Financial statement analysis (1)
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Financial statement analysis is the process of understanding the risk and profitability of a firm through analyzing reported financial information using accounting tools and techniques. It is the foundation for evaluating credit risk and doing fundamental company valuation. There are different types of financial statement analysis including long-term analysis for assessing solvency over time, short-term analysis for short-term creditors, internal analysis by insiders, and external analysis by outsiders with limited information. Other types are horizontal analysis comparing items over years, vertical analysis examining items as a percentage of a total, and dynamic analysis using data from multiple years.
Financial statement analysis (1)
- 2. Financial statement analysis (or financial analysis) is the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques. Financial statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
- 3. 1)Long Term Analysis: In this case the long term solvency, stability and profitability positions are judged. It is helpful for long term providers of funds. It judges the company’s position over a period of time 2)Short Term Analysis: It is helpful for short term providers of funds. Short term funds are current liabilities. Mainly trade creditors and banks in order to provide bank overdraft and short term loans use short term analysis
- 4. 3)Internal Analysis : An internal analysis is done by insiders of the firm who have access to all financial information. This involves identifying the business strengths and weaknesses, by analysing its competencies 4)External Analysis : External Analysis is an analysis done outsiders to the business firm. Such parties have access to limited financial information which are published or revealed to analysts by the firm
- 5. 5)Horizontal Analysis : In case of horizontal analysis the financial statement are analyzed horizontally. Examples of horizontal analysis are comparative statement analysis and trend statement analysis. In case of horizontal analysis the same item is compared of one year preceding year or the following years. 6)Vertical Analysis : In case of vertical analysis only one year’s financial statement is required. The analysis is done vertically in this case. A particular item i.e. net sales in income statement and in balance sheet total capital available/ employed, is compared with all other items
- 6. 7)Dynamic Analysis :In case of dynamic analysis more than one year’s financial data is essential. Examples of dynamic analysis are ratio calculated for more than one year, comparative statement analysis, trend analysis etc 8)Static analysis : In case of static analysis only one year’s financial data is utilized. It has limited scope since year-to-year comparison cannot be done. Examples of static analysis are ratios calculated of only one year , common size analysis, etc
- 7. 9)Intra-Firm Analysis : Intra firm analysis is used to comparing the financial performance of the same business firm over a period of time. 10)Inter-Firm Analysis : Inter firm analysis is used to compare the financial figures of two firm from the same industry for the name period. 11)Standard Analysis : Standards are set in advance against which the actual performance is measured and inferences are drawn.
- 8. Lavish Jain : 11 Nikesh Patra : Ashwin Shanbang: