysis of financial statements is a technique in which the relationship between items in
the samefinancial statement is identified by expressing all amounts as a percentage a total amount.
This method compares different items to a single item in the same accounting period. The financial
statements prepared by using this technique are known as common size financial statements.
This analysis is performed on the income statement as well as the balance sheet.

Balance Sheet:
When applying this method on the balance sheet, all of the three major categories accounts (i.e.
assets, liabilities, and equity) are compared to the total assets. All of the balance sheet items are
presented as a proportion of the total assets. These percentages are shown along with the absolute
currency amounts. For example, suppose a company has three assets; cash worth $4 million,
inventory worth $7 million and fixed assets worth $9million. The vertical analysis method will show
these as
Cash: 20%
Inventories: 35%
Fixed Assets: 45%

Income Statement:
And when applying this technique to the income statement, each of the expense is compared to the
total sales revenue. The expenses are presented as a proportion of total sales revenue along with
the absolute amounts. For example, if the sales revenue of a company is $10 million and the cost of
sales is $6 million, the cost of sales will be reported as 60% of the sales revenue.
The main advantage of using vertical analysis of financial statements is that income statements and
balance sheets of companies of different sizes can be compared. Comparison of absolute amounts
of companies of different sizes does not provide useful conclusions about their financial performance
and financial position.
Usually the vertical analysis is performed for a single accounting period to see the relative
proportions of different account balances. But it is also useful to perform vertical analysis over a
number of periods to identify changes in accounts over time. It can help to identify unusual changes
in the behavior of accounts. For example, if the cost of sales has been consistently 45% in the
history, then a sudden new percentage of 60% should catch the attention of analysts. Reasons
behind this change should be investigated and then measures should be taken to bring this
percentage back to its normal level.

Balance Sheet

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Balance sheet is a snapshot of a company's financial condition at a specific moment in time, usually
at the close of an accounting period. The balance sheet is the core of the financial statements (the
other major financial statements are the income statement (statement of comprehensive income),
statement of changes in equity and statement of cash flows). Unlike the other financial statements,
balance sheet is accurate only at one moment in time, not a period of time.
The balance sheet comprises assets (e.g. cash, inventory, etc.), liabilities (e.g. debt, accounts
payable, etc.) and equity (e.g. share capital, retained earnings, reserves, etc.).
The balance sheet is also referred to as the statement of financial position (new IFRS name of the
statement). For more information about structure and composition of the balance sheet see
"Statement of financial position".

Statement of Financial Position

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Statement of financial position is the new name of the balance sheet used in IFRS.
International Financial Reporting Standards (IAS 1) do not prescribe the exact format of the
Statement of financial position but it can be obtained from IFRS Taxonomy. Just that official format is
build into the ReadyRatios analytical software.
According to the IFRS Taxonomy Statement of financial position has the following format
(current/non-current variant):

Reference
IAS (IFRS),

IFRS Taxonomy 2011 XBRL name

p.
ASSETS

Assets

Non-current assets

NoncurrentAssets

Property, plant and equipment

1p54a,
16p73d

PropertyPlantAndEquipment

Investment property

1p54b

InvestmentProperty

Goodwill

1p54c

Goodwill

Intangible assets other than goodwill

1p68(c)

IntangibleAssetsOtherThanGoo
dwill

Investment accounted for using equity

method

1p54e,
IFRS
8p24a,28e

Investment<...>EquityMethod

Investments in subsidiaries, joint ventures

and associates

1p55

Investments<...>Associates

Non-current biological assets

1p54f

NoncurrentBiologicalAssets

Trade and other non-current receivables

1p54h,78b

NoncurrentReceivables

Deferred tax assets

1p54o,56,
12p81g

DeferredTaxAssets

Current tax assets, non-current

1p54n

CurrentTaxAssetsNoncurrent

Other non-current financial assets

1p54d,
32p11

OtherNoncurrentFinancialAsset
s

Other non-current non-financial assets

1p54

OtherNoncurrentNonfinancialAs
sets

Non-current non-cash assets pledged as

collateral for which transferee has right by
contract or custom to sell or repledge
collateral

39p37
IFRS9

Noncurrent<...>Collateral

Current assets
Current inventories

CurrentAssets
1p54g

Inventories

Trade and other current receivables

1p54h
1p78b

TradeAndOtherCurrentReceivab
les

Current tax assets, current

1p54n

CurrentTaxAssets

Current biological assets

1p54f

CurrentBiologicalAssets

Other current financial assets

1p54d

OtherCurrentFinancialAssets

Other current non-financial assets

1p54

OtherCurrentNonfinancialAsset
s

Cash and cash equivalents

1p54i
7p45

CashAndCashEquivalents

Current non-cash assets pledged as

collateral for which transferee has right by
contract or custom to sell or repledge
collateral

39p37
IFRS9

Current<...>Collateral

Non-current assets or disposal groups

classified as held for sale or as held for
distribution to
owners

1p54j
IFRS5p38

Noncurrent<...>ToOwners

EQUITY and LIABILITIES

EquityAndLiabilities

Equity

Equity

Equity attributable to owners of

parent

EquityAttributableToOwnersOfP
arent

Issued (share) capital

1p54r

IssuedCapital

Share premium

1p54r

SharePremium

Treasury shares

1p54r

TreasuryShares

Other equity interest

1p54r

OtherEquityInterest

Other reserves

1p54r

OtherReserves

Retained earnings

1p54r

RetainedEarnings

Non-controlling interests

1p54q

NoncontrollingInterests

Liabilities

Liabilities

Non-current liabilities

NoncurrentLiabilities

Non-current provisions for employee

benefits

1p54l

Noncurrent<...>Benefits

1p54l

OtherLongtermProvisions

Trade and other non-current payables

1p54k

NoncurrentPayables

Deferred tax liabilities

1p54o
12p81gi

DeferredTaxLiabilities

Current tax liabilities, non-current

1p54n

CurrentTaxLiabilitiesCurrent

Other long-term financial liabilities

1p54m

OtherNoncurrentFinancialLiabili
ties

Other non-current non-financial liabilities

1p54

OtherNoncurrentNonfinancialLi
abilities

Other long-term provisions

Current liabilities

CurrentLiabilities

Current provisions:

CurrentProvisions

Current provisions for employee benefits

1p54l

CurrentProvisionsForEmployeeB
enefits

Other short-term provisions

1p54l
37p84a

OtherShorttermProvisions

Trade and other current payables

1p54k

TradeAndOtherCurrentPayables

Current tax liabilities, current

1p54n

CurrentTaxLiabilities

Other current financial liabilities

1p54m

OtherCurrentFinancialLiabilities

Other current non-financial liabilities

1p54

OtherCurrentNonfinancialLiabili
ties

Liabilities included in disposal groups

classified as held for sale

1p54p

Liabilities<...>Sale

Statement of Comprehensive Income

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Statement of Comprehensive Income

Comprehensive income is the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The statement of
comprehensive income illustrates the financial performance and results of operations of a
particular company or entity for a period of time.
According to International Financial Reporting Standards since 1 January 2009 an entities make:

a Statement of comprehensive income (see the table below) or

two separate statements comprising:

an Income statement displaying components of profit or loss and

a Statement of comprehensive income that begins with profit or loss (bottom line of the
income statement) and displays the items of other comprehensive income for the reporting
period (IAS 1 p.81)

So the statement of comprehensive income aggregates income statement (profit and loss
statement)and other comprehensive income which isn't reflected in profits and losses. "Total
comprehensive income is the change in equity during a period resulting from transactions and other
events, other than those changes resulting from transactions with owners in their capacity as
owners." (IAS 1 p.7)
The statement of comprehensive income is one of the major financial statements used by
accountants and business owners (the other major financial statements are the balance sheet
(statement of financial position), statement of changes in equity and statement of cash flows).
IFRS do not prescribe the exact format of the Statement of comprehensive income but it can be
obtained from IFRS Taxonomy. Just that official format is built into the ReadyRatios analytical
software.
Statement of Comprehensive Income
Reference

IFRS Taxonomy 2010 XBRL name

IAS (IFRS), p.
COMPREHENSIVE INCOME

1p106a

ComprehensiveIncome

1p82i
PROFIT (LOSS)

1p82f

ProfitLoss

Profit (loss) from continuing

1p82f

Profit<...>Operations

IFRS 8p23,

ProfitLossBeforeTax

operations
Profit (loss) before tax

8p28b
Gross profit

1p103

GrossProfit

Revenue

1p82a, 18p35b,

Revenue

IFRS, 8p28a
Cost of sales

1p99

CostOfSales

Other income

1p103, 1p102

OtherIncome

Distribution costs

1p99

DistributionCosts

Administrative expense

1p99

AdministrativeExpense

Other expense

1p99

OtherExpenseByFunction

Other gains (losses)

1p103, 1p102

OtherGainsLosses

Profit (loss) from operating

ProfitLossFromOperatingActivities

activities
Difference between carrying

IFRIC

amount of dividends payable and

17p5

Difference<...>Distributed

carrying amount of non-cash assets

distributed
Gains (losses) on net monetary

9p29

Gains<...>Position

1p82 aa

GainLoss<...>AmortisedCost

position
Gain (loss) arising from
derecognition of financial assets
measured at amortised cost

Difference between carrying

IFRIC 17p5

Difference<...>Payable

Finance income

IFRS 7 IG13

FinanceIncome

Finance costs

1p82b

FinanceCosts

Share of profit (loss) of associates

1p82c

Share<...>Method

Gains (losses) arising from

Effective 2013-

Gains<...>Value

difference between previous

01-01 IAS 1.82

carrying amount and fair value of

ca

amount of non-cash assets

distributed and carrying amount of
dividends payable

and joint ventures accounted for

using equity method

financial assets reclassified as

measured at fair value
Income tax expense (from

1p82d, 7p20

IncomeTax<...>Operations

1p82e-i

Profit<...>Operations

1p91

OtherComprehensiveIncome

1p91, 1p82g

Other<...>OnTranslation

1p91, 1p82g

Other<...>Assets

1p91, 1p82g

Other<...>Hedges

1p91, 1p82g

Other<...>Operations

continuing operations)
Profit (loss) from discontinued
operations
OTHER COMPREHENSIVE
INCOME
Other comprehensive income, net
of tax, exchange differences on
translation
Other comprehensive income, net
of tax, available-for-sale financial
assets
Other comprehensive income, net
of tax, cash flow hedges
Other comprehensive income, net
of tax, hedges of net investments in
foreign operations

Other comprehensive income, net

1p7d

Other<...>Instruments

1p91, 1p82g

Other<...>Revaluation

of tax, gains (losses) from

investments in equity instruments
Other comprehensive income, net
of tax, gains (losses) on revaluation
Other comprehensive income, net

19p120h, 1p91, Other<...>Plans

of tax, actuarial gains (losses) on

1p82g

defined benefit plans

Income (expense) recognised in
other comprehensive income
relating to non-current assets or
disposal group classified as held for
sale

IFRS 5p38

Income<...>ForSale