Financial statement analysis

 CONCEPT OF FINANCIAL STATEMENTS

Financial statements represent a summary of the financial information prepared in the

required manner for the purpose of use by manger and external stake holders. Financial
reports are prepared basically to communicate to external holders about the financial position
of the company. Financial statement analysis is useful both help anticipate future position
and, more important.

In the words of Hampton “A financial statement is an organize collection of data organized

according to logical and accounting procedure “

According to howard and upton “ Although my own financial statement expressed in money
value might be though of as financial statements, the term has come to be limited by most
accounting and business writers to mean the ‘ balance sheet and profit and loss account’.

 Meaning and concept

Financial statement represent a summary of the financial information prepare

in the required manner for the purpose of use by managers and external stakeholders.

Financial reports are prepared basically to communicate to the external shareholders

about financial position of the company that they own. Financial statement analysis is

useful both to help anticipate future condition and, more important, as a starting point

for planning action that will improve the firm’s future performance. Financial

statement analysis generally begins with a set of financial ratios designed to reveal a

company’s strengths and weaknesses as compared with other companies in the same
industry, and show whether its financial position has been improving and decrease

over a period of time.

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the item of the

balance sheet and the profit and loss account. Financial analysis helps to determine

smooth operation of the project over its entire life cycle. The two major aspects of

financial analysis are liquidity analysis and capital structure analysis for which ratio is

employed. Liquidity ratios measure a project’s ability to meet its short-term

obligations. Capital structure analysis is done to see long term solvency i.e. the

project’s ability to meet long-term commitments to creditors. Information contained

in balance Sheet and Profit and Loss Account is often in the form of raw data rather

than as information useful for decision making. The process of converting the raw

data contained in the financial statements into meaningful information for decision

making is known as statement analysis.

Financial Analysis is a process of synthesis and intellectual activity. If the

business operations results in profits, the total investment is enhanced, bringing

prosperity to shareholders, increase in goodwill and strengthening of credit. On the

other hand, if these are loses, capital invested to the extent of loss is lost or dissipated

ability to pay creditors and lenders is weakened and the business concern operates

under a ‘handicap’.

Users of Financial Analysis

  Trade creditors

 Lenders

 Investors

 Management

OBJECTIVES OF FINANCIAL STATEMENTS

The objectives of financial statements Is to provide information about the

financial position, performance and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions.

 To provide reliable financial information about economic resources and

obligations of a business enterprise.

 To provide reliable information about in net resources (resources less

obligations) of an enterprise that results from its activities.

 To provide financial information that assist in estimating the earning potentials

of a business.

 To provide other needed information about changes in economic resources of

obligation.

 To disclose, to the extent possible, other information related to the financial

statements that is relevant to the needs of the users of these statements.