Importance Of Financial Statement Analysis

Managers, firm owners, and investors keep track of their firm performance. Financial statements are used to keep track of the strengths and weaknesses of firms. The three major financial statements used are income statements, balance sheets, and statement of cash flows. Financial ratios are also used to measure where a company stands within itself and in its industry norms. This analysis is called Financial Statement Analysis. Financial Statement Analysis gives understanding to a firm’s financial position at a given point of time and predictions for the future.

Financial Statements

Financial statements include information that can help a firm or business know the stability of their organization. Financial statements

The statement of cash flows reports the cash generated during a given period of time. It compares the cash from operating activities to net income. Overall statement of cash flows identifies the cash flowing in and out of the company. If the company is making more cash than it is spending, it is apparent to be good for stockholder value. The three primary sections are: operating activities, investment activities, and financing activities. Operating activities include cash earned and used during normal business operations. These accounts include accounts payable, accounts receivable, and unearned revenues. Investment activities are the investment activities. These accounts would include all investments like sale of property, equipment, and land. Financing activities cover the company’s financing. This section could include bonds and s, stocks and dividend payments. These accounts are: capital equipment, paid-in capital account, stocks and retained

They are used to analyze trends in financial statements. Ratios are valuable to see the financial status of a firm. There are three basic categories used for ratios. Ratios can be used in trend analysis, also called timer series analysis. This analysis evaluates a firm’s performance over time. Cross-sectional analysis is another category. Firms uses this analysis to compare different firms at the exact point in time. The last category is industry comparative analysis. This category is used to compare the firm’s ratio to average ratios of other firms in that same industry. Using ratios help a firm evaluate their performance. The five major types of financial ratios are: liquidity ratios, asset management ratios, financial leverage ratios, profitability ratios, and market value ratios. These ratio can be used from information used in the firm’s income statement, balance sheet, and stock market. Ratio analysis give insight to a firm financial strengths and