Scribd
Upload
40 views2 pages

Fsa Revision Notes

Uploaded by

Gauri Gavkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
40 views2 pages

Fsa Revision Notes

Uploaded by

Gauri Gavkar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

CHP 1

1. What is Financial Statement Analysis?

Financial statement analysis involves reviewing a company’s financial reports to understand its
performance, financial position, and cash flows.

These reports include the balance sheet, income statement, and cash flow statement.

The goal is to assess the company’s profitability, liquidity, and financial stability.

2. Key Financial Statements

Income Statement: Shows the company’s revenues, expenses, and profits over a specific period. This
helps you understand how much money the company made or lost.

Key terms: Revenue, Gross profit, Operating profit, Net profit.

Balance Sheet: Provides a snapshot of a company’s assets, liabilities, and equity at a specific point in
time. It helps you understand what the company owns (assets) and owes (liabilities).

Key terms: Assets (Current and Non-Current), Liabilities (Current and Non-Current), Equity.

Cash Flow Statement: Shows how cash moves in and out of a company. It splits cash flows into three
activities: operating, investing, and financing.

Key terms: Cash from operations, Cash from investing, Cash from financing.

3. The Purpose of Financial Statement Analysis

Evaluating Performance: Financial statement analysis helps you evaluate how well a company is
doing in terms of generating profits and managing expenses.

Assessing Risk: You can assess the company’s liquidity (ability to meet short-term obligations) and
solvency (ability to meet long-term obligations).

Making Investment Decisions: By understanding financial statements, investors can decide if a


company is a good investment opportunity.

4. Types of Financial Ratios Used in Analysis

To analyze financial statements, analysts often use financial ratios. These ratios give quick insights
into a company’s financial health. Some common ratios include:

Profitability Ratios (e.g., Return on Equity, Gross Profit Margin): Measure how well the company
generates profit from its sales and assets.

Liquidity Ratios (e.g., Current Ratio, Quick Ratio): Measure a company's ability to meet short-term
obligations (debts).

Leverage Ratios (e.g., Debt-to-Equity Ratio): Measure the company’s financial risk by comparing its
debt to its equity.

Efficiency Ratios (e.g., Inventory Turnover, Receivables Turnover): Measure how efficiently the
company uses its assets to generate sales.
5. Steps in Financial Statement Analysis

Step 1: Collect Data: Obtain the company’s latest financial statements (income statement, balance
sheet, cash flow statement).

Step 2: Perform Ratio Analysis: Calculate key ratios to assess profitability, liquidity, solvency, and
efficiency.

Step 3: Compare with Industry or Peers: Compare the company’s ratios to those of other companies
in the same industry or sector. This gives context to the numbers.

Step 4: Assess Trends Over Time: Look at the company’s financial performance over multiple periods
(e.g., years) to identify trends.

Step 5: Interpret the Results: Based on the ratios and trends, draw conclusions about the company’s
financial health, its strengths, weaknesses, and potential risks.

6. Common Pitfalls in Financial Statement Analysis

Window Dressing: Companies may sometimes manipulate financial statements to look better,
especially at year-end. Be cautious of changes that don’t reflect real performance.

Different Accounting Methods: Different companies might use different accounting methods (e.g.,
LIFO vs. FIFO), making direct comparisons difficult.

Non-Recurring Items: Ensure that one-time events (like asset sales) don’t skew your analysis of
ongoing performance.

7. Limitations of Financial Statement Analysis

Historical Data: Financial statements are based on past data and might not fully reflect the current or
future situation.

Accounting Differences: Companies may use different accounting standards (like IFRS vs. GAAP),
affecting comparability.

Non-Financial Factors: Financial statements alone can’t tell the full story. Non-financial factors (like
competition, market conditions, management quality) are also important.

Summary:

Financial statement analysis helps you evaluate a company’s financial health by analyzing its income
statement, balance sheet, and cash flow statement.

Key tools used in the analysis are financial ratios (profitability, liquidity, leverage, and efficiency
ratios).

It’s important to compare the company’s financial performance to industry peers and trends over
time.

While useful, financial statement analysis has limitations and should be used in combination with
other information (like market conditions, management quality)

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