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    Financial Statement Analysis 12th

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    Rohit
    Financial statement analysis (FSA) is the systematic process of analyzing a company's financial statements to assess its performance and financial position. [1] The objectives of FSA include measuring profitability, financial strength, efficiency, and short- and long-term solvency. [2] There are two main types of FSA: horizontal analysis compares financial data over multiple years, while vertical analysis examines the relationship between line items for a single period. [3] Parties interested in FSA include investors, management, employees, suppliers, lenders, government agencies, and researchers. [4] Key tools used in FSA are comparative financial statements, common size statements, ratio analysis, and cash flow statements.

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    Financial Statement Analysis 12th

    Uploaded by

    Rohit
    102 views2 pages
    Financial statement analysis (FSA) is the systematic process of analyzing a company's financial statements to assess its performance and financial position. [1] The objectives of FSA include measuring profitability, financial strength, efficiency, and short- and long-term solvency. [2] There are two main types of FSA: horizontal analysis compares financial data over multiple years, while vertical analysis examines the relationship between line items for a single period. [3] Parties interested in FSA include investors, management, employees, suppliers, lenders, government agencies, and researchers. [4] Key tools used in FSA are comparative financial statements, common size statements, ratio analysis, and cash flow statements.

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    Financial statement analysis (FSA) is the systematic process of analyzing a company's financial statements to assess its performance and financial position. [1] The objectives of FSA include measuring profitability, financial strength, efficiency, and short- and long-term solvency. [2] There are two main types of FSA: horizontal analysis compares financial data over multiple years, while vertical analysis examines the relationship between line items for a single period. [3] Parties interested in FSA include investors, management, employees, suppliers, lenders, government agencies, and researchers. [4] Key tools used in FSA are comparative financial statements, common size statements, ratio analysis, and cash flow statements.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    102 views2 pages

    Financial Statement Analysis 12th

    Uploaded by

    Rohit
    Financial statement analysis (FSA) is the systematic process of analyzing a company's financial statements to assess its performance and financial position. [1] The objectives of FSA include measuring profitability, financial strength, efficiency, and short- and long-term solvency. [2] There are two main types of FSA: horizontal analysis compares financial data over multiple years, while vertical analysis examines the relationship between line items for a single period. [3] Parties interested in FSA include investors, management, employees, suppliers, lenders, government agencies, and researchers. [4] Key tools used in FSA are comparative financial statements, common size statements, ratio analysis, and cash flow statements.

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    © All Rights Reserved
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    of 2

    ICS To be or not to be

    Financial Statement Analysis


    FSA is a systematic process of studying the relationship among the various financial factors contained in
    the financial statement to have a better understanding of the working and the financial position of a
    business.

    It basically refers to the study of data contained in asset of financial statements, viz income statement
    and positional statements.

    Objectives

    1. To measure the profitability or earning capacity of the business.


    2. To measure the financial strength of the business [security analysis]
    3. To make comparative study with in the firm (intra-firm) and with other firms (interfirm).
    4. To judge the efficiency of management [portfolio management]
    5. To provide useful information’s to the management
    6. To find out the capability for payment of interest, dividend etc. [dividend decision]
    7. To measure the short-term and long-term solvency of the business. [debt analysis]

    Type of FSA

    There are two main approaches for the analysis of financial statements.

    1. Horizontal Analysis/ Dynamic/ Time series/ Intra-Firm comparision:


     in this type of analysis, figure in the financial statements for two or more years are compared and analysed.
     It helps in knowing the trends of the business over a period of time.
     It is also known as Time series analysis or Dynamic Analysis.
     Comparative statements and Cash flow statements are example of horizontal analysis.
     This analysis provides information in absolute and percentage terms.
    2. Vertical Analysis/ Static/ Cross Sectional/ Inter-firm Comparison:
     in this type of analysis, figures in the financial statement for a single year are analysed.
     It involves the study of relationship between various items of balance sheet or statement of profit and loss
    of a single year or period.
     It is also known as Static Analysis.
     Common Size Statement and Raito analysis relating to a particular accounting period are examples of this
    type of analysis.
     This analysis provides information in percentage out of 100 only.

    Uses of FSA

    1. Security analysis: it helps the investors to know whether the firm is fulfilling their expectations with regard
    to payment of dividend, capital appreciation and security of money.
    2. Credit analysis: when a firm offers credit to a new customer or a dealer, such analysis helps in determining
    whether to extend credit or not.
    3. Debt analysis: it helps in determining the borrowing capacity of a prospective borrower.
    4. Dividend analysis: it helps the firm in determining the rate of dividend, how much portion of earnings to be
    distributed and how much to be retained.
    5. General business analysis.

    1
    ICS To be or not to be

    Parties interested in FSA

    Parties Areas of Interest Explanation


    1. Investors / owners / i. Profitability Want to know the earning capacity of
    Shareholders ii. Financial position business and safety of their investment.
    iii. Future prospectus of business
    2. Management i. Short/long term solvency Help them in decision making as well as in
    ii. Liability of the concern controlling and self-evaluation.
    iii. Profitability in relation to
    turnover and investment
    3.employees / labour union i. Profitability For negotiating the wages/salaries/bonus.
    ii. Financial position of the
    concern.
    4. Suppliers / Creditors i. Profitability To judges the present and future ability of
    ii. Short-term solvency the company to meet its obligations.
    5.Lenders/ Bankers/ Financial i. Profitability They are interested in ensuring regular
    Institutions ii. Financial position payment of interest and repayment of
    iii. Short/long term solvency principal amount on scheduled dates.
    6.government and agencies i. Profitability Help in formulating various policies.
    ii. Financial position Help in taking decisions regarding taxations
    iii. Growth and price regulations.
    iv. Estimating of national income
    7. Researchers i. Profitability Future capacity of company
    ii. Financial position
    iii. Growth
    iv. Future prospects

    Limitation of FSA

    1. Based on basic financial statement which themselves suffer from certain limitation.
    2. Ignores changes in price level.
    3. Affected by the personal ability and bias of the analyst. [not free from bias]
    4. Lack of qualitative analysis as only those transactions and events are recoded which can be measured in terms
    of money.
    5. When different accounting policies are followed by the two frims then comparision b/w their financial
    statement becomes unreliable.
    6. Analysis of single year’s financial statement have limited use.
    7. Also affected by the window dressing.
    8. Historical nature of financial statements.
    9. Results may have different interpretations.

    Tools or Techniques of FSA

    1. Comparative Financial statement


    2. Common size Statement
    3. Ratio Analysis
    4. Cash Flow Statement

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