Financial Statement Analysis Essay

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Recommended: Chapter4 Analysis Of Financial Statements

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT

The various tools of financial statement are used for decision-making process. The financial statement becomes a tool for future planning and forecasting. The analysis of these statements involves their division according to similar groups and arranged in desired form. The interpretation involves the explanation of financial facts in a simplifiers manner.

Objectives of Analysis and Interpretation:

The users of financial statement have definite objectives to analysis and interpret .Therefore; there are variations in the objectives of interpretation by various classes of people. However, there are certain specific and common objectives which are listed below:

To interpret the profitability …show more content…

The process of analysis is classified on the basis of information used and ‘modus operandi’ of analysis. The classification is as under:

Financial statement analysis

On the basis of information on basis of ‘modus operandi’ of

Used: analysis:

(a) External analysis (a) Horizontal analysis

(b) Internal analysis (b) Vertical analysis

LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a very important device but it has Certain limitation which are to be kept in mind. Following are the limitations of financial statement analysis.

Based on past data:
The nature of financial statements is historical. Past cannot be the index of future estimation, forecasting, budgeting and planning.

Financial statement analysis cannot be a substitute for judgment :
Analysis is a tools which can be utilized usefully by an expert may lead to erroneous conclusion by unskilled analysis. Thus the result analysis cannot be considered as judgment or conclusion.

Reliability of figures:
The accuracy and reliability of analysis depends on reliability of figures derived from financial statement.

Different interpretation:
Result of the analysis may be interpreted differently by different …show more content…

Profit earning is considered essential for the survival of the business. There are two types of profitability ratios profit margin ratio and the rate of return ratios. Profit margin ratio shows the relationship between profit and sales.

Popular profit margin ratios are gross profit margin and net profit margin ratio. Rate of return ratio reflects between profit and investment. The important rates of return measures are rate of return on total assets and rate in equity.

EARNINGS RATIOS:

Earnings are income to the shareholders of the share invested by them. Hence the earning ratio will be useful to the investors to the value of the shares that is been holding by them

COMPARATIVE BALANCE SHEET:

The comparative balance sheet is helpful in analysing and evaluating the financial position of the firm over a period of years. The comparative balance sheet analyse is the study of the trend of the same items, group of items, and computed items in two or more balance sheet of the same business enterprise on different dates.

The changes in periodic balance sheet items reflect the conduct of a business. The changes can be observed by comparison of the balance sheet at the beginning and at the end of the period and these changes can help in forming an opinion about the progress of an

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