Financial Analysis: An Introduction To Financial Statement Analysis

Financial Statement Analysis: An Introduction

The primary aim of this section of the report is to illustrate, interpret and evaluate the principle methods of analyzing a company’s accounts. Financial Statement Analysis is the process that involves assessing a company’s financial statements to indicate its performance, financial health and future prospects. The four financial statements used are income statement, balance sheet, statement of cash flows and statement of changes owners’ equity. Financial statement analysis is performed by both internal and external members of a firm. This report focusses on external users. The direct interest external users include investors, owners and creditors while the indirect interest external users include

Its main fortes is that it can be comprehended and communicated easily. Trend analysis simplifies the complex developments in the financial statement items. It forecasts Key business insights on risks and financial health of the organization by calculating changes in revenue, cash and other financial statement items. It predicts the future prospects of the firm by scrutinizing past trends. It helps the management to formulate future plans Various national economic statistics, such as gross domestic product and the amount spent to replace productive capacity, are derived by combining absolute amounts reported by businesses. It is the best tool for intra firm analysis.

WEAKNESS:

Horizontal analysis can show distortions in the historical trends but it does not give a true portrait of the underlying drift. In circumstances of changes in the macro environment like economic slowdown can distort a normal business line but other vagaries such as stock loss, corruption in the company are more refined. Trend analysis is useful to only a narrow range of users. Creditors, government bodies rely on more accurate and detailed information not provided by horizontal

Planning, co-ordination, control and communications. It helps the management to formulate future plans

• The ratios are examined over time and the financial data obtained from them can be used to make intra firm analysis, inter firm analysis- comparisons with competitors and industry average comparison.

• It has wide range of information for all types of users.

LIMITATIONS:

• The ratios are based on financial statements. These financial statements have certain limitations. The financial statement information is based on accounting conventions and concepts that are highly based on personal judgment. The financial statements do not cover non-financial information.

• Macro environment conditions such as market conditions, poor management, and economic changes are ignored.

• Just like those of horizontal analysis, the price level changes are not considered in ratio analysis.

• There are no standard practices or norms for these ratios. Different people can interpret it in different ways

• The ratios provide a glimpse of past but no reliable information of future