Financial

Statement
Analysis
What do we mean
by Financial
Statements?

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Financial statements are reports
prepared by a company’s management
to present the financial performance and
position at a point in time. A general-
purpose set of financial statements
usually includes a balance sheet,
income statements, statement of
owner’s equity, and statement of cash
flows. These statements are prepared to
give users outside of the company, like
investors and creditors, more information
about the company’s financial positions.
 INCOME STATEMENTS
The income statement shows the revenue
and expenses of the company over a period
of time. Most companies issue annual
income statement, but quarterly and semi-
annual income statements are also
common. Users can analyse the income
statement to see if companies are operating
efficiently and producing enough profit to
fund their current operations and growth.
 BALANCE SHEETS
The income statement shows the revenue
and expenses of the company over a
period of time. Most companies issue
annual income statement, but quarterly
and semi-annual income statements are
also common. Users can analyse the
income statement to see if companies are
operating efficiently and producing enough
profit to fund their current operations and
growth.
 OWNER’S EQUITY
The statement of owner’s capital
summarizes all owner investments and
withdrawals from the company during a
period. It also reports the current income or
loss recorded in retained earnings.

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 CASHFLOW
The statement of cash flows, or the cash flow
statement, is a financial statement that summarizes
the amount of cash and cash equivalents entering
and leaving a company. The cash flow statement
measures how well a company manages its cash
position, meaning how well the company generates
cash to pay its debt obligations and fund its operating
expenses. The cash flow statement complements the
balance sheet and income statement and is a
mandatory part of a company's financial reports

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 FINANCIAL
STATEMENTS
ANALYSIS

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 What is the Financial Statements
Analysis?
It is the process of reviewing and analysing a
company's financial statements to make
better economic decisions to earn income in
future. Financial statement analysis is a
method or process involving specific
techniques for evaluating risks, performance,
financial health, and future prospects of an
organization.
 HORIZONTAL ANALYSIS
Horizontal analysis is used in financial
statement analysis to compare historical data,
such as ratios, or line items, over a number of
accounting periods. Horizontal analysis can
either use absolute comparisons or percentage
comparisons, where the numbers in each
succeeding period are expressed as a
percentage of the amount in the baseline year,
with the baseline amount being listed as 100%.
This is also known as base-year analysis.
 VERTICAL ANALYSIS
Vertical analysis is a method of financial statement
analysis in which each line item is listed as a
percentage of a base figure within the statement.
Thus, line items on an income statement can be
stated as a percentage of gross sales, while line
items on a balance sheet can be stated as a
percentage of total assets or liabilities, and vertical
analysis of a cash flow statement shows each
cash inflow or outflow as a percentage of the total
cash inflows.
 FINANCIAL RATIO ANALYSIS

Financial ratios are mathematical comparisons of

financial statement accounts or categories. These
relationships between the financial statement
accounts help investors, creditors, and internal
company management understand how well a
business is performing and of areas needing
improvement.
 FUNDAMENTAL ANALYSIS
Fundamental analysis is the process of looking at
a business at the most basic or fundamental
financial level. This type of analysis examines the
key ratios of a business to determine its financial
health. Fundamental analysis can also give you
an idea of the value of what a company's stock
should be. It takes several factors into account,
including revenue, asset management, and the
production of a business as well as interest rate.
 DU PONT ANALYSIS
The DuPont analysis (also known as the DuPont
identity or DuPont model) is a framework for
analysing fundamental performance popularized
by the DuPont Corporation. DuPont analysis is a
useful technique used to decompose the different
drivers of return on equity (ROE). Decomposition
of ROE allows investors to focus on the key
metrics of financial performance individually to
identify strengths and weaknesses.
How important
the Financial
Statements is?
How important the Financial Statements is?
A company's financial statements provide vital information
about its financial health. These statements are compiled
based on day-to-day bookkeeping that tracks funds flowing
in and out of the business. The information the statements
provide offers benchmarks and feedback that help the
company make minor adjustments and also determine its
overall direction. Financial statements are useful for
making decisions regarding expansion and financing. They
also figure into marketing decisions, providing data
indicating which aspects of company operations provide
the best return on investment.

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Profit and Loss

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A profit and loss statement details how much profit -
or loss-a business has made during a designated
period once operating expenses are subtracted from
overall revenue. The upper part of the statement lists
different sources of operating income, such as
revenue from wholesale and retail sales, and rental
or interest income. The lower part of the income
statement lists different categories of expenditures
such as materials, labour, rent and depreciation. The
most important pieces of information gleaned from a
profit and loss statement are whether or not your
business is earning a profit, and how much it is
earning or losing.
Balance Sheet

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 A balance sheet captures the
financial health of your business at a
particular moment of time. The
assets section lists what your
business owns, such as cash on
hand, money in the bank, and
money that is owed to you. The
liabilities section lists everything
your business owes, such as
outstanding principle on loans,
unpaid payroll, and unpaid bills. The
most important piece of information
that a balance sheet provides is
your company's net worth, or its
value once you subtract liabilities
from assets.

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Cash Flow
Projection

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 Cash Flow
A cash flow projection is a document that maps anticipated
income and expenditures during an upcoming period. It is an
essential planning tool that helps you to anticipate and plan
for potential revenue shortfalls by conserving resources or
seeking financing. The cash flow projection contains
sections detailing categories of anticipated expenditures
such as payroll, rent and loan payments, as well as a
section listing sources of anticipated revenue such as sales
from wholesale and retail operations, and capital infusions
from loans. Comparing total anticipated income with total
anticipated expenditures tells you whether you can expect to
have sufficient operating capital.

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 Overview
Your company's financial statements function in tandem to
provide information about the overall health of your
company. If your profit and loss statement tells you that
you are earning a profit but your balance sheet and cash
flow statement show you operating in the red, then you are
probably on the right track and it's just a matter of time
before you catch up. If your balance sheet and cash flow
projection show that you have sufficient capital but your
profit and loss statement shows that your business is
losing money, you should conserve resources and
strategize about ways to begin earning a profit before you
run out of money.

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 The financial statement analysis is important for different
reasons: (Page 1)
 Holding on Share

Shareholders are the owners of the company. Time and again, they may
have to take decisions whether they have to continue with the holdings of
the company's share or sell them out. The financial statement analysis is
important as it provides meaningful information to the shareholders in
taking such decisions.

 Decisions and Plans

The management of the company is responsible for taking decisions and

formulating plans and policies for the future. They, therefore, always need
to evaluate its performance and effectiveness of their action to realise the
company's goal in the past. For that purpose, financial statement analysis is
important to the company's management.

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 (Page 2)
 Extension on Credit

The creditors are the providers of loan capital to the company. Therefore
they may have to take decisions as to whether they have to extend their
loans to the company and demand for higher interest rates. The financial
statement analysis provides important information to them for their purpose.

 Decisions and Plans

The management of the company is responsible for taking decisions and

formulating plans and policies for the future. They, therefore, always need
to evaluate its performance and effectiveness of their action to realise the
company's goal in the past. For that purpose, financial statement analysis is
important to the company's management.

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 (Page 3)

 Investment Decision

The prospective investors are those who have surplus capital to invest in
some profitable opportunities. Therefore, they often have to decide whether
to invest the capital in the company's share. The financial statement
analysis is important to them because they can obtain useful information for
their investment decision making purpose.

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Thanks!

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