Objectives of Financial

Statement Analysis
Financial Statement Analysis
Objectives
The main objective of the analysis financial statement for any company
is to provide the necessary information which is required by the users of
the financial statement for the informative decision making, assessing
the current and past performance of the company, prediction of the
success or failure of the business, etc.
Top 4 objectives of Financial Statement Analysis are as follows –

1. To know the current position of the company

2. Eliminating Discrepancies if any
3. Future Decision Making
4. Minimize the Chances of Fraud

You are free to use this image on your website, templates etc,  Please provide us with
an attribution link

Let us discuss each one of them in details

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Home » Accounting Resources » Accounting Fundamentals » Objectives of Financial Statement

Analysis

Objectives of Financial
Statement Analysis

Article byMadhuri Thakur

Reviewed byDheeraj Vaidya, CFA, FRM

Financial Statement Analysis

Objectives
The main objective of the analysis financial statement for any company
is to provide the necessary information which is required by the users of
the financial statement for the informative decision making, assessing
the current and past performance of the company, prediction of the
success or failure of the business, etc.
Top 4 objectives of Financial Statement Analysis are as follows –

1. To know the current position of the company

2. Eliminating Discrepancies if any
3. Future Decision Making
 4. Minimize the Chances of Fraud

 You are free to use this image on your website, templates etc,  Please provide us with
an attribution link

Let us discuss each one of them in detail

Top 4 Objectives of Financial

Statements Analysis?
#1 – To know the Current Position
Promoters/owners want to know whether the company is heading in
the right direction or they are lagging in their targets, which they have
planned in the past. Regular recording of financial transactions helps
them to understand their financial position and helps them analyze
prospects in a better way.
Example: Suppose the company had previously planned to double its
revenues over the next five years. We have revenue data of the
company for the last four years.

As you can see in the above example, the company is performing well
in the first two years and looks like it will reach the desired target or
maybe perform better than their desired target. But in the FY 2018-19,
the revenue growth of the company declined to single-digit levels, i.e.,
around 6% on a YoY basis.

The decline in revenue will be a cause of concern for the management

but will be able to gear up their team in time to work more efficiently
to reach their target.

#2 – Eliminating Discrepancies if any

Recording of day to day transactions, i.e., sales and purchase, expenses
or incomes, or other statements, help them understand where they
need to improve and make quick decisions in case of any
discrepancies.

Example 1: Suppose a company named A has targeted sales of 1500

crores in this financial year. The quarterly sales report shows sales of
just 300 crores in the first quarter.
The above example shows the revenue earned by ABC Ltd. each
month. During the first three months, the revenue numbers are
increasing, but after that, there was a consistent decline in the
revenue. Maintaining each month’s revenue will help the management
to get engaged with the sales team and find out the reasons for the
fall in revenue numbers, eliminate discrepancies and will act
accordingly to stop the dip in revenue numbers and try to reach the
target as planned.

Example 2:

The above example shows that the profit of the firm increases, but due
to excess expenses, the ratio of the increase in net profits with respect
to increased gross profit is less.
Gross profit increased by approximately 25%, whereas net profit
increases just 13-14%. Recording and analyzing will help them
eradicate the errors in the future due to which there is a decrease in
net profits from the actual expected.

#3 – Future Decision Making

Quarterly statements like sales book, purchase, trading a/c, or
manufacturing a/c  helps them in executing their plans in a better way.
This provides them the opportunity to make future decisions with
reliable information. There is a new practice of preparing
provisional final accounts even by small companies. Analyzing
financial statements on a short term basis helps the organization to
make efficient decisions.

Example:  Suppose the company’s operating margin is around 12-

13% for the last 7-8 quarters. But in the previous quarter, the
operating margin drops significantly to 7-8 %.

The company is performing well on revenue front but more precisely

maintaining the operating margin at consistent levels with an increase
in sales numbers. But in the quarter ending June-19, the operating
margin dips to 7%, which is way below the average of 12-13%, which
the company is managing over the last 5-6 quarters.
There may be many reasons for the fall in the operating margin like
increase in raw material, a decrease in sales price due to demand or
increase indirect expenses like wages or electricity and the company
after reviewing it will need to change the future strategy and make
some decisions depending upon the reason for the fall in operating
margin in the last quarter.
Financial statements help to understand the reason and make future
decisions depending on the situation. Let’s assume the reason is
decreasing in Sales Price. Management can take the necessary steps to
understand the future market sentiments and identify the reasons for
the decrease in the sales price and can opt for strategy according to it.
#4 – Minimize the Chances of Fraud
This is not the main objective of analyzing transactions but the one
which cannot be neglected. Often we come across the news that the
employee cheated his boss, which led to huge losses for the
company.   Analyzing the statements will make sure that the employee
will be aware that the management is aware of everything that is
happening in the company and also if any suspicion arises on any
financial entry, management can have a look into the matter and will
be able to solve it without incurring extra losses.

Example: Excess commission given by the accounts department to the

agents of the company, or there is a difference in the purchase of raw
material. Since the company records or maintains an individual
account of each supplier, they can analyze each account, which will
lead to the conclusion, and the company will not have to suffer losses
due to the fraud done by one of his own employees.
In the above example, there is a surge in the conveyance expenses and
general expenses of the firm. More than three-fold increase in the
expenses are a case of suspicion, and management would want to
have a look at the voucher and verify who has to pay it, received it,
and for what purpose.

Conclusion
Financial statements are important for all stakeholders. Investors
need to analyze the financial statements before making any
investment in the company.

 Same way, banks will be more comfortable in granting loans to

those companies whose financial books are well maintained and
shows a clear picture of their profits. This makes them more
confident that the company will be able to pay future debt
obligations.
 Government agencies have their self-interest in the financials of
the company. The collection of taxes from the companies is done
on the basis of information provided by the accounting
department of the company. Companies have to submit tax
returns on a quarterly basis, which are analyzed by government
authorities.
 Overall the financial statement analysis makes a difference in the
performance of companies. Companies with regular analyzing of
financials can intercept their problems within time and can opt
for a strategy that can help them attain their future targets.
 Also, the companies with a better understanding of their
financials can cope with the worst business scenarios in a better
way as they know the financial strength of their balance sheet.
  Blog
 Free Video Tutorials
 All Articles
 Courses
 All In One Bundle

Home » Accounting Resources » Accounting Fundamentals » Objectives of Financial Statement

Analysis

Objectives of Financial
Statement Analysis

Article byMadhuri Thakur

Reviewed byDheeraj Vaidya, CFA, FRM

Financial Statement Analysis

Objectives
The main objective of the analysis financial statement for any company
is to provide the necessary information which is required by the users of
the financial statement for the informative decision making, assessing
the current and past performance of the company, prediction of the
success or failure of the business, etc.
Top 4 objectives of Financial Statement Analysis are as follows –

1. To know the current position of the company

2. Eliminating Discrepancies if any
3. Future Decision Making
 4. Minimize the Chances of Fraud

 You are free to use this image on your website, templates etc,  Please provide us with
an attribution link

Let us discuss each one of them in detail

Top 4 Objectives of Financial

Statements Analysis?
#1 – To know the Current Position
Promoters/owners want to know whether the company is heading in
the right direction or they are lagging in their targets, which they have
planned in the past. Regular recording of financial transactions helps
them to understand their financial position and helps them analyze
prospects in a better way.
Example: Suppose the company had previously planned to double its
revenues over the next five years. We have revenue data of the
company for the last four years.

As you can see in the above example, the company is performing well
in the first two years and looks like it will reach the desired target or
maybe perform better than their desired target. But in the FY 2018-19,
the revenue growth of the company declined to single-digit levels, i.e.,
around 6% on a YoY basis.

The decline in revenue will be a cause of concern for the management

but will be able to gear up their team in time to work more efficiently
to reach their target.

#2 – Eliminating Discrepancies if any

Recording of day to day transactions, i.e., sales and purchase, expenses
or incomes, or other statements, help them understand where they
need to improve and make quick decisions in case of any
discrepancies.

Example 1: Suppose a company named A has targeted sales of 1500

crores in this financial year. The quarterly sales report shows sales of
just 300 crores in the first quarter.
The above example shows the revenue earned by ABC Ltd. each
month. During the first three months, the revenue numbers are
increasing, but after that, there was a consistent decline in the
revenue. Maintaining each month’s revenue will help the management
to get engaged with the sales team and find out the reasons for the
fall in revenue numbers, eliminate discrepancies and will act
accordingly to stop the dip in revenue numbers and try to reach the
target as planned.

Example 2:

The above example shows that the profit of the firm increases, but due
to excess expenses, the ratio of the increase in net profits with respect
to increased gross profit is less.
Gross profit increased by approximately 25%, whereas net profit
increases just 13-14%. Recording and analyzing will help them
eradicate the errors in the future due to which there is a decrease in
net profits from the actual expected.

#3 – Future Decision Making

Quarterly statements like sales book, purchase, trading a/c, or
manufacturing a/c  helps them in executing their plans in a better way.
This provides them the opportunity to make future decisions with
reliable information. There is a new practice of preparing
provisional final accounts even by small companies. Analyzing
financial statements on a short term basis helps the organization to
make efficient decisions.

Example:  Suppose the company’s operating margin is around 12-

13% for the last 7-8 quarters. But in the previous quarter, the
operating margin drops significantly to 7-8 %.

The company is performing well on revenue front but more precisely

maintaining the operating margin at consistent levels with an increase
in sales numbers. But in the quarter ending June-19, the operating
margin dips to 7%, which is way below the average of 12-13%, which
the company is managing over the last 5-6 quarters.
There may be many reasons for the fall in the operating margin like
increase in raw material, a decrease in sales price due to demand or
increase indirect expenses like wages or electricity and the company
after reviewing it will need to change the future strategy and make
some decisions depending upon the reason for the fall in operating
margin in the last quarter.
Financial statements help to understand the reason and make future
decisions depending on the situation. Let’s assume the reason is
decreasing in Sales Price. Management can take the necessary steps to
understand the future market sentiments and identify the reasons for
the decrease in the sales price and can opt for strategy according to it.
#4 – Minimize the Chances of Fraud
This is not the main objective of analyzing transactions but the one
which cannot be neglected. Often we come across the news that the
employee cheated his boss, which led to huge losses for the
company.   Analyzing the statements will make sure that the employee
will be aware that the management is aware of everything that is
happening in the company and also if any suspicion arises on any
financial entry, management can have a look into the matter and will
be able to solve it without incurring extra losses.

Example: Excess commission given by the accounts department to the

agents of the company, or there is a difference in the purchase of raw
material. Since the company records or maintains an individual
account of each supplier, they can analyze each account, which will
lead to the conclusion, and the company will not have to suffer losses
due to the fraud done by one of his own employees.
In the above example, there is a surge in the conveyance expenses and
general expenses of the firm. More than three-fold increase in the
expenses are a case of suspicion, and management would want to
have a look at the voucher and verify who has to pay it, received it,
and for what purpose.

Conclusion
Financial statements are important for all stakeholders. Investors
need to analyze the financial statements before making any
investment in the company.

 Same way, banks will be more comfortable in granting loans to

those companies whose financial books are well maintained and
shows a clear picture of their profits. This makes them more
confident that the company will be able to pay future debt
obligations.
 Government agencies have their self-interest in the financials of
the company. The collection of taxes from the companies is done
on the basis of information provided by the accounting
department of the company. Companies have to submit tax
returns on a quarterly basis, which are analyzed by government
authorities.
  Overall the financial statement analysis makes a difference in the
performance of companies. Companies with regular analyzing of
financials can intercept their problems within time and can opt
for a strategy that can help them attain their future targets.
 Also, the companies with a better understanding of their
financials can cope with the worst business scenarios in a better
way as they know the financial strength of their balance sheet.

Top 4 Objectives of Financial

Statements Analysis?
#1 – To know the Current Position
Promoters/owners want to know whether the company is heading in
the right direction or they are lagging in their targets, which they have
planned in the past. Regular recording of financial transactions helps
them to understand their financial position and helps them analyze
prospects in a better way.

Example: Suppose the company had previously planned to double its

revenues over the next five years. We have revenue data of the
company for the last four years.

As you can see in the above example, the company is performing well
in the first two years and looks like it will reach the desired target or
maybe perform better than their desired target. But in the FY 2018-19,
the revenue growth of the company declined to single-digit levels, i.e.,
around 6% on a YoY basis.

The decline in revenue will be a cause of concern for the management

but will be able to gear up their team in time to work more efficiently
to reach their target.

#2 – Eliminating Discrepancies if any

Recording of day to day transactions, i.e., sales and purchase, expenses
or incomes, or other statements, help them understand where they
need to improve and make quick decisions in case of any
discrepancies.

Example 1: Suppose a company named A has targeted sales of 1500

crores in this financial year. The quarterly sales report shows sales of
just 300 crores in the first quarter.

The above example shows the revenue earned by ABC Ltd. each
month. During the first three months, the revenue numbers are
increasing, but after that, there was a consistent decline in the
revenue. Maintaining each month’s revenue will help the management
to get engaged with the sales team and find out the reasons for the
fall in revenue numbers, eliminate discrepancies and will act
accordingly to stop the dip in revenue numbers and try to reach the
target as planned.
Example 2:

The above example shows that the profit of the firm increases, but due
to excess expenses, the ratio of the increase in net profits with respect
to increased gross profit is less.

Gross profit increased by approximately 25%, whereas net profit

increases just 13-14%. Recording and analyzing will help them
eradicate the errors in the future due to which there is a decrease in
net profits from the actual expected.

#3 – Future Decision Making

Quarterly statements like sales book, purchase, trading a/c, or
manufacturing a/c  helps them in executing their plans in a better way.
This provides them the opportunity to make future decisions with
reliable information. There is a new practice of preparing
provisional final accounts even by small companies. Analyzing
financial statements on a short term basis helps the organization to
make efficient decisions.

Example:  Suppose the company’s operating margin is around 12-

13% for the last 7-8 quarters. But in the previous quarter, the
operating margin drops significantly to 7-8 %.
The company is performing well on revenue front but more precisely
maintaining the operating margin at consistent levels with an increase
in sales numbers. But in the quarter ending June-19, the operating
margin dips to 7%, which is way below the average of 12-13%, which
the company is managing over the last 5-6 quarters.

There may be many reasons for the fall in the operating margin like
increase in raw material, a decrease in sales price due to demand or
increase indirect expenses like wages or electricity and the company
after reviewing it will need to change the future strategy and make
some decisions depending upon the reason for the fall in operating
margin in the last quarter.
Financial statements help to understand the reason and make future
decisions depending on the situation. Let’s assume the reason is
decreasing in Sales Price. Management can take the necessary steps to
understand the future market sentiments and identify the reasons for
the decrease in the sales price and can opt for strategy according to it.
#4 – Minimize the Chances of Fraud
This is not the main objective of analyzing transactions but the one
which cannot be neglected. Often we come across the news that the
employee cheated his boss, which led to huge losses for the
company.   Analyzing the statements will make sure that the employee
will be aware that the management is aware of everything that is
happening in the company and also if any suspicion arises on any
financial entry, management can have a look into the matter and will
be able to solve it without incurring extra losses.

Example: Excess commission given by the accounts department to the

agents of the company, or there is a difference in the purchase of raw
material. Since the company records or maintains an individual
account of each supplier, they can analyze each account, which will
lead to the conclusion, and the company will not have to suffer losses
due to the fraud done by one of his own employees.

In the above example, there is a surge in the conveyance expenses and

general expenses of the firm. More than three-fold increase in the
expenses are a case of suspicion, and management would want to
have a look at the voucher and verify who has to pay it, received it,
and for what purpose.

Conclusion
Financial statements are important for all stakeholders. Investors
need to analyze the financial statements before making any
investment in the company.
 Same way, banks will be more comfortable in granting loans to
those companies whose financial books are well maintained and
shows a clear picture of their profits. This makes them more
confident that the company will be able to pay future debt
obligations.
 Government agencies have their self-interest in the financials of
the company. The collection of taxes from the companies is done
on the basis of information provided by the accounting
department of the company. Companies have to submit tax
returns on a quarterly basis, which are analyzed by government
authorities.
 Overall the financial statement analysis makes a difference in the
performance of companies. Companies with regular analyzing of
financials can intercept their problems within time and can opt
for a strategy that can help them attain their future targets.
 Also, the companies with a better understanding of their
financials can cope with the worst business scenarios in a better
way as they know the financial strength of their balance sheet.