Financial Statement Analisis

FINANCIAL STATEMENT ANALISIS : 

FINANCIAL STATEMENT ANALISIS By MATHEW JOSE

Financial Statements : 

Financial Statements Financial statements contain summarized information about the financial affairs of a firm, organized systematically as per the accounting principles. These statements are used by investors, creditors and analysts to examine the firm’s performance

The major financial statements are: : 

The major financial statements are: Balance Sheet: It indicates the financial position of the business at a particular moment of time. It communicates information about the assets, liabilities and owner’s equity for a business firm on a specific date. Profit and Loss Account: It indicates the earning capacity of the firm. It presents the summary of revenues, expenses and net income (or loss) of a firm. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during the same period.

Financial Statement Analysis : 

Financial Statement Analysis Financial statement analysis helps in understanding the information contained in the financial statements in a better manner. It helps in knowing the strengths and weaknesses of a firm, thereby enabling the firm in decision-making as well as in forecasting aspects related to future. The objectives of financial statement analysis are:

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To establish relationship between the various components of financial statements and in finding their relative importance. To assess the profitability and operating efficiency of the firm as well as the various divisions of the firm. To provide useful information to different sections of individuals. The parties usually interested in the information revealed by financial statement analysis are shareholders, creditors, financial institutions, analysts and the management itself. To help in comparing the performance of the firm over a period of time. It also helps to compare the performance of the firm with its competitors or with industry standards.

NATURE OF FINANCIAL STATEMENT : 

NATURE OF FINANCIAL STATEMENT BASED ON RECORDED FACTS ACCOUNTING CONVENTIONS POSTULATS PERSONAL JUDGEMENT

FUNCTIONS/USES/IMPORTANCE OF FINAL STATEMENT : 

FUNCTIONS/USES/IMPORTANCE OF FINAL STATEMENT FOR MANAGEMENT FOR THE FINACIERS FOR THE CREDITERS FOR INVESTERS OWNERS FOR EMPOYEES FORCONSUMERS

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FOR STOCK EXCHANGERS FOR TAX AUTHORITIES FOR GOVERNMENT FOR TRADE ASSOCIATIONS ANDPROFESSIONSL SOCIETIES FOR RESERCHERS AQND ACADEMICANS

Tools for Analysing Financial Statements : 

Tools for Analysing Financial Statements Ratio Analysis: Ratios are quantities that establish relationship between two variables. Ratio analysis helps in studying various aspects like liquidity, efficiency, profitability and solvency of the firm. Ratio analysis can be performed in two ways: - Comparative Analysis: It helps in analyzing whether the ratios computed for the firm are within limits when compared to certain standards or other firms in the industry. Ratios of the firm can also be compared with the previous ratios, in order to identify the existing trend. - Du Pont Analysis: It helps in computing the profitability of the firm in terms of net profit margin and asset turnover.

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Funds Flow Analysis: Balance sheet and P&L statement do not reflect the changes in the assets and liabilities of the firm over a period of time. This purpose is achieved by the Statement of Changes in Financial Position, also referred to as the Funds Flow Statement/Analysis. It summarizes the changes in owner’s equity, firm’s assets, and liabilities resulting from financial and investment transactions during the period; and the way in which the firm used its financial resources during the period.

Limitations of Financial Statement : 

Limitations of Financial Statement Window-dressing: It refers to the practices at the year end that make balance sheets look better than they otherwise would. In such situations the whole process of analyzing the financial statement is futile as the ratio would no longer reflect a correct picture. Developing benchmarks for diversified companies: Diversified companies often have divisions operating in significantly different industries. The financial information that hey publish consolidates the results of those different operations into one set of statements. In such a situation it becomes difficult to find an appropriate benchmark as there might be no company which is into similar operations as the diversified firm. Price-level changes: Inflation often distorts financial statements. Real estate purchased years ago, will be carried on the balance sheet at its original cost. During periods of rapid inflation, inventory, cost of goods sold, and depreciation can badly distort the true results.

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Discrepancies in accounting principles: Accounting principles allow a great deal of latitude in reporting. Using different accounting policies, similar companies might report the same thing differently. For example, two companies that are similar in their operations might account for depreciation in a different way. One company might follow written down value method and the other might follow straight-line depreciation. This in turn will affect the net income and the ratios that are computed for the two firms. Interpretation of results: Interpretation of ratios is not always clear. For example, a low inventory turnover ratio indicates that the amount of investment in inventories is less which might lead to stock-outs. But at the same time a very high inventory turnover ratio is also not desirable as it indicates that a large amount of cash that could have been used for other profitable purposes is locked up in the form of inventories. Correlation among ratios: Existence of some amount of correlation between the ratios might also lead to misinterpretation