Financial Statement Analysis

3543 words - 15 pages

FINANCIAL MANAGEMENT

Financial Statement Analysis
The process of determining financial

strengths and weaknesses of a firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data.

Financial Statement Analysis
Metcalf and Titard:It is a process of evaluating the relationship between component parts of a financial statement to obtain a better under standing of a firm’s position and performance.

Financial Statement Analysis
Purpose:To diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm.

Types of Financial Analysis
On the basis ...view middle of the document...

– Dynamic Analysis.

Types of Financial Analysis
On the basis of modus operandi : Horizontal analysis.
• Dynamic Analysis. • Tools employed are:
Comparative statements. Trend percentages.

Types of Financial Analysis
On the basis of modus operandi : Vertical analysis.
• The study of relationship of the various items in the financial statements of one accounting period. Figures from financial statements of a year are compared with a base selected from the same year’s statement. – Static Analysis.

Types of Financial Analysis
On the basis of modus operandi : Vertical analysis.
• Static Analysis. • Tools employed are:
Common-size Financial statements. Financial ratios.

Procedure for Financial Statement Analysis
Selection Classification Interpretation

Procedure for Financial Statement Analysis
Selection
• selection of information necessary for analysis of financial statements.

Classification
• the methodical classification of the data.

Interpretation
• drawing of conclusions. • explaining the meaning and significance of the data.

Procedure adopted for Analysis and Interpretation of Financial Statement The analyst should know the plans and policies of the management so that he may be able to find out whether these policies are properly executed or not.

Procedure adopted for Analysis and Interpretation of Financial Statement The extent of analysis should be determined. Then only the sphere of work can be decided.

Procedure adopted for Analysis and Interpretation of Financial Statement
The extent of analysis should be determined. Then only the sphere of work can be decided. For e.g. if the aim is to find out the earning capacity of the firm, then analysis of income statement is made. analysis is made. On the other hand, if financial position is to be studied Balance Sheet

Procedure adopted for Analysis and Interpretation of Financial Statement The data given in the financial statements should be reorganized and rearranged.

Procedure adopted for Analysis and Interpretation of Financial Statement
The data given in the financial statements should be reorganized and rearranged. Similar data is grouped under same are heads and down individual components broken

according to nature, ie. The data is reduced to standard form.

Procedure adopted for Analysis and Interpretation of Financial Statement A relationship is established among financial statements with the help of tools and techniques of analysis.

Procedure adopted for Analysis and Interpretation of Financial Statement
A relationship is established among

financial statements with the help of tools and techniques of analysis. For eg:Ratios, trends, comparative statements, common size statements, fund flow statements and cash flow statements.

Procedure adopted for Analysis and Interpretation of Financial Statement The information is interpreted in a simple and understandable way. The conclusions are drawn from interpretation and...

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