The analysis of financial statement is a process of evaluating the relationship between component parts of financial statement to obtain a better understanding of firm financial position.
Analysis is a process of critically examining the accounting information given in financial statements. For the purpose of analysis, individual items are studied; their interrelationship with other related figures is established.
Thus analysis of financial statement refer to treatment of information contain in financial statement in a way so as to afford a full diagnosis of the profitably and financial position of the firm concern.
According to Myser “Financial study analysis is largely a study of relationship among the various financial factor in the business as disclosed by the single set of statement and a study of trend of these factor shown in the financial statement”.
OBJECTIVE OF FINANCIAL STATEMENT ANALYSIS
Financial statement is helpful in assessing the financial position and profitability of the concern. Keeping in the view of accounting ratio the accountant should calculate the ratio in appropriate form as early as possible for presentation for management for managerial decisions.
Following are the main objectives of analysis of financial statements: -
1. To evaluate the business in terms of profit in present and future.
2. To evaluate the efficiency of various parts or department of the business.
3. To evaluate the short term and long term solvency of business for distributing profit to the trade creditor and debenture holders.
4. To evaluate the chances of growth of business in the future by preparing budgets and forecasting.
5. To evaluate the operational efficiency of one firm with another firm by study the comparative statements.
6. To evaluate the financial and economical stability of the business.
7. To evaluate the actual meaning and consequence of financial data.
8. To evaluate the long-term liquidity of the fund of the business.
IMPORTANCE OF ANALYSIS OF FINANCIAL STATEMENT
Financial statement is prepared at a certain point of time according to established convention. These statements are prepared to suit the requirement of the proprietor. For measuring the financial soundness, efficiency, profitability and future prospects of the concern, it is necessary to analyze the financial statement. Following purposes are served by the Financial analysis: -
- Help in Evaluating the operational efficiency of the Concern:- It is necessary to analyze the financial statement for matching the total expenses incurred in manufacturing, Advertising, selling and distribution of the finished goods and total financial expanses of the current year comparing with the total expanses of the previous year and evaluate the managerial efficiency of concern.
- Help in Evaluating the short and long term financial position:- It is necessary to analyze the financial statement for comparing the current assets and current liabilities to evaluate the short term and long term financial soundness.
- Help in calculating the profitability:- It is necessary to analyze the financial statement to know the gross profit and net profit.
- Help in indicating the trend of achievements:- Analysis of financial statement helps in comparing the Financial position of previous year and also compare various expenses, purchases and sales growth, gross and net profit. Cost of goods sold, total value of assets and liabilities can be compare easily with the help of Analysis of financial statement.
- Forecasting, budgeting and deciding future line of action:-The potential growth of the business can be predicts by the analysis of financial statement which helps in deciding future line of action. Comparisons of actual performance with target show all the shortcomings.
LIMITATIONS OF FINANCIAL ANALYSIS
- It is Suffering from the limitations of financial statements
- There is Absence of standard universally accepted terminology in financial analysis
- price level changes is ignored in financial analysis
- quantity aspect is ignored in financial analysis
- Financial analysis provides misleading result in absence of absolute data