Financial statements are prepared for decision making. Financial analysis is the processes identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and profitand loss account. There are various methods or techniques used in analyzingfinancial statements, such as comparative statements, trend analysis, common sizestatements, and schedule of changes in working capital.Financial statement analysis is largely a study of relationship among variousfinancial factors in a business are disclosed by a single set of statements and thetrend of these factors are shown in a series of statements.The purpose of financial analysis is to diagnose the information contained infinancial statements so as to judge the profitability and financial soundness of thefirm. Financial statement analysis is an attempt to determine the significance andmeaning to the financial statements data so that forecast may be made of the futurefinancial position and performance.
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Broadly speaking there are three steps involved in the analysis of financialstatements. These are: