Meaning and concept :
financial statement analysis is the process of
classifying, evaluating and interpreting the relationship between different
heads of account of financial statements. This provides relevant information to
the management and other interested persons and institutions to understand the
result of performance and position of the entity.
Financial statements analysis helps to know solvency
and profitability position of the organization for a given period of time. This
supports to the management, creditors ,lenders and shareholders to make
decision for the future action. The financial statements involve income
statement, statement of retain earning , balance sheet and cash flow statement.
Objectives of financial statement
analysis :
i.To judge liquidity :analysis of financial statement
helps to judge the short term solvency position of the company. It can be
determined by comparing the amount
ii. To assess solvency : financial statements analysis
supports to assess long term solvency position of the company. It can be
determined by comparing the amount of long terms debs with shareholders fund
and long term assets.
iii.To judge profitability : financial statement
analysis judges the profitability position of the company. The amount of gross
profit and net profit compared with sales ,assets, shareholders fund and other
heads of accounts.
iv. To judge operational efficiency :the comparison of
actual revenues and expenses for aperiod with the standard determined helps to
judge the operational strength and weakness of the company.
v.To help for planning and budgeting :planning and
budgeting should be prepared on the basis of past financial information and
estimation about probable change in environment. Financial statements helps for
planning and budgeting for future performance.
vi. To compare inter company performance :a comparative
study of financial statements of the different companies in different way helps
to know their probable strength and weaknesses.
Significance or impratance of
financial analysis
a. helps to know liquidity and solvency
b. helps to know turnover and profitability
c .helps in evaluation of performance
d. helps to planning and budgeting
e. helps for determination standard and control
limitations of financial statement
analysis
1. Only focus on quantitative aspects
2. may misled to the user
3. not reveal the current worth
4.based on personal judgment
Worksheet
worksheet is the device that has been used for
assisting the accountant in performing certain task. It is simply a rough
sketch for final account made by the accountants. It shows the details of
accounting works and adjustments to check their arithmetical accuracy before
preparing financial statements.It is also known as extended trial balance. This
makes easy to prepare adjusted trial balance and financial statement like
income statement, retained earning and balance sheet. Generally, two types of
format are found in practice :
a. ten column worksheet
b. twelve column worksheet
Income statement
Income statement reports the result of company
operations during the particular period of time. In other words, it depicts the
success or failure of a company’s operations. It consists of the incomes with
the expenses occurring during a period. The main objective of preparing income
statement is to know about the net income or net loss of an accounting year.
Balance sheet
It is a statement that reports the assets and claim to
the assets on a specific point of time. the claims of creditors called
liabilities where the claims of owner are called shareholders equity. The
relationship among the different components of a balance sheet is presented
below.
Assets =shareholders equity + liabilities
Statement of Cash flow
A statement that shows the cash receipts and payment
(also called inflow and outflow) during a particular period of time is called
cash flow statement. It shows the effects on the position of cash under operating,
investing and financial activities.
Value added statement
The value added is the difference between sales revenue
and purchase price of products and services. It is ascertained by deducting
cost of purchase from sales revenue.so, sales price of product is higher than
cost. In other words excess of market value over the cost of material is known
as value added.
Value added = sales revenue – cost of bought in
material and services
Value added statement is a useful means to inform
operating results of the companies to the concerned bodies such as workers,
staff and shareholders as well as government and financial institutions.
Advantages of
value added
1.helps to the worker in developing their positive
attitude towards the business
2. informs the concerned bodies regarding size and
importance of business
3. helps in preparing budgets
4. helps in initiating and presenting productive
incentive plans to increase the productivity of workers
5. economist determine the national income on the basis
of value added
6.enables to develop important ratios
