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Meaning of Financial Statement Analysis

Financial Statement Analysis is an important part of overall financial analysis, based on the statements which are the end products of accounting system

Financial statement analysis is an important part of overall financial analysis, based on the statements which are the end products of accounting system, viz., Balance Sheet and Profit and Loss Account.

Analysis of Financial Statements is a systematic process of the critical examination  the financial information contained in the financial statements in order to understand and make decisions regarding the operations in the firm. The Analysis of Financial Statements is a study of relationships among various financial facts an figures as set out in the financial statements i.e., Balance sheet and Profit and Loss Account . the complex data given in these financial statements is divided/broken into simple and valuable elements and relationships are established between the elements of the same statement or different financial statements.

 Financial statements indicate certainabsolute information about assets, liabilities, equity,revenues,expenses and profit or loss of an enterprise. They are not readily understandable to the external users of financial statements . A financial analyst can adopt the following tools and techniquesfor analysis of the financial statements.

Comparative financial statements are the statements in which figures for two or more periods are placed side by side along with change in figures in absolute and percentage terms to facilitate omparision. Both Profit and Loss Account andBalance Sheet are prepared in the form of Comparative Financial Statements.

Financial statement analysis gives structural relationships of the various items in the financial statements . the main functions which are used in the process of analysis and interpretation are:

1)Rearrangement of financial Statements

For analysis, it is necessary to reclassify the data contained in the financial statements into purposive classes so that maximum information from very data for analysis can be obtained . reclassification and rearrangement of different data depend upon the purpose of analysis

2)Comparision:

After the classification of data of financial statements into different categories, it is necessary to derive comparative data of the same enterprise of the past periods if it is a time series analysis. In case of cross-sectional analysis, it is necessary to derive comparative data of the same accounting period of similar of comparable enterprises. For this, a comparative study is necessary.

3)Analysis:

Comparative financial data are then analysed with reference ti financial characteristics like profitability , solvency and liquidity.

4)Interpretation:

The concluding part of financial statement analysis is interpretation of financial information generated in the process of financial statement analysis.The interpretation should be precise and directed towards indicating the movement of various financial characteristics.

Related keywords: time value of money concepts
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Comments (9)

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