Financial statement analysis, as the name suggests is the analysis of financial statements. Generally, the financial statements of an organization include the profit and loss account or the income statement, the balance sheet and the statement of cash flows.

1. FAQs on Financial Statement Analysis
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Financial statement analysis, as the name suggests is the analysis of financial statements. Generally,
the financial statements of an organization include the profit and loss account or the income
statement, the balance sheet and the statement of cash flows. Mere preparation of the income
statement, the balance sheet and the cash flows statements may not yield or show the overall
health of the organization. This calls for an in-depth analysis of these financial statements. And that
is the basis for conducting financial statement analysis.
The analysis of financial statements includes the analysis corresponding to the information recorded
in the financial statements which include revenue earned for the year, profit earned for the year,
profit to assets ratio, profit to equity ratio, profit to debt ratio, ratio of current assets to fixed assets,
ratio of current liabilities to long term liabilities, etc. Each of these calculations and ratios give an
insight into the functioning of the organization. They also help in gauging the overall performance of
the firm against benchmark performances of a typical firm operating under similar conditions.
Here are some of the FAQs or frequently asked question in financial statement analysis
What are financial ratios and how do we use them?
A: Financial ratios are relative comparison of two or more heads or items belonging to financial
statements, which can be used for comparing purposes. For example, gross profit ratio is a ratio
which describes the margin of gross profit in terms of the cost of goods sold. Mathematically, gross
profit ratio is Revenue – Cost of goods sold/ Revenue. The higher the ratio, the better.
What are different types of financial ratios?
A: Financial ratios are an integral part of financial statement analysis and they are used to quantify
various aspects of an organization which include liquidity, activity, debt, profitability and market
strength. For example, liquidity ratios measure the cash reserves and their availability to the firm.
Profitability ratios measure the profit earned for every dollar invested by the firm. Activity ratios
measure the operations time of the firm. In other words, it explains in how much time the firm
converts the raw materials into finished products, sells them and earns profit. Debt ratios measure
the percentage or ratio of outside debt in total liabilities and long term liabilities. Market ratios help
in measuring the returns per share, book value of shares, market value of shares, market to book
ratio, etc.
Give an analysis of return-on-investment ratios?
A: Return-on-investment ratios, as the name suggests are used to compare the percentage or ratio
of the amount invested and the return or revenue generated on the amount. In other words, the
earnings per dollar is calculated. Some of the ratios include return on assets, return on common
equity or return on equity shares, return on total equity, return on total capital, etc.
How can common-size-analysis be used for analyzing financial statements?

2. A: Common-size-analysis of financial statements is a process where in the financial statements are
expressed in terms of both numbers and the percentage change over the years. For example, in a
common-size balance sheet for two years, the change in assets as well as the change in liabilities is
compared in terms of percentage change. This can give a good insight into some of the substantially
large changes that have been happening in the firm in from past to the present. And help in making
investment and other decisions.