GS1;PART III;PART C
Technique of Analysis of financial statement
Financial statement:
They are written records that convey the financial activities and condition of business or entity . It has four major components i.e.
- Income statement
- Balance sheets
- Statement of retained earnings
- Cash flows
Financial statement analysis:
It is a systematic process of analysis the financial information in the financial statement to understand and take financial decision.
Goals of FSA:
- To find out about the financial health of a firm.
- To measure the current profitability
- To measure operational efficiency of the firm.
- To determine the power of firm to pay its debt on time
Techniques of analysis:
- Comparative statement: They are financial statement that cover a different time frame. Comparative statement lines up section of balance sheet and income statement for different period and the absolute change and percentage change is observed and noted.
| Particulars | Year 2017 | Year 2018 | Absolute change | Percentage change |
| Sales | 1000 | 2000 | 1000 | 100% |
| Revenue | 5000 | 6000 | 1000 | 40% |
| Assets | 200 | 500 | 300 | 150% |
| Liabilities | 400 | 500 | 100 | 25% |
- Common size: It used to compare financial statement of different size of companies or of the same company over different periods. The structure of the common size statement uses a common figure as the base and the other line items are calculated on that basis.
- Ratio analysis: A ratio analysis is a quantitative analysis of the information of the financial statement. It is used to calculate various aspects of company operating and financial performance such as its efficiency, liquidity, profitability and solvency.
- Current ratio= current assets/ current liability
- Quick ratio= (cash and cash equivalents + asset receivables)/ current liabilities
- Cash ratio= ( cash + cash equivalents)/ current liabilities
- Horizontal analysis: Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situations.The statements for two or more periods are used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in dollars and percentage.
Some related terms:
There are various types of Financial analysis. They are briefly mentioned herein:
External analysis: The external analysis is done on the basis of published financial statements by those who do not have access to the accounting information, such as, stockholders, banks, creditors, and the general public.
Internal Analysis: This type of analysis is done by finance and accounting department. The objective of such analysis is to provide the information to the top management, while assisting in the decision making process.
Short term Analysis: It is concerned with the working capital analysis. It involves the analysis of both current assets and current liabilities, so that the cash position (liquidity) may be determined.
Horizontal Analysis: The comparative financial statements are an example of horizontal analysis, as it involves analysis of financial statements for a number of years. Horizontal analysis is also regarded as Dynamic Analysis.
Vertical Analysis: it is performed when financial ratios are to be calculated for one year only. It is also called as static analysis.
Expected questions:
- What is financial statement?
- Write name of technique of analysis of financial statement?
- Forms of financial statement.
- Concept of financial system analysis
- Goals of financial system of analysis.
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