Scribd
Upload
57 views3 pages

PT A Acc Notes

This document discusses financial statement analysis. It defines financial statement analysis as a systematic process of studying relationships among financial factors in statements to understand a business's workings and position. The objectives of analysis are to measure profitability, financial strength, perform comparative studies within/between firms, judge management efficiency, and provide useful information. Analysis tools include comparative statements, common size statements, ratio analysis, and cash flow statements. Limitations include ignoring price changes, analyst bias, qualitative limitations, differing accounting policies, and window dressing. Internal and external users are also outlined.

Uploaded by

fathima hamna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
57 views3 pages

PT A Acc Notes

This document discusses financial statement analysis. It defines financial statement analysis as a systematic process of studying relationships among financial factors in statements to understand a business's workings and position. The objectives of analysis are to measure profitability, financial strength, perform comparative studies within/between firms, judge management efficiency, and provide useful information. Analysis tools include comparative statements, common size statements, ratio analysis, and cash flow statements. Limitations include ignoring price changes, analyst bias, qualitative limitations, differing accounting policies, and window dressing. Internal and external users are also outlined.

Uploaded by

fathima hamna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

CHAPTER-2

Financial statement analysis


Financial Statements analysis is a systematic process of studying the relationship
among the various financial factors contained in the financial statements to have a
better understanding of the working and the financial position of a business.

In simple words analysis of financial statements is a more comprehensive study of balance


sheet and profit and loss account using the tools of analysis to get a proper understanding of
profitability and financial position of business.
Objectives or Purposes of Financial Statement Analysis

a) To measure the Profitability or Earning Capacity of the business -analysis


helps in measuring the profits and earning capacity of business. It helps in
judging whether the profits are accurate or not.
b) To measure the Financial Strength of the business – analysis helps in
understanding the financial position of the company. It helps in judging the
financial health of the business.
c) To make Comparative Study within the firm (intra – firm) and with other firms
(inter – firm)- analysis helps in comparisons of financial statements. There are two
types of comparisons-
1) Intra firm- it is the comparison within the business i.e. previous year and current
year or from one department to another. It is also known as trend analysis.

2) Inter firm- it is the comparison of one business to another i.e. comparing one
company to another. It is known as cross sectional analysis.

d) To judge the Efficiency of Management- profits and assets of the business


helps in judging the efficiency of the business i.e. whether the business is utilising its
resources in an efficient manner or not.
e) To provide Useful Information to the Management- analysis helps the
management to get useful insight of the business which helps them in taking many
managerial decisions.
f) To find out the Capability for payment of interest, dividend etc. - profitability of
the business helps in judging whether the business will be able to pay interest and
dividend. Analysis helps in judging the capability of the business of payment of
interest and dividend.
g) To measure the Short-term and Long-term Solvency of the business- analysis
helps in judging whether the business will be able to pay its short term and long term
dues.
Limitation of Financial Statement Analysis
1) Ignores changes in price level. -Financial accounting analysis does not take in
to consideration the current changes in the prices in the economy.

2) Affected by the personal ability and bias of the analyst- since analysis is done
by the accountant he or she applies their own personal judgement while using
the tools of analysis which affect the analysis.

3) Lack of qualitative analysis as only those transaction and events are recorded
which can be measured in terms of money.- only those transactions in
financial statements can be analysed which can be measured in money.
4) When different accounting policies are followed by the two firms then
comparison between their financial statement becomes unreliable.- since
accounting is dependent upon personal judgement of the accountant
sometimes different policies adopted by accountant makes it difficult to
compare the financial statements

5) Analysis of single year’s financial statement have limited use- single year
financial statements are of limited use as they cannot be used for inter firm
and intra firm comparisons.

6) Also affected by the Window dressing- Window dressing refers to the


presentation of a better financial position than what it actually is by
manipulating the books of accounts. If the values of different assets and
liabilities are not shown at fair value the analysis will not give a fair picture of
the business.

Significance or Importance of Financial Analysis: the importance of the analysis


is for two users-
i) Internal users- these are the users within the business which require analysis of
financial statements. The internal users are-

For Management: To know the profitability, liquidity and solvency position to


measure the effectiveness of its own decisions taken and to take corrective measure
in future.

For Owners: Owners or present investors contribute capital in the business and as
such want to know about the profitability and financial soundness of the business

2) External users- these are the users outside the business which require analysis of
financial statements. The external users are –

For Potential investors: They need information to judge how safe and rewarding the
proposed investment will be.

For Creditors: Short-term creditors want to know the liquidity position of the business
where as long term creditors want to know about the solvency position and ability to
pay the interest consistently.

For Government: To know the profitability position for taking taxation decision and to
take decisions about the price regulations.

For Employees: To know the progress of the company for assessing bonus, possible
increase in wages and to ensure stability of their jobs.

For Customers: To know about the continuance of the business in future.

For Tax Authorities: They need information for the assessment of income tax GST
etc.
Tools for financial statement analysis
The various tools used for analysis of financial statements are:
Comparative Statement: It is a statement in which financial Statements of two years
are compared and changes in absolute terms and in percentage terms are
calculated. It is a form of Horizontal Analysis.

Types of Comparative Statements:

1. Comparative Balance Sheet; and


2. Comparative Statement of Profit and Loss.
Comparative Balance Sheet: It shows the increases and decreases in various
items of assets, equity and liabilities in absolute term and in percentage term by
taking the corresponding figures in the previous year’s balance sheet as a base.
COMPARATIVE STATEMENT OF PROFIT AND LOSS/COMPARATIVE INCOME
STATEMENT
Comparative Income Statement: It shows the increases and decreases in various
items of income Statement in absolute amount and in percentage amount by taking
the corresponding figures in the previous year’s Income Statement as a base.

2) Common Size statement: Figures of Financial statements are converted it to


percentage with respect to some common base.

In Common size Income Statement Sales/Revenue from Operations is taken is


common base where as in Common size Balance Sheet Total assets or Total
Equity and Liabilities are taken as common base.

3) Ratio Analysis: It is a technique of Study of relationship between various items in


the Financial Statements. An analysis of financial statements with the help of
accounting ratios is termed as Ratio analysis

4) Cash Flow Statement: It is a statement that shows the inflow and outflow of cash
and cash equivalents during a particular period which helps in finding out the causes
of changes in cash position between the two balance sheet dates. It is prepared
under accounting standard 3.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy