Guidelines and Uses of Financial

Statement Analysis Students

should remember the following guidelines
while analysing the Financial Statements:
1. Use of ratios to get hints while questioning –
Computing ratios help in questioning

correctly about the company’s financial position, even

though accurate answers may
be given, ratios form a mode in understanding company’s
affairs.
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2. Being selective while choosing ratio – Scores
of different ratios can be computed

 however there is possibility of getting perplexed. Hence

for most reasons a minute set of ratios generally three to
seven would be sufficient.
 Few ratios appropriately chosen would take into custody
most of the information that can be derived from financial
statements.
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 3. Employment of proper point of reference
 computed ratios (computed from a set of financial
statements) against some point of reference or
standards.
 These standards could be either the industrial average
ratios or the industrial ratios of the leaders or the past
ratios of the same concern.
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4. Knowledge of loop holes used by the accountants –
As firms are inclined to

 influence the reported income, students should learn

about the tools employed by them.

5. Footnotes not to be ignored – At times, footnotes

may contain significant

 information. They may disclose things that management

may try to conceal.
 The more complicated it is to read a footnote, the more
information, the more weighted down it may be.
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 6. A mixture of art and science is financial
statement analysis – It is to be
 remembered that financial statement analysis is an
uneven combination of art and science.
 It cannot be looked upon as a simple, structured
implement.
 It is a process necessitating attention, care, common
intellect and business judgement for whichthere are no
mechanical alternatives.
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 Association Of Ratios

 Financial ratios of a concern, over and over again

present a high scale of association. This is for the reason
that quite a few ratios have some common constituent
such as sales that is used
 in computing various turnover ratios and quite a few
items are inclined to move in synchrony
 due to the fact of some common underlying feature.
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 In view of association of ratio, it is laid off and repeatedly
puzzling to make use of a large number of ratios in
financial statement analysis.
 For this reason it is required to choose a small set of
ratios from a large group of ratios.
 Such an assortment has need of a good perception of
the meaning and drawbacks of varied ratios and an
insight into the business economics.
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 Uses of Financial Statement Analysis
 Appropriately combined financial ratios may be used to
evaluate corporate superiority, arbitrate
creditworthiness, forecast bankruptcy, assess equity
shares, forecast bond ratings and appraise market risk.
 At the same time as financial statement analysis can be
a very constructive device, there are definite problems
and matters stumbled upon in such analysis.
 Wide-ranging business analysis calls for going ahead of
conventional financial appraisals to regard qualitative
features pertinent for assessing the presentation and
hopes of a company
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