UNIT III: TECHNIQUES OF FINANCIAL ANALYSIS

Meaning:
Financial statement analysis means study of relationship among various factors in a business as
disclosed by financial statements of a firm. The analysis shows the trend of the factors and will
help in evaluation of component parts. The analysis of financial statements is done to obtain a
better insight into a firm‟s position and performance.
The basic objectives of financial statements are as follows:
 To judge the financial health of the firm
 To evaluate the profitability of the enterprise
 To gauge the debt servicing capacity of the firm
 To understand the long term and short term solvency of the firm
 To know the return on capital employed or invested

Methods of Analyzing Financial Statements:

For analysis of financial statements, they should be re-arranged to reveal the relative significance
and effect of various items of data in relation to time period and for making inter-firm
comparisons. The analysis of financial statements will help in interpretation and logical
conclusions.
The important methods used in analysis of financial statements are as follows.
 Comparative financial statements
 Common size statements
 Trend ratios
 Ratio analysis
 Funds flow analysis
 Cash-flow analysis
 Break-even and Cost-volume profit analysis
 Value added analysis
From the syllabus perspective we are going to focus on Cash-flow analysis, Funds flow analysis
and Ratio analysis.
Before we start with the analysis tools, let‟s understand the different forms of financial
statements.

This Material is for reference of IMERT, Pune (2018-19)