Financial

Financial
Statement
Statement
Analysis
Analysis

Mrs. Rama Mishra

Assistant Professor

Financial
Statement Analysis
Financial Statements show mass complex data
in absolute monetary terms. Trading A/c, Profit
& Loss A/c and Balance sheet consists in
Financial statement of a business unit.
Financial statement analysis is a study of
relationships among the various financial
factors in a business disclosed by the financial
statement.
It means analysis converts the mass of data
into useful information for the internal &
external users.

 Financial statement
analysis(orfinancial analysis) is
the process of reviewing and
analyzing a company'sfinancial
statementsto make better
economic decisions.
Thesestatementsinclude the
income statement, balance
sheet,statementof cash flows, and
astatementof retained earnings

Examples of External
Users of Statement
Analysis
Trade Creditors -- Focus on the
liquidity of the firm.
Bondholders -- Focus on the longterm cash flow of the firm.
Shareholders -- Focus on the
profitability and long-term health of
the firm.

Primary Types of
Financial Statements
A) Balance Sheet

A summary of a firms financial position

on a given date that shows total assets
= total liabilities + owners equity.

B) Income Statement (Trading A/c and

P&L A/c)
A summary of a firms revenues and
expenses over a specified period, ending
with net income or loss for the period.

Tools of Financial Statement

Analysis
Following are the most important
tools and techniques offinancial
statementanalysis:
1. Horizontal and Vertical Analysis
2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis: Comparison of two or more
year'sfinancial datais known ashorizontal
analysis, or trend analysis.Horizontal analysisis
facilitated by showing changes between years in
both dollar and percentage form..
Vertical Analysis: Vertical analysisis the
procedure of preparing and presenting common
size statements.Common size statementis one
that shows the items appearing on it in percentage
form as well as in dollar form. Each item is stated
as a percentage of some total of which that item is
a part. Key financial changes and trends can be
highlighted by the use of common size statements

2. Ratio Analysis : The ratios analysis is

the most powerful tool offinancial
statementanalysis.Ratios simply means
one number expressed in terms of another.
A ratio is a statistical yardstick by means of
which relationship between two or various
figures can be compared or measured.
Ratios can be found out by dividing one
number by another number. Ratios show
how one number is related to another

Advantages of Financial
Statement Analysis
There are variousadvantagesof financial
statements analysis.
a) The majorbenefitis that the investors get
enough idea to decide about the investments of
their funds in the specific company.
b) Secondly, regulatory authorities like
International Accounting Standards Board can
ensure whether the company is following
accounting standards or not.
c) Thirdly, financial statements analysis can help
the government agencies to analyze the
taxation due to the company.
d) Moreover, company can analyze its own
performance over the period of time through

Limitations Of Financial
Statement Analysis
Although analysis offinancial statementis essential to
obtainrelevantinformation for making several
decisions and formulating corporate plans and
policies, it should be carefully performed as it suffers
from a number of the following limitations.
1. Mislead the user: The accuracy of financial
information largely depends on how accurately
financial statements are prepared. If their preparation
is wrong, the information obtained from their analysis
will also be wrong which may mislead the user
inmaking decisions.
2. Not useful for planning: Since financial
statements are prepared by using historicalfinancial
data, therefore, the information derived from such

3. Qualitative aspects: Thenfinancial

statementanalysis provides only quantitative information
about the company's financial affairs. However, it fails to
provide qualitative information such as management labor
relation, customer's satisfaction, management's skills and
so on which are also equally important for decision making.
4. Comparison not possible: The financial statements
are based on historical data.
Thereforecomparativeanalysis of financial statements of
different years can not be done as inflation distorts the
view presented by the statements of different years.
5. Wrong judgement: The skills used in the analysis
without adequate knowledge of the subject matter may
lead to negative direction . Similarly, biased attitude of
theanalystmay also lead to wrong judgement and
conclusion.