CHAPTER :-

NAME :-

ROLL NO. :-

REGD NO. :-

COLLEGE :-

EAMINATION :-

SIGNATURE :-

INTERNAL SIGN. EXTRENAL SIGN.

 : ABSTRACT :

The main purpose of this study is to

determine, forecast and evaluate the best
of economic conditions and company's
performance in the future. The other
purpose of this study is to analyze the
financial statement and than give
information for financial managers to
make through decisions about their
business. The financial statement applies
tools, analytical techniques and required
methods for business analysis. It is a
diagnostic tool for evaluating financing
activities, investment activities and
operational activities as well as an
assessment tool for management
decisions and other business decisions.
The analysis of financial statements,
respectively the analysis of the financial
reports are used by managers,
shareholders, investors and all other
interested parties regarding the
company's state. Managers use financial
reports to see the situation in which the
company stands and then provide
information to shareholders, to see how
reasonable are the investments made in
the company.
 : CONTENTS :

1.1. Introduction

1.2. Meaning of Financial Statement

Analysis

1.3. Importance of the Analysis

1.3.1 Importance of Financial

Statement Analysis

1.4. Limitations of Financial Statement

Analysis

1.5. Types of Financial Statement Analysis

1.6.Conclusion
1.1.Introduction:-
It has already been
discussed earlier in Chapter -2 that
financial statements present the relevant
financial information relating to
expenses, incomes, assets, liabilities,
taxes, equities, reserves and surpluses,
dividend, amount of inflow and outflow
of cash of business unit in absolute
figures. They practically do not help to
take immediate steps or decisions about
the financial affairs. Although financial
statements are prepared primarily for
decision making, but these statements are
not an end in themselves. More over
financial statements are not so
meaningful to the external users because
they require information relating to
liquidity position, solvency position,
profitability position of a company.
Meaningful conclusion can be drawn and
will be much more helpful for taking
financial decisions if the absolute figures
presented in financial statements be
analyzed by the application of various
techniques. These techniques are designed
as per the requirements of different users.
1.2. Meaning of financial statement
analysis:-

Financial statement analysis

refers to the study of relationship among
various financial factors of a business
which are disclosed in financial
statements. it is the process of
determining financial strength and
weaknesses of a establishing the
relationship between the different items
presented in Bala Statement of Profit and
Loss. The analysis establishes the
relationship between various
factors disclosed in a single set of
statement and also study the trend of
these factors by

comparing the financial statements of

different periods..
Defination:-

In the words of Metcalf and Titrad,

"Analyzing financial statements is a
process of evaluating the relationship
between component parts of a financial
statement to obtain a better
understanding of a firm's position and
performance".

According to Myers," Financial statement

analysis is largely a study of relationship
among the various financial factors in a
business as disclosed by a single set of
statements, and a study of the trend of
these factors as shown in a series of
statements."
definitions it is clear that,
financial statement analysis is the process
of reviewing and analyzing a company's
financial statements to make better
economic decisions. It is the study of
relationship between different
components of financial statements to
have a better understanding about the
position and performance of one business.
It help the users to take right economic
and investment decisions. With the help
of this analysis, analysts/managers assess
the financial health (i.e. strength and
weakness) of an enterprise.
1.3.Importance of the Analysis:-

Analysis of
financial statements helps to take various
decisions at various places of an
enterprise. In a competitive market
financial statement analysis facilitates in
forecasting for the future and preparing
the budgets. In the light of its usefulness
and relevance the objectives and
importance of financial statement analysis
are discussed below:

1.3.1 Importance of financial statement

analysis:-

Financial statement analysis is

an important means of assessing past
performance of an enterprise, thereby
gaining an understanding of the financial
health and enabling more effective
decision making. Past performance is
often good indicator of future
performance. Since decision makers are
always concerned with the future, they
always emphasise upon the analysis of
financial statements. The importance of
the financial statement analysis from the
view point of its various stakeholders are
discussed below:

(a) It provides meaningful information to

the share holders to take decisions
whether to hold company's share or to
sell them out. (b) It helps the
management of a business concern for
formulating plans and policies for the
future.
(c) It supplies relevant information to the
bankers and other financiers in taking
decisions as to whether to extend their
loans to the company.

(d) It becomes highly beneficial for the

prospective investors in taking right
investment decisions.

(e) It enables the government to collect

the taxes and duties due from the
business houses.

(f) It facilitates the regulatory bodies/

authorities to determine the legality of
company's fiscal decisions and following
of correct accounting procedures. (g) It
helps in determining the liquidity position
of a company and ability to pay off its
short-term obligations.

(h) It identifies the reasons for change in

profitability and financial position of a
firm over different periods.

(i) It shows the profit margin and

determines the ability to withstand in
competition and adverse conditions.

(i) It supplies valuable information to

trade associations which render various
suppor services to member units.

(k) It facilities the researchers to compile

the performances of different firms to
prepare .

1.4 .Limitation of financial statement

analysis:-
Despite the several uses and importance
of financial statement analysis it is not
free from criticisms on different points.
Since the analysis is based on the
information provided by the financial
statements, it also suffers from the same
inherent limitations of financial
statements as discussed in previous
chapter. Financial information might be
window-dressed which would lead to
wrong conclusions. The main limitation
of financial statement analysis are as
follows:

(a) Financial Accounting is historical in

nature and therefore, the financial
statements are based on past data which
does not consider price level changes.
Hence the conclusions based on such data
may not be much meaningful and
significant for future decisions.

(b) Use of different methods for valuation

of inventory and charging of depreciation
give different results for an organization
for different periods, and for another but
similar organization, which makes
comparison meaning less.

(c) In case of inter- firm comparison, it

may be stated that no two firms are alike
in age, capital investment, technology
adopted, size and production capacity.
Hence,
comparison may not be relevant.

(d) Changes in accounting procedure by a

business unit may often make the
financial analysis useless.

(e) Analysis and interpretation of financial

statements involve judgment of analysts
and analysis may have different opinions
for the same accounting figure.

(f) Since financial statements are normally

prepared at the end of one accounting
period its analysis is also done only
thereafter. But a dynamic market needs
the analysis at a regular time interval.

(g) Financial statement analysis fails to

provide qualitative information such as
customers' satisfaction management skill,
labour relation,etc.

(h) Conclusions from the analysis are not

sure indication of bad and good
management. They merely convey certain
observations upon which final decisions
should not be taken without further
investigation.

1.5. Types of financial statement analysis:-

Financial Statements are primarily

prepared for decision-making of an
enterprise. These statements are not end
in themselves. The financial information
relating to expenses, incomes, assets,
liabilities equity, reserves, taxes,
dividends etc. which are presented in
absolute figures may not help the
management to take immediate steps or
decisions about the economic affairs.
The analysis made by its different users
for different purposes. Financial
statement analysis can be classified into
different categories on the basis of (a)
types of users (b) method of operation as
presented below:

TYPES OF FINANCIAL STATEMENT

ANALYSIS

(a)On the basis of types of users

1.InternalAnalysis

2.ExternalAnalysis

(b)on the basis of method of the

operation

1.Dynamic/Horizontal Analysis

2.Static /Vertical Analysis

(a) the basis of the need of the users this

can be divided as (i) Internal Analysis
(ii) External Analysis..

(i) Internal Analysis :

This analysis is done by the management

and persons who have access to the
accounting records of a concern.
Management of a company desires to
know its financial health and operational
efficiency. Executives and employees of
the organisation as well as the
Government agencies conduct the
analysis because of their access to books
of accounts.
(ii) External Analysis:

The analysis conducted

by the persons who do not have access to
the books of accounts of the business is
known as external analysis. They are the
outsiders, viz. creditors, bankers,
investors, general public, etc. They do not
have also any right to inspect the books
of accounts, method of accounting, etc.

(b) On the basis of method of operation

the financial statements are analysed as
(i) Dynamic or Horizontal Analysis
(ii) Static or Vertical Analysis.
Analysis.

(i)Dynamic or horizontal Analysis:

This analysis
of financial statement refers to
comparison of financial information of a
company for several years. The financial
data of various years are presented
horizontally over a number of columns
and compared with a base year or
standard year. Since this analysis is based
on the data of several years and is able to
show a trend of the company's
performance, it is called dynamic analysis.

(ii)Static or vertical Analysis:-

Vertical analysis refers to the study of

relationship between various items
contained in the financial statements of
one accounting period. This analysis
considers financial figures of current year
without recognizing the past and future
data and hence called static analysis.
Practically, it presents the structural
relationship of different items contained
in the financial statements.

1.6. Conclusion:-

The Primary objective of the financial

statement analysis is to provide a clear
picture and understanding about the
financial position and profitability of a
concern. It is objectives of financial
statement analysis are:

(a) To ascertain the short-term liquidity

position of the business concern.

(b) To evaluate the long-term solvency

position of an enterprise.

(c) To assess the earning capacity

(profitability) of one business unit for the
purpose of inter- firm comparison.

(d) To estimate the future profit of a firm

by studying the trend of profit over the
years.

(e) To ascertain the operational efficiency

of the employees and managers.

(f) To evaluate the efficiency of the

business as regards the proper utilisation
of financial and other resources.

(g) To determine the working capital

position and its effective utilization.
(h) To indentify various economic as well
as non-economic factors and their effect
on the performance of the firm.

(i) To make a comparative study of

different factors and components for a
particular

period and over a period of time. (i) To

measure the growth and development of
the business.

(k) To facilitate the forecasting for the

future.

(1) To help in formulating a sound

financial policy and its proper

The main objective of the financial

statement analysis for any company is to
provide the necessary information
required by the financial statement users
for informative decision making, assessing
the current and past performance of the
company, predicting the success or failure
of the business, etc.
 '' References ''

BUREAU'S FUNDAMENTALS OF
MANAGEMENT ACCOUNTING

Written by:-

Dr. Upendra Nath Sahu

SLO-Cum Deputy Secretary to Govt.Deptt.

of H.E., Govt. of Odisha, Bhubaneswar

Dr. Sunil Kumar Jena

Sushilabati Govt. Women's

College,Rourkela

Dr. Banamali Panda

Assistant Professor of Commerce B.J.B.

Autonomous College,Bhubaneswar

Dr. Ajoy Mohanty Retired Principal

Retired Associate Professor of Commerce
Khallikote University, Berhampur

Reviewed By:-

Prof (Dr.) Gunanidhi Sahu

Former Director, Higher Education,

Odisha