Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in the future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts, and a statement of changes in equity.
The financial analysis examines and interprets data of various types according to their suitability. The most common types of financial analysis are vertical analysis, horizontal analysis, leverage analysis, growth rates, profitability analysis, liquidity analysis, efficiency analysis, cash flow, rates of return, valuation analysis, scenario and sensitivity analysis, and variance analysis.
2. What is Financial statement Analysis
Types of Financial statement analysis
Horizontal and Vertical analysis
Ratio analysis
Internal and External analysis
3. Financial statement analysis is the process of reviewing and
analyzing a company’s Financial statement to make better
economic decisions to earn income in future.
Financial statements analysis are classified according to their
objectives, Materials used and Modus operandi.
The common types of financial statement analysis are Internal &
External analysis, Short term & Long term analysis, Ratio
analysis and Horizontal & Vertical analysis.
4. Horizontal analysis also known as trend analysis.
Horizontal Analysis compares Financial information over time, typically from past
quarter or years.
5. Vertical analysis is the proportional analysis of a financial statement
Every line item on an income statement is stated as a percentage of gross sales.
6. Financial ratios compare the results in different line items of the financial
statements.
Basically, Ratio analysis means the difference between two variables.
Performance ratios: These ratios are derived from the revenue and aggregate
expenses line items on the income statement, and measure the ability of a business to
generate a profit.
It is measured by- gross profit ratio and net profit ratio
Liquidity ratios: These ratios compare the line items in the balance sheet, and
measure the ability of a business to pay its bills in a timely manner.
It is measured by- current ratio and quick ratio.
7. Leverage and coverage ratios: These ratios are used to estimate the comparative
amounts of debt, equity, and assets of a business, as well as its ability to pay off its
debts.
It is measured by- debt to equity ratio
Activity ratios: These ratios are used to calculate the speed with which assets and
liabilities turnover, by comparing certain balance sheet and income statement line
items.
It is measured by- inventory turnover, and payables turnover.
Financial ratio analysis is only possible when a company constructs its financial
statements in a consistent manner.
8. Intercanal Financial analysis in generally referred to as managerial financial
analysis. It is used to take a proper financial decision.
Internal users of financial statement analysis are managers and owners.
External financial analysis referred to overall financial heath of a company.
Users of external financial statement are owners and prospective owners, Creditors
and lenders, Employees and their unions, Customers, Governmental units, General
public.
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