Financial Statement Analysis
A financial statement is an official document of the firm that explores the complete financial info of the firm. The most aim of the financial statement is to produce info and perceive the financial aspects of the firm. Hence, the preparation of the financial statement is important as much as financial decisions.
MEANING AND DEFINITION
According to Hamptors John, the financial statement is an organized assortment of information consistent with logical and consistent accounting procedures. Its purpose is to convey an understanding of the financial aspects of a business firm. It may display an edge at a flash of time as within the case of a balance-sheet or may reveal a service of activities over a given period of time, as within the case of a financial statement.
Financial statements are the outline of the accounting method, which, provides helpful info to each internal and external parties. John N. Nyer also defines it “Financial statements offer an outline of the accounting of a business enterprise, the balance-sheet reflective the assets, liabilities, and capital as on a piece of certain information and the income statement showing the results of operations throughout a certain period”.
Financial statements usually include 2 vital statements:
- The earnings statement or profit and loss account.
- Balance sheet or the position statement.
Apart from that, the business also prepares a number of the other parts of statements that are very helpful to the internal purpose such as:
- Statement of changes in owner’s equity.
- Statement of changes in financial position.
The income statement is also called profit and loss account, which reflects the operational position of the firm during a particular period. Normally it consists of one accounting year. It determines the complete operational performance of the priority like total revenue generated and expenses incurred for earning that revenue.
Income statement helps to determine the gross profit and net profit of the priority. Gross profit is determined by the preparation of trading or manufacturing a/c and net profit is determined by the preparation of profit and loss account.
The position statement is also called a balance sheet, which reflects the financial position of the firm at the end of the financial year.
The position statement helps to ascertain and understand the total assets, liabilities, and capital of the firm. One can understand the strength and weaknesses of the concern with the help of the position statement.
Statement of Changes in Owner’s Equity
It is also called a statement of retained earnings. This statement provides info about the deviations or position of owner’s equity in the company. How the retained earnings are hired in the business concern. Nowadays, the preparation of this statement is not popular and nobody is going to prepare the separate statement of changes in owner’s equity.
Statement of Changes in Financial Position
This statement provides info regarding the changes or position of owner’s equity within the company. How the retained earnings are utilized within the business. A statement of changes in financial position helps to understand the changes in financial position from one period to another period.
Statement of changes in financial position involves 2 vital areas like fund flow statement that involves the changes in working capital position and cash flow statement that involves the changes in cash position.
TYPES OF FINANCIAL STATEMENT ANALYSIS
Analysis of Financial Statement is additionally necessary to understand the financial positions throughout a selected period. consistent with Myres, “Financial statement analysis is essentially a study of the connection among the various financial factors in a business as disclosed by one set of statements and a study of the trend of those factors as shown in a series of statements”.
Analysis of financial statements may be broadly classified into two important types on the basis of material used and methods of operations
1. Based on Material Used
Based on the material used, financial statement analysis could also be classified into 2 major sorts such as External analysis and internal analysis.
A. External Analysis
Outsiders of the business concern do normally external analyses but they are indirectly involved in business concerns such as investors, creditors, government organizations and other credit agencies. External analysis is incredibly a lot of help to understand the financial and operational position of the business. The external analysis mainly depends on the published financial statement of the concern. This analysis provides only restricted info regarding the business concern.
B. Internal Analysis
The company itself does disclose a number of precious info to the business concern in this kind of analysis. This analysis is employed to understand the operational performances of every and each department and unit of the business. The internal analysis helps to take decisions regarding achieving the goals of the business concern.
2. Based on Method of Operation
Based on the strategies of operation, financial statement analysis may be classified into 2 major kinds such as horizontal analysis and vertical analysis.
A. Horizontal Analysis
Under the horizontal analysis, financial statements are compared with many years and based on that, a firm might make judgments. Normally, the current year’s figures are compared with the base year (base year is considered as 100) and how the financial information is changed from one year to another. This analysis is also known as dynamic analysis.
B. Vertical Analysis
Under the vertical analysis, financial statements measure the quantities relationship of the assorted items within the financial statement on a selected period. It is also called static analysis, because, this analysis helps to determine the relationship with various items appeared in the financial statement. For example, a sale is assumed as 100 and other items are converted into sales figures.
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