Financial Accounting

Financial Statement Analysis

Submitted to-prof.Awais

Introduction
We need to provide information to present and
investors and creditors and others in making
rational investment, credit and other decisions.
Mere a glance of the financial accounts of the
company does not provide useful information
simply because they are raw in nature
The information provided in the financial
statement is not an end in itself as no
meaningful conclusions can be drawn from
these statements alone.

Financial Statement

The income statement

The balance sheet
Cash flow statement
Change in owner equity statement
Notes to the account

What is FSA?
Analysis =To cut into pieces

Analysis, Interpretation and

comparison of financial data to
achieve the desired result. It is
used to determine the financial
strength and weaknesses of an
organization.

Comparative Statement
Analysis
Comparative financial statement are
useful in analyzing the changes over time
They carry data relating to two or more
years and facilitate the comparison of an
item with previous years and even the
future figures may be projected.
The two comparative statements are:
Balance Sheet
Income Statement

Purpose of FSA
It is the collective name of tools and
techniques that are intended to provide
relevant information to decision makers.
The purpose of financial analysis is to
diagnose the information contained in
financial statements so as to judge the
profitability and financial solvency of the
firm.
It provides valuable insight into a firms
performance.

Profitability

 Effective decisions making requires

evaluation of the past performance of
companies and assessment of their
future prospects.
Financial Performance
Financial Position
Prediction of future performance
Comparison on Intracompany
basis(within the company itself)
Intercompany basis(between
companies)

Requirement of Effective Financial

Statement Analysis
We need to be aware of the organizations:
Business strategy
Objectives
Annual report and other documents like articles
about the organization in newspapers and
business reviews
These are called individual organizational factors.
Understand the nature of the industry in which
the organization works.

 Understand that the overall state of

the economy may also have an
impact on the performance of the
organization.
Financial Statement analysis is more
than just Crunching numbers;it
involves obtaining a broader picture
of the firm in order to evaluate how
that firm is performing

Types of Financial Analysis

External Analysis
Internal Analysis
Horizontal Analysis
Vertical Analysis

External Analysis:
It is carried out by outsiders of the
business ,investors, creditors
etc.,who does not have access to
internal records of the company
--depending mainly on published
accounts
Internal Analysis:
It is carried out by the persons who
have access to internal records of the
companyexecutive, manager etc
by officers appointed by government

Horizontal analysis, also

called trend analysis, refers
to studying the behavior of
individual
financial statement items over
several accounting periods.

Vertical analysis uses

percentages to compare
individual components of
financial statements
to a key statement figure. Horizontal
analysis compares items over many
time
periods; vertical analysis compares
many items within the same time
in a financial
period.

Horizontal Analysis:
Comparison of change
statement item such as inventories during
two or more accounting periods
Vertical Analysis:
Comparison of particular financial statement
item to a total including that item such as
inventories as a percentage of current assets.

Limitation of financial statement

analysis

Strong FSA does not mean that

the organization has a strong
financial future.
Financial statement analysis
might look good but there may
be other factors that can cause
an organization to collapse.
Influence of personal judgment.