CHAPTER ial Statement Analysis LEARNING OBJECTIVES ‘of this Chapter would enable students to understand: g of Financial Statement Analysis a . ques of Financial Statement Analysis a Statement Analysis a tween Horizontal Analysis and Vertical Analysis nce of Financial Statement Analysis |Statement Analysis cial Statement Analysis cial Statement Analysis il statements to understand and take economic decisions. jf Financial Statements is a study of relationships among various financial values financial statements, i.e, Balance Sheet, Statement of Profit & Loss and Cash Flow he data given in the financial statements is divided or broken into simp ements and relationships are established between the interdependent or ‘of the same statement or different financial statements. This process of § relationships and interpretation thereof to understand the workir ‘of a business is known as Analysis of Financial Statements lysis is largely a study of relationships among the various losed by a single set of statements, and a study of tre of statements.” fof financial statements are an attempt to determine the signifi it data so that the forecast may be made of the prospects for bt maturities (both current and long-term) a —Kennedy and Muller “both ‘Analysis’ and ‘Interpretation’. ‘Analysis’ is ta given in the financial statements by proper h explaining the meaning and significance plementary to each other, ic., analysis is ‘the Liquidity, Long-term Solvency, fs and other users of financial potential of the businesAnalysis. 7 his techy es of one Period wit analysis (i.¢, and size), » COMpariso, mean statements in , hi Placed side }Financial Statement Analysis 2.3 TYPES OF FINANCIAL STATEMENT ANALYSIS Financial Statement Analysis can be classified into four categories: External Analysis External Analysis is conducted by those who do not have access to the detailed records | of an enterprise and, therefore, have to depend on published accounts, i.c., Statement of Profit & Loss, Balance Sheet, Directors’ and Auditor's Reports. Such type of analysis is made by investors, lenders, creditors, government agencies and research scholars. | Internal Analysis (Internal Analysis is conducted by the management to know the financial position and operational efficiency of the organisation. The important feature of such analysis is that \) the management has access to all information of the enterprise and, therefore, the analysis | 4s more detailed, extensive and accurate. dout b ‘outsiders such as creditors, lenders, bankers, debentureholders and government for management. § made to review and analyse financial statements for a number of years. ‘Analysis. It shows comparison of financial data for several years @ It is useful for trend analysis and long-term planning. Comparative jarative Financial Statements are examples of horizontal analysis inst and analyse the financial statements of one year only. It is ysis of the financial statement relating to a particular Of analysis, Such an analysis is useful in comparin of the same type or divisions or departmentsvariables of an enterprise o, It is also called Time Series ver a Pe Anaj 10% ‘declining over a period of last 5 a “observe the behaviour of the same aii, a Performance and position of 1 he fin enterprises or firms is kno Wn as variables of two or more enterprises o, ingle set of statements of two fimsre IM ncial Statement Analysis 2.5 Analysis | ative financial data are then analysed with reference to financial characteristics Compa ike profitability, solvency and liquidity interpretation Pieconciuding part of financial statement analysis is interpretation of financial information generated in the process of financial statement analy The interpretation should be feet and directed towards indicating the movement of various financial characteristics D SIGNIFICANCE OF FINANCIAL STATEMENT ANALYSIS sted groups for various purposes. Financial e of such analysis: statements are used by various the following purposes and bring Earning Capacity or Profitability linancial analysis, the earning capacity or profitability of an enterprise In addition, the earning capacity nterprise, in coming years, may All the external users of financial statements, especially investors and Pare interested in earning capacity and forecast Efficiency (analysis helps to identify the areas where the mana; they have been inefficient. For example, by using accounting Telative proportion of production, administrative and 0f unfavourable variation can be identified and reasons out the significa rs have been Solvency of the Enterprise venterprise can be assessed on the basis of financial "are interested to know the short-term solvency et short-term liabilities. Debentureholders d short-term solvency of the enterprise al amount and interest thereon.‘users of the financial statements to understand the com, » Financial data can be made more comprehensy.” pe which can be easily explained and understood. Y cha UO a Athy we can take a variety of decisions in debt analysis, dividend decision Various are, and general : comes to know whether the fi of dividend, capital appreciati rities analyst who is intereste, behaviour of share prices, FM is fulfillin ion and secur id in cash. Bener; le earnings to distribute and» ‘of the firm and hence, to s as een ‘controlling *So, they are always inte of the business, Trade They would like to know whether lis on expected lines Gr fie, earning) and financial position m8) F d invest in a particular company or not of a firm, ic, the ability t can be determined with th they decide whether they 9 an enterprise, ic, dates. In other rm, ic., ability toinversely Telated. 4 « different ecounting yeai Money. Matters alone, the qualita Public relations are ign Ored Whi ven in all such limitations from w Basic data given in the fin jasis of the analysis of this | |