A financial statement (or financial report) is a formal record of the financial activities of abusiness, person, or other entity. For a business enterprise, all the relevant financialinformation, presented in a structured manner and in a form easy to understand, arecalled the financial statements. They typically include four basic financial statements:
Statement of retained earnings
Statement of cash flows1. Balance sheet: also referred to as statement of financial position or condition, reportson a company's assets, liabilities, and Ownership equity at a given point in time.2. Income statement: also referred to as Profit and Loss statement (or a "P&L"), reportson a company's income, expenses, and profits over a period of time. Profit & Loss accountprovide information on the operation of the enterprise. These include sale and the variousexpenses incurred during the processing state.3. Statement of retained earnings: explains the changes in a company's retained earningsover the reporting period.4. Statement of cash flows: reports on a company's cash flow activities, particularly itsoperating, investing and financing activities.For large corporations, these statements are often complex and may include an extensiveset of notes to the financial statements and management discussion and analysis. Thenotes typically describe each item on the balance sheet, income statement and cash flowstatement in further detail. Notes to financial statements are considered an integral partof the financial statements.Financial analysis refers to an assessment of the viability, stability and profitability of abusiness, sub-business or project. It is performed by professionals who prepare reportsusing ratios that make use of information taken from financial statements and otherreports. These figures just give the position of asset or the profit or loss of that companyin a particular year. It does not specify whether the company is growing or not, how muchprofitable the company is now as compared to the previous years etc. To know about thecomparative analysis of these financial statements are to be done. These reports areusually presented to top management as one of their bases in making business decisions.Based on these reports, management may: Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipment in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital; Make decisions regarding investing or lending capital; Other decisions that allow management to make an informed selection on variousalternatives in the conduct of its business.There are various methods to understand and interpret the financial statements. Theyare:I.
Break Even AnalysisIII.
Calculation of LeverageIV.
EBIT EPS Analysis