2.
Financial statement analysis (or financial
analysis) is the process of understanding
the risk and profitability of a firm
(business, sub-business or project) through
analysis of reported financial
information, by using different accounting
tools and techniques.
Financial statement analysis is the
foundation for evaluating and pricing credit
risk and for doing fundamental company
valuation.
3. 1)Long Term Analysis: In this case the long term
solvency, stability and profitability positions
are judged. It is helpful for long term
providers of funds. It judges the company’s
position over a period of time
2)Short Term Analysis: It is helpful for short term
providers of funds. Short term funds are
current liabilities. Mainly trade creditors and
banks in order to provide bank overdraft and
short term loans use short term analysis
4. 3)Internal Analysis : An internal analysis is done
by insiders of the firm who have access to all
financial information. This involves identifying
the business strengths and weaknesses, by
analysing its competencies
4)External Analysis : External Analysis is an
analysis done outsiders to the business firm.
Such parties have access to limited financial
information which are published or revealed
to analysts by the firm
5. 5)Horizontal Analysis : In case of horizontal
analysis the financial statement are analyzed
horizontally. Examples of horizontal analysis
are comparative statement analysis and trend
statement analysis. In case of horizontal
analysis the same item is compared of one year
preceding year or the following years.
6)Vertical Analysis : In case of vertical analysis
only one year’s financial statement is required.
The analysis is done vertically in this case. A
particular item i.e. net sales in income
statement and in balance sheet total capital
available/ employed, is compared with all other
items
6. 7)Dynamic Analysis :In case of dynamic analysis
more than one year’s financial data is
essential. Examples of dynamic analysis are
ratio calculated for more than one
year, comparative statement analysis, trend
analysis etc
8)Static analysis : In case of static analysis only
one year’s financial data is utilized. It has
limited scope since year-to-year
comparison cannot be done. Examples of
static analysis are ratios calculated of only
one year , common size analysis, etc
7. 9)Intra-Firm Analysis : Intra firm analysis is used
to comparing the financial performance of
the same business firm over a period of
time.
10)Inter-Firm Analysis : Inter firm analysis is
used to compare the financial figures of two
firm from the same industry for the name
period.
11)Standard Analysis : Standards are set in
advance against which the actual
performance is measured and inferences are
drawn.
