FINANCIAL STATEMENT ANALYSIS

Meaning of Financial Statement Analysis:

• The term ‘financial analysis’, also known as analysis and interpretation of

financial statements’, refers to the process of determining financial strengths
and weaknesses of the firm by establishing strategic relationship between the
items of the balance sheet, profit and loss account and other operative data.
• Financial Statement Analysis is an analysis that assesses the financial
wellbeing of the firm, its strengths and areas of concern. It determines
relations among various items in the statements.

• It aims to scrutinize, interpret, compare and depict useful relationships

among financial statements BALANCE Sheet, Income Statement
within and across the statements.
• Financial Statement Analysis is used to determine the future course of
actions for various decision-making aspects like:

 Financial Position
 Investing Decisions
 Profitability
 Strengths and Weakness
• These are used by internal and external parties such as lenders,
investors, security analysts, managers, etc.
 DEFINITIONS:

• According to Metcalf and Titard, “is a process of evaluating the

relationship between component parts of a financial statement to
obtain a better understanding of a firm’s position and
performance.”
• According to Myers, “Financial statement analysis is largely a study of
relationship among the various financial factors in a business as disclosed by
a single set-of statements and a study of the trend of these factors as shown
in a series of statements.”
 OBJECTIVES:
• (i) To assess the earning capacity or profitability of the firm.
• (ii) To assess the operational efficiency and managerial
effectiveness.
• (iii) To assess the short term as well as long term solvency position
of the firm.
• (iv) To identify the reasons for change in profitability and financial
position of the firm.
• (v) To make inter-firm comparison.
• (vi) To make forecasts about future prospects of the firm.
• (vii) To assess the progress of the firm over a period of
time.
• (viii) To help in decision making and control.
• (ix) To guide or determine the dividend action.

• (x) To provide important information for granting credit

IMPORTANCE OF FINANCIAL STATEMENT ANALYSIS
TOOLS OF FINANCIAL STATEMENT ANALYSIS
TYPES OF FINANCIAL STATEMENT ANALYSIS
PARTIES INVOLVED IN FINANCIAL STATEMENT ANALYSIS

The different parties involved in carrying out financial statement analysis are depicted below
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS:

 The difference in Accounting policies, methods, standards between both local and global
firms.
 Continuous change in Technology, Trends, Techniques and Tools of evaluation due to
dynamic environment.
 Manipulation by the analyst or firm through unethical practices and misleading
representation of facts.
 Less reliability and truthfulness due to wrong interpretation or personal bias of the analyst.
 Selection of the wrong tool of analysis while comparisons are being made.
 Difficulty in the analysis of the firms with the large or diversified product
range.
 The analysis is done on a quantitative basis; non-monetary aspects are
completely ignored.
 Many firms do not consider changes in price levels resulting in the wrong
interpretation at the time of analysis.
 The analysis is done only on the basis of historical data, many other factors
necessary for forecasting may not be taken into consideration.