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FINANCIAL STATEMENT ANALYSIS

Presented by: Group 1


1. Rubab Zahra
2. Muhammad Abdullah
3. Faisal UL Rahman
4. Abdullah Arshad
5. Basit Saeed
DEFINITION

• “Financial Statement Analysis 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”
• Financial Statement Analysis is concerned with the process of determining financial strength and
weakness
• It establishes relationship between various accounts in the financial statements

Analysis and Interpretation


• Classification of data given in the financial statements
• Explaining the meaning and significance of relationship between various factors

• Comparison of these relationships.

• Make predictions about an organization as an aid in making decisions.


TYPES OF FINANCIAL STATEMENT
ANALYSIS

1. According to Material Use


Internal Analysis
o Analysis by the owners, management and employees
o Carried out to find the strength and weakness of the company
o To find the growth rate of the company

External Analysis
o Analysis done by the external parties by investors, financial analysts, lenders,
and general public
o The purpose is to know the financial and operating performance
o To know about the credit worthiness
2. According to Modus Operandi
• Horizontal Analysis

It explains whether there is a growth over a period of years

This analysis may be conducted for two years or any number of

Years
• Vertical Analysis:

Analysis of Financial Statements for one period only

Example: Current Assets and Current Liabilities, Working Capital etc..


Procedure for Financial Statement Analysis
• The purpose for which the analysis is conducted is determined well in advance
• On the basis of the purpose the items should be identified
• If the analysis is carried out for income statement, the items should be clearly
arranged on basis of sales
• If the analysis is carried out for balance sheet, the items should be classified as fixed
assets and current assets for asset side and current liabilities, debt and equity for
liability side
• After classification of the items in the Income statements and Balance sheet
increase or decrease of each items for one period to another should be calculated
• Comparison on basis of percentage of sales for income statement and total assets
and liabilities for balance sheet
• Interpretation after the analysis to provide information for managerial decision
Methods of Financial Statement Analysis

• Comparative Balance Sheet


• Comparative Income Statement
• Common-size Statements
• Cash Flow Analysis
• Trend Analysis
• Fund Flow Analysis
• Ratio Analysis
Comparative Balance Sheet

• It displays a company's financial position at two or more distinct points, typically


from one accounting period to another
• In this statement, assets are separately analyzed as current assets and fixed assets

• The liabilities are analyzed as current liabilities, Debts (long term loans) and Equity
(Share Capital and Reserves
Comparative Income Statement

A comparative income statement combines information from several income


statements as columns in a single statement. It helps you identify financial trends and
measure performance over time. You can compare different accounting periods from
your records. Or, you can compare your income statement to other companies.

• A comparative income statement helps you with many accounting tasks. Here are
just a few ways the statement benefits your business:
• Compare current amounts to past years
• See if performance has improved over time
• Figure out patterns in high and low sales months
• Calculate percentages of changes
• Show how your company compares to others when securing outside capital
Common Size Statements

• The statement which reports the figures as a percentage of some common


base are called common size statements
• Common Size statements are prepared by common size income statement
and common-size balance sheet
• Sales is taken as the common base for common size income statement

• In common size balance sheet, total assets or liabilities are taken as the
common base
Cash Flow Analysis

Cash flow analysis is the process of examining the amount of cash that flows
into a company and the amount of cash that flows out to determine the net
amount of cash that is held. Once it's known whether cash flow is positive or
negative, company management can look for opportunities to alter it to
improve the outlook for the business.

Types of Cash Flows


1. cash flows from operations
2. cash flows from investing
3. cash flows from financing.
Trend Analysis

• Trend analysis is a strategy used in making future predictions based on


historical data. It allows to compare data points over a given period of
time and identify uptrends, downtrends, and stagnation.
Types of trend analysis
1. Upward trend (bull market)
2. Downward trend (bear market)
3. Horizontal trend
Fund Flow Analysis
A fund flow analysis is a financial document which you can create and use to
analyze and understand the financial position of your business. More
importantly, it sets out where funds are coming into your business and how
they are being used.
Why use a fund flow analysis?
You may look at the balance sheet for your business and decide that it
includes all of the detail you need. The key flaw of a balance sheet and the
reason why a fund flow analysis is more useful is that a balance sheet only
provides a frozen snapshot: it details current liabilities, equity and assets, but
doesn’t include information on the source of the funds and the uses to which
those funds were put.
Ratio Analysis

Ratio analysis is a quantitative method of gaining insight into a company's liquidity,


operational efficiency, and profitability by studying its financial statements such as the
balance sheet and income statement.
• Ratio analysis can mark how a company is performing over time, while comparing a
company to another within the same industry or sector.
• Ratio analysis may also be required by external parties that set benchmarks often tied
to risk.

Types of Ratio Analysis


1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Efficiency Ratios
5. Coverage Ratios
6. Market Prospect Ratios

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