Financial Statement Analysis

FINANCIAL STATEMENTS TOOLS INTERESTED PARTIES PURPOSE LIMITATIONS

1. FINANCIAL STATEMENT ANALYSIS

2. Contents Introduction Tools for Financial Analysis Interested Parties Purpose Limitations

3. Introduction Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions. These statements include income statement, balance sheet, cash flow statement , statement of changes in equity. FSA asses the financial health & performance of the company. FSA consist of comparisons for the company over the period of time and comparisons of different companies either in the same industry or in different industries.

4. To diagnose following parameters Profitability Solvency Liquidity stability

5. Need for Financial Analysis To Evaluate Financial Performance Financial Position Prediction of Future Performance Operating efficiency of firm

6. Tools for Financial Analysis Comparative Statement Common size Statement Trend Analysis Ratio Analysis Funds flow Statement Cash flow Statement

7. Common Size Statement The figures of financial statements are converted to percentages. The balance sheet items are expressed as the ratio of each asset to total assets and the ratio of each liability to total liabilities. items are expressed as a percentage of base year. it is time series analysis.

8. Comparative Statement It is also called as Horizontal Analysis. It shows the financial position of a company at different time periods.

9. Ratio Analysis The most popular way to analyze the financial statements is computing ratios. It is an important and widely used tool of analysis of financial statements. It is study of ratios b/w various items or groups in FS.

10. RATIO ANALYSIS (CON…)

11. CASH FLOW STATEMENT In financial accounting, a  cash flow statement , also known as statement  of  cash flows , is a financial  statement  that shows how changes in balance sheet accounts and income affect A cash  and  cash  equivalents, and breaks the analysis down to operating, investing and financing activities.

12. FUNDS FLOW STATEMENT It is a statement which discloses the analytical information about the different sources of a fund and the application of the same in an accounting cycle. It deals with the transactions which change either the amount of current assets and current liabilities (in the form of decrease or increase in working capital) or fixed assets, long-term loans including ownership fund.

13. Interested Parties Management Employees Creditors Lenders & Investors Shareholders Labor Unions Govt. Agencies

14. Purpose To Evaluate Financial Performance Financial Position Prediction of Future Performance Operating efficiency of firm

15. Limitations The accuracy of financial information largely depends on how accurately financial statements are prepared. Companies have a choice of accounting methods (LIFO vs. FIFO and depreciation methods).  It check just monetary aspect of company's performance and position but it ignores non-monetary aspect of company. If one company's accounting period completes at 31st Dec. and other company's accounting period completes at 31st march, we will unable to compare both company's financial statement.