ANALYSIS OF FINANCIAL STATEMENT

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 FINANCIAL STATEMENT
• Financial Statements are the statements showing the
financial position and results of business operation at the
end of the accounting period. The basic financial
statements include Balance Sheet and Profit and Loss
Account.

• BS shows the financial position at a particular point of

time. It also called as “Statement of financial position”.

• The P&L Account shows the result of operations for a

period of time. Also knownctsas Income Statement.
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 FINANCIAL ANALYSIS
• Financial Analysis is commonly called analysis and
interpretation of financial statements.

• It means establishing relationships between the

items in financial statements for determining the
financial strength and weakness of the business. It
is the process of scanning of the financial
statements to judge profitability, solvency,
stability, growth and prosperity of a firm.

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 OBJ ECTI VES OF FI NANCI AL
STATEMENTS
The main objectives of financial statements is to
provide information about the financial position
and performance of an enterprise that is useful in
making decisions.

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Other objectives:
i) To provide information about assets and liabilities
of a firm.
ii) To provide useful information to various parties
interested in financial statements.
iii) To present true and fair view of the business.
iv) To estimate the earning capacity of the enterprise.
v) To determine the debt capacity of the concern.
vi) To decide about the future prospects of the business.
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 PROCEDURE OF FINANCIAL ANALYSIS

i. Re-arrangement of financial statements.

ii. Derive the comparative data

iii. Analysis

iv. Interpretation

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 Types of Financial Analysis
On the basis of the materials used and The modus
operandi of analysis The modus operandi of
analysis
• On the basis of materials used:
• 1. External analysis.
• 2. Internal analysis.

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 Cont.
1. External analysis: This analysis is done by outsiders who do not
have access to the detailed internal accounting records of the business firm.
(Investors, creditors, government agencies, credit agencies and general public.)

2. Internal analysis: This analysis is conducted by persons who have

access to the internal accounting records of a business firm. (Executives and
employees of the government agencies which have statutory powers vested in
them.)

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 On the basis of modus operandi:
1. Horizontal analysis: When financial statements for a number of years are
analysed, the analysis is called ‘horizontal analysis’’. For example, study of
profitability trends for a period of five years. It is also called as dynamic
analysis because it shows the changes that have taken place.

Techniques: Comparative BS and P&L A/c, Trend Analysis.

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 Cont.
• Vertical analysis: It refers to the study of relationship of the
various items in the financial statements of one accounting
period.
• It involves a study of the quantitative relationship among
various items of financial statements of single period.
• Example: Comparison of current assets to current liabilities for
one point of time or one accounting period.
• It also known as static analysis.
• Techniques: Common size BS and P&L A/c, Ratio Analysis.

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 Tools of Financial Analysis:
• Various tools and techniques are used for financial analysis.
The most widely used tool is the ratio analysis. Given are the
important tools of financial analysis:
1. Comparative Financial Statement analysis.
2. Trend Analysis
3. Common Size Statement analysis
2. Funds flow analysis Cash flow Analysis
3. Ratio Analysis
4. Cost Volume Profit Analysis

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