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Every organization-large and small-has managers. Someone must be responsible for
making plans, organizing resources, directing personnel, and controlling operations.
Every where mangers carry out three major activities-planning, directing and motivating,
and controlling. Ê

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alanning involves selecting a course of action and specifying how the action will be
implemented. The first step in planning is to identify the alternatives and then to select
from among the alternatives the one that does the best job of furthering the
organization's objectives. While making choices management must balance the
opportunity against the demands made on the companies resources. Ê

The plans of management are often expressed formally in budgets, and the term
budgeting is applied to generally describe the planning process. Budgets are usually
prepared under the direction of controller, who is the manager in charge of the
accounting department. Typically, budgets are prepared annually and represent
management's plans in specific, quantitative terms.Ê








Ôn addition to planning for the future, managers must oversee day -to-day activities and
keep the organization functioning smoothly. This requires the ability to motivate and
affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer
questions, solve on-the-spot problems, and make many small decisions that affect
customers and employees. Ôn effect, directing is that part of the manager's work that
deals with the routine and the here and now. Managerial accounting data, such as daily
sales reports are often used in this type of day-to-day decision making.Ê

 
 

Ôn carrying out the control function, managers seek to ensure that the plan is being
followed. Feedback, which signals operations are on track, is the key to effective control.
Ôn sophisticated organizations, this feedback is provided by detailed reports of various
types. One of these reports, which compares budgeted to actual results, is called a
performance report. aerformance report suggest where operations are not proceeding as
planned and where some parts of the organization may require additional attention. Ê

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The work of management can be summarized in a model. The model, which depicts the
planning and control cycle, illustrates the smooth flow of management activities from
planning through directing and motivating, controlling, and then back to planning again.
all of these activities involve decision making. So it is depicted as the hub around which
the activities revolve.Ê

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  Ê

Ê arepare and interpret financial statements in comparative and common-size form.ÊÊ


Ê ompute and interpret financial ratios that would be most useful to a common
stock holder.ÊÊ

Ê ompute and interpret financial ratios that would be most useful to a short -term
creditor ÊÊ

Ê ompute and interpret financial ratios that would be most useful to long -term
creditors.ÊÊ


 



  
 








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  is defined as the process of identifying financial
strengths and weaknesses of the firm by properly establishing relationship between the
items of the balance sheet and the profit and loss account.Ê

There are various methods or techniques that are used in analyzing financial statements,
such as comparative statements, schedule of changes in working capital, common size
percentages, funds analysis, trend analysis, and ratios analysis.Ê

Financial statements are prepared to meet external reporting obligations and also for
decision making purposes. They play a dominant role in setting the framework of
managerial decisions. But the information provided in the financial statements is not an
end in itself as no meaningful conclusions can be drawn from these statements alone.
However, the information provided in the financial statements is of i mmense use in
making decisions through analysis and interpretation of financial statements. Ê

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Following are the most important tools and techniques of financial statement analysis: Ê

Œ Ê Horizontal and Vertical Analysis ÊÊ

Ê Datios Analysis Ê

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   Ê

omparison of two or more year's financial data is known as —  


  , or

trend analysis. ÿ
 

is facilitated by showing changes between years in
both dollar and percentage form. lick here to read full article.Ê

  

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Horizontal analysis of financial statements can also be carried out by computing  
 

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states several years' financial data in terms of a base
year. The base year equals 100%, with all other years stated in some percentage of this
base. lick here to read full article.Ê

- 


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  is the procedure of preparing and presenting common size
statements.      
   is one that shows the items appearing on it in
percentage form as well as in dollar form. Each item is stated as a percentage of some
total of which that item is a part. Key financial changes and trends can be highlighted by
the use of common size statements. lick here to read full article.Ê

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The ratios analysis is the most powerful tool of financial statement analysis.Datios
simply means one number expressed in terms of another. A ratio is a statistical yardstick
by means of which relationship between two or various figures can be compared or
measured. Datios can be found out by dividing one number by another number. Datios
show how one number is related to another. lick here to read full article.Ê

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arofitability ratios measure the results of business operations or overall performance and
effectiveness of the firm. Some of the most popular profitability ratios are as under: Ê

@Ê ëross profit ratioÊÊ

@Ê cet profit ratio ÊÊ
@Ê Operating ratio ÊÊ
@Ê Expense ratio ÊÊ
@Ê Deturn on shareholders investment or net worth ÊÊ
@Ê Deturn on equity capital Ê
@Ê Deturn on capital employed (DOE) Datio ÊÊ
@Ê ividend yield ratio ÊÊ
@Ê ividend payout ratio ÊÊ
@Ê Earnings aer Share (EaS) Datio ÊÊ
@Ê arice earning ratioÊÊ

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uiquidity ratios measure the short term solvency of financial position of a firm. These
ratios are calculated to comment upon the short term paying capacity of a concern or
the firm's ability to meet its current obligations. Following are the most important
liquidity ratios. Ê

@Ê urrent ratio ÊÊ
@Ê uiquid / Acid test / Quick ratio ÊÊ

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Activity ratios are calculated to measure the efficiency with which the resources of a firm
have been employed. These ratios are also called turnover ratios because they indicate
the speed with which assets are being turned over into sales. Following are the most
important activity ratios: Ê

@Ê Ônventory / Stock turnover ratio ÊÊ

@Ê ebtors / Deceivables turnover ratio ÊÊ
@Ê Average collection periodÊÊ
@Ê reditors / aayable turnover ratio ÊÊ
@Ê Working capital turnover ratio ÊÊ
@Ê Fixed assets turnover ratioÊÊ
 @Ê Over and under tradingÊÊ

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uong term solvency or leverage ratios convey a firm's ability to meet the interest costs
and payment schedules of its long term obligations. Following are some of the most
important long term solvency or leverage ratios.Ê

@Ê ebt-to-equity ratioÊÊ
@Ê aroprietary or Equity ratio ÊÊ
@Ê Datio of fixed assets to shareholders funds ÊÊ
@Ê Datio of current assets to shareholders funds ÊÊ
@Ê Ônterest coverage ratioÊÊ
@Ê apital gearing ratio ÊÊ
@Ê Over and under capitalization ÊÊ

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A collection of financial ratios formulas which can help you calculate financial ratios in a
given problem. lick hereÊ

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   ÊÊ

Although financial statement analysis is highly useful tool, it has two limitations. These
two limitations involve the comparability of financial data between companies and the
need to look beyond ratios. lick here to read full article.ÊÊ




 
 






 

There are various


 of financial statements analysis. The major    is

that the investors get enough idea to decide about the investments of their funds in th e
specific company. Secondly, regulatory authorities like Ônternational Accounting
Standards Board can ensure whether the company is following accounting standards or
not. Thirdly, financial statements analysis can help the government agencies to analyze
the taxation due to the company. Moreover, company can analyze its own performance
over the period of time through financial statements analysis.

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