Financial Statement Analysis and its tools or Techniques

Financial Statement Analysis is the process of analysing the financial position of the company with the help of standardised statements. 

Meaning of Financial Statement Analysis:

It means the process of systematic analysis of the financial information of the company for a particular period of time. The analysis of the financial statement will help the related parties in understanding the actual financial position of the company to take economic decisions. 

In other words, It is the study of the relationship among various financial values or records which are already shown in the financial statements of the company, i.e., Balance sheet, Statement of Profit and loss account or income statement and cash flow statement. 

With the help of standardized tools and techniques for the analysing financial statement of the company, the process of analysis becomes very easy, the complex data given in the financial statement of the business will be converted into simple and valuable elements. The formats help to establish the interdependent relationship among the related value and figures. 

Definition of Financial Statement Analysis:

"Financial statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and a study of trends of these factors, as shown in a series of statements."

- Myer

"The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statement data so that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities (both current and long-term) and profitability and sound dividend policy."

-  Kennedy and Muller

Terms included in the Analysis of the Financial Statement:

The analysis of the financial statements included two following terms: 

1. Analysis:

The term analysis is referred to the simplification of financial data from complex statements into a simple format by classifying it.  

2. Interpretation:

The term interpretation is referred to the explanation of the meaning and significance of financial information. 

Tools or Techniques of Analysis of Financial Statement:

The techniques of the analysis are needed because data in the financial statements is very complex and difficult to understand because most of the data is repeated in all statements. The financial statement included information about the assets, liabilities, capital, revenues, expenses, profit earned or loss incurred during the particular year. But this data is not in a comparable format so that's why it's tough to understand for outsiders who have an interest in our company for any reason.

So that's why the following techniques are used to make comparable financial data of any business: -

1. Comparative Statements: 

The comparative Statements are the group account-wise comparative study of two or more years of financial statements i.e. balance sheet and profit and loss account. 

2. Common-size Statements:

The common-size statements are the states in which we will study the two or more years of financial statements by putting them side by side and converting the values into percentages to compare them. 

3. Ratio Analysis:

In the ratio analysis, we convert the value of two or more components into the ratio for comparing them. There are fixed arithmetical formals available to calculate the ratios of the financial information which we will discuss next topics. 

4. Cash Flow Statement:

The cash flow statement shows the actual inflow and outflow of cash for the various activities of the business i.e., Operating activities, administration activities, investing activities and financial activities. 

Thanks for reading the topic.

please comment with your feedback with whatever you want. If you have any questions, please ask us by commenting.

References: -

1. mca.gov.in
2. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.