Financial Statement Analysis

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The role of financial statement analysis is to use the company’s financial statements & other relevant information to make economic decisions. Two major areas where financial statement analysis is used to help make decisions are :

• Evaluate company’s past performance and current financial position
• Project company’s ability to earn profits and future cash flows

What is design to cost?- an overview

The major economic decisions that can be taken through financial statement analysis are:

• Whether to invest in the company’s securities
• Whether to extend bank credit to the company

While doing financial statement analysis the analyst must classify the business activities into three groups. Understanding the nature of activities of a firm helps the analyst to ascertain where the company is doing good and where it is lacking.

• Operating Activities : – Activities that are part of a day-to-day business functionality of an entity . Eg. sales of goods and services to customers, costs of providing the goods and services, taking deposits and making loans by bank.
• Investing Activities : – Activities associated with the acquisitions and disposals of a long term assets. Eg. purchase and sale of a office building, plant and machinery, purchase or sale of other entities equities or debt securities.
• Financing Activities : – Activities related to obtaining and repaying capital. Eg. issuing common shares , bonds etc . Issuance or repayments of debt , payments of distribution ( dividend ).

Different financial statements used for analytical purposes are:

• Income Statements is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
• Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
• Cash Flow provides information about sources and uses of cash of the firm. It provides information to assess firm’s liquidity, solvency and financial flexibility.

Also Read- Financial Planning for small and medium-sized businesses: 5 Tips for Sustainable Growth

Statement of change in owner’s equity details the change in owners’ equity over an accounting period by presenting the movement in reserves comprising the shareholders’ equity.

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