The stakeholders of a firm viz., shareholders, creditors, suppliers, managers,employees, tax authorities, government and others are interested broadly in knowing what the firm is doing and whether the firm is financially sound or otherwise. The information requirement of each of these stakeholders may be different. Trade creditors and short-term lenders are interested knowing the ability of the firm to meet short-term liabilities, whereas term lending institution and banks are interested in the long-term survival of the firm. Similarly, others stakeholders may have other information requirements.Before introducing you to the concept of financial analysis let us recapitulate on the various types of financial statements, as all the variables used in ratio analysis are taken from these statements.
1. Profit & Loss A/c (P&L A/c) : The income statement or trading and profit and loss account shows the various variables regarding expenses and revenue and the aggregate difference between these two as either net profit or net loss.
2. Balance Sheet : Balance sheet is a statement that shows the financial position of a firm on a particular date, it summarises the assets owned by the business and the claim of the owners and creditors against thes assets in the form of liabilities as on the date of the statement.
3. Profit & Loss Appropriation A/c : This statement that is also known as profit and loss appropriation account is a link between P&L A/c and Balance sheet. The net profit shown in the P&L A/c is transferred to the balance sheet after appropriation though this statement. Retained earnings are the accumulated excess of earnings over losses and dividends.
4. Fund Flow Statement : This statement shows the sources of funds from which additional funds are derived and the use (application) of these funds.
5. Cash Flow Statement : This statement depicts the change in cash position from one period to another.
Financial statements are the means of providing general information regarding operational results and the financial position of a business firm. These statements do not reveal significant information such as efficiency of management strength and weakness of the firm, potential of further progress,etc. In order to extract meaningful information these statements need to be analysed and interpreted for specific purposes. Analysis of financial statements is the systematic numerical calculation of the relationship between
one fact with the other to measure the profitability, operational efficiency and the growth potential of the business.
The main objectives of financial statement analysis and interpretation are as follows :
• Measuring financial soundness
• Judging solvency
• Measuring profitability
• Judging operational efficiency
• Indicating trends
• Assessing growth potential
• Inter firm and intra firm comparison
1. Profit & Loss A/c (P&L A/c) : The income statement or trading and profit and loss account shows the various variables regarding expenses and revenue and the aggregate difference between these two as either net profit or net loss.
2. Balance Sheet : Balance sheet is a statement that shows the financial position of a firm on a particular date, it summarises the assets owned by the business and the claim of the owners and creditors against thes assets in the form of liabilities as on the date of the statement.
3. Profit & Loss Appropriation A/c : This statement that is also known as profit and loss appropriation account is a link between P&L A/c and Balance sheet. The net profit shown in the P&L A/c is transferred to the balance sheet after appropriation though this statement. Retained earnings are the accumulated excess of earnings over losses and dividends.
4. Fund Flow Statement : This statement shows the sources of funds from which additional funds are derived and the use (application) of these funds.
5. Cash Flow Statement : This statement depicts the change in cash position from one period to another.
Financial statements are the means of providing general information regarding operational results and the financial position of a business firm. These statements do not reveal significant information such as efficiency of management strength and weakness of the firm, potential of further progress,etc. In order to extract meaningful information these statements need to be analysed and interpreted for specific purposes. Analysis of financial statements is the systematic numerical calculation of the relationship between
one fact with the other to measure the profitability, operational efficiency and the growth potential of the business.
The main objectives of financial statement analysis and interpretation are as follows :
• Measuring financial soundness
• Judging solvency
• Measuring profitability
• Judging operational efficiency
• Indicating trends
• Assessing growth potential
• Inter firm and intra firm comparison
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