FINANCIAL MANAGEMENT
FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis - a method of
reviewing and analyzing a company’s
accounting reports in order to gauge its past,
present or projected future performance
- used by internal and external stakeholders
- the process of identifying financial strengths
and weaknesses of the firm by properly
establishing relationships between the items of
the balance sheet and the income
statement account.
FINANCIAL STATEMENTS - are a set of
documents that show your company’s financial
status at a specific point in time. They include
key data on what your company owns and
owes and how much money it has made and
spent.
GENERAL OBJECTIVES OF FINANCIAL
STATEMENT
- Providing information for economic decisions
- Providing information about financial position
- Providing information about performance of an
enterprise
- Providing information about changes in
financial position
BASIC FINANCIAL STATEMENTS
Statement of Financial Position - known as
“Balance Sheet”
- Provide information about the financial
condition, position and structure of the company
in terms of its assets, liabilities and the
difference between the two, which is the equity
or net worth
- Is a financial “snapshot” of your business at a
given date in time
Accounting Equation
Assets = Liabilities + Owner’s Equity
1. Assets = Liabilities + Owner’s Equity
2. Liabilities = Assets - Owners Equity
3. Owner’s Equity = Assets - Liability
A. Report Form (Formal Balance Sheet)
- The statement of financial position that can be
presented in vertical format known as the report
form, with the Asset section above the
Liabilities and Equities sections that, together,
balance it
- The statement of financial position can be
presented in vertical format
B. Account Form
- The entire statement of financial position is
normally presented in horizontal layout, with an
Assets page on the left, and a page for
Liabilities and Equities on the right.
Statement of Comprehensive Income
- reports on a company ' s performance over a
period of time and lists amounts of Revenues
(also known as Sales) and Expenses
A. Multi-Step Approach
- shows the various profitability stages from
gross profit, operating profit up to the net profit
which is essential in terms of cost control and
management.
B. Single-Step Approach
- presents the revenue, expenses, and
ultimately the profit and loss generated by a
business and reports using one equation
Statement of Changes in Equity
- shows all changes in owner's equity for a
period of time. The purpose of the statement of
changes in equity is to provide users with useful
information on how capital or funds of an entity
is utilized and used. Since it shows the
movements of equity and accumulated earnings
and losses, the users can depict on where the
company ' s equity came from and where did it
go
Statement of Stockholder’s Equity
- another name for the statement of shareholder
equity. This section of the balance sheet is also
known as a statement of shareholders’ equity or
a statement of owner’s equity. It gives
shareholders, investors or the company’s owner
a picture of how the business is performing, net
of all assets and liabilities
Statement of Cash Flows
- is a financial statement that provides
aggregate data regarding all cash inflows a
company receives from its ongoing operations
and external investment sources. It also
includes all cash outflows that pay for business
activities and investment during a given period
 USES OF FINANCIAL STATEMENT
ANALYSIS
Security Analysis - useful for investors to
check dividend payment
Debt Analysis - used by firm to check
borrowing capacity of prospective borrower
Credit Analysis - useful for firm to decide on
extending credit
Dividend Decision - helps decide on the rate
of dividend
General Business Analysis - helps identify
key profit drivers and business risks
METHODS IN FINANCIAL STATEMENT
ANALYSIS
Comparative Financial Analysis - is an analysis
of financial statements at different periods of time.
This statement helps to understand the
comparative position of financial and operational
performance at different periods of time.
TWO MAJOR PARTS
1. Comparative Balance Sheet Analysis -
concentrates only the balance sheet of the
concern at different periods of time. Under this
analysis the balance sheets are composed with
previous year’s figures or one-year balance
sheet figures compared with other years. This
analysis may be horizontal or vertical.
2. Comparative Income Statement Analysis -
concentrates only the income statement of the
concern at different periods of time. Under this
analysis, only profit and loss account is taken to
compare with previous year’s figure or compare
within the statement. This analysis may be
horizontal or vertical.
Trend Analysis - helps to understand the trend
relationship with various items, which appear in
the financial statements. The financial
statements may be analyzed by computing
trends of a series of information. It involves the
percentage relationship of each and every item
of the statement with the common value of
100%. In this analysis, only major items are
considered for calculating the trend package.
Common Size Analysis - a method in which
figures reported are converted into percentage
to some common base. In the balance sheet
the total assets figures is assumed to be 100
and all figures are expressed as a percentage
of this total. This is the simplest method of
financial statement analysis, which reflects the
relationship of each and every item with the
base value of 100%.
Funds Flow Statement - helps to understand
the changes in the financial position of a
business enterprise between the beginning and
ending financial statement dates.
Cash Flow Statement - a statement which
shows the sources of cash inflow and uses of
cash out-flow of the business concern during
a particular period of time. It is a statement
which involves only short-term financial position
of the business concern. Cash flow statement
provides a summary of operating, investment
and financing cash flows and reconciles them
with changes in its cash and cash equivalents.
FUNDS FLOW STATEMENT VS CASH FLOW
STATEMENT
Ratio Analysis - compares line-item data from
a company's financial statements to reveal
insights regarding profitability, liquidity,
operational efficiency, and solvency.
Types of Ratio Analysis
1. Liquidity Ratio - helps to understand the
liquidity in a business which is the potential
ability to meet current obligations. This ratio
expresses the relationship between current
assets and current liability of the business
concern during a particular period. This is also
called a short-term ratio.
 2. Activity Ratio - measures the efficiency
of the current assets and liabilities in the
business concern during a particular period.
This ratio is helpful to understand the
performance of the business concern. This
is also called a turnover ratio.
3. Solvency Ratio - measures the long-term
obligation of the business concern. This ratio
helps to understand how the long-term funds
are used in the business concern. This is also
called a leverage ratio.
4. Profitability Ratio - helps to measure the
profitability position of the business concern.

WHAT TO LOOK FOR IN FINANCIAL

STATEMENT ANALYSIS
Trends - The trends given in generally cover at
least the previous three full accounting years
therefore any fluctuations in any area can be
easily pinpointed.
Benchmark - The average results for each ratio
together with the industry profile of the average
company in the sector can both be used as
benchmarks to compare individual company
performance
Size - All the major companies in the sector
are ranked on the basis of sales, profits,
total assets and employee numbers.
Growth - The average annual growth of each
company’s sales, profits, total assets and
number of employees over the three-year
period being analyzed is calculated and ranked.