Meaning of Financial Analysis: Financial Statements presents a mass of complex data in absolute monetary terms and reveal little about the liquidity,solvency and, profitability of the business.In financial analysis,the data given in financial statement is classified into simple groups and a comparison of various groups is made with one another to pin-point the strong points and weaknesses of a business.It is very useful to the comparison between the two groups will provide useful information.The analysis of these figures helps the interested reader by giving tongue to these mute heaps of figures.
In The Words of Finney and Miller:"Financial analysis consists in separating facts according to some definite plan,arranging them in groups according to certain circumstances and then presenting them in a convenient and easily read and understandable form".
Types or Methods of Financial analysis:Financial Analysis is an art and such as there are various approaches towards Financial Analysis.Two basic approaches are given below:-
1:Horizontal Analysis:-In such type of analysis, financial statements for a number of years are reviewed and analysed.figures for two or more years are contained in such type of analysis and these figures are placed side by side to facilitate comparison.such analysis indicates the increase or decrease in these items not only in absolute figures but also in percentage form.It also hepls in knowing the trend of of the business.Since such type of analysis is based on the data from year to year rather than only one year,it is also called'Dynamic Analysis'.
2: Vertical Analysis:-In such type of analysis,is an accounting tool that enables proportional analysis of documents,such as fianancial statements.its performing a vertical analysis,every line item on a financial statement is entered as a percentage of another item.for example,on an income statement,every line item is started in terms of the percentage of gross sales.
WHAT IS FINANCIAL STATEMENT:- Financial Statement Analysis is a component of accounting and key to understanding an organisation’s financial condition. External stakeholders use it to understand the overall performance and business value of an organisation, while internal constituents use it as a monitoring tool for managing finances.
Acting as a company’s financial health‘report card’, it comprises the review of three significant financial statements that every company must maintain: the balance sheet, income statement and cash flow statement.
- Balance sheet: summary of the assets, liabilities (debt) and equity of a business at the end of an accounting period and a report of the company’s financial worth in terms of book value.
- Income statement: a detailed account of a company’s revenue earning (also known as the profit and loss statement).
- Cash flow statement:provides data on how much cash or cash equivalent circulates the company via various inflows and outflows, spanning ongoing operational activities, external investment sources and cash from financing.
As such, a financial statement analysis provides a comprehensive and unbiased overview of a company’s profitability, value, creditworthiness and financial security.
Nature of Financial Statements:-
Financial statements are prepare and using facts relating to events, which are recorded chronologically. Thus, we have to first record all these facts in monetary terms. Then, we have to process them using all applicable rules and procedures. Finally, we can now use all this data to generate financial statements.
Readmore:-Financial Accounting in Hindi
Based on this understanding, the nature of financial statements depends on the following points:
- Recorded facts: We need to first record facts in monetary form to create the statements. For this, we need to account for figures of accounts like fixed assets, cash, trade receivables, etc.
- Accounting conventions: Accounting Standards prescribe certain conventions applicable in the process of accounting. We have to apply these conventions while preparing these statements. For example, the valuation of inventory at cost price or market price, depending on whichever is lower.
- Postulates: Apart from conventions, even postulates play a big role in the preparation of these statements. Postulates are basically presumptions that we must make in accounting. For example, the going concern postulate presumes a business will exist for a long time. Hence, we have to treat assets on a historical cost basis.
- Personal judgments: Even personal opinions and judgments play a big role in the preparation of these statements. Thus, we have to rely on our own estimates while calculating things like depreciation.
Now that we understand the meaning and nature of financial statements, a glance at their objectives would be appreciable.
