Guidelines and uses of financial statement analysis
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The document outlines guidelines for financial statement analysis, emphasizing the importance of using ratios judiciously, selecting a limited number of relevant ratios, and referencing industry standards. It highlights the need to understand potential loopholes in financial reporting and the significance of footnotes for uncovering hidden information. Additionally, it notes that financial analysis combines both art and science, requiring a thoughtful approach beyond mere numerical assessment.
Guidelines and uses of financial statement analysis
- 1. Guidelines and Uses of Financial Statement Analysis Students should remember the following guidelines while analysing the Financial Statements: 1. Use of ratios to get hints while questioning – Computing ratios help in questioning correctly about the company’s financial position, even though accurate answers may be given, ratios form a mode in understanding company’s affairs. Continue Reading
- 2. 2. Being selective while choosing ratio – Scores of different ratios can be computed however there is possibility of getting perplexed. Hence for most reasons a minute set of ratios generally three to seven would be sufficient. Few ratios appropriately chosen would take into custody most of the information that can be derived from financial statements. Continue Reading
- 3. 3. Employment of proper point of reference computed ratios (computed from a set of financial statements) against some point of reference or standards. These standards could be either the industrial average ratios or the industrial ratios of the leaders or the past ratios of the same concern. Continue Reading
- 4. 4. Knowledge of loop holes used by the accountants – As firms are inclined to influence the reported income, students should learn about the tools employed by them. 5. Footnotes not to be ignored – At times, footnotes may contain significant information. They may disclose things that management may try to conceal. The more complicated it is to read a footnote, the more information, the more weighted down it may be. Continue Reading
- 5. 6. A mixture of art and science is financial statement analysis – It is to be remembered that financial statement analysis is an uneven combination of art and science. It cannot be looked upon as a simple, structured implement. It is a process necessitating attention, care, common intellect and business judgement for whichthere are no mechanical alternatives. Continue Reading
- 6. Association Of Ratios Financial ratios of a concern, over and over again present a high scale of association. This is for the reason that quite a few ratios have some common constituent such as sales that is used in computing various turnover ratios and quite a few items are inclined to move in synchrony due to the fact of some common underlying feature. Continue Reading
- 7. In view of association of ratio, it is laid off and repeatedly puzzling to make use of a large number of ratios in financial statement analysis. For this reason it is required to choose a small set of ratios from a large group of ratios. Such an assortment has need of a good perception of the meaning and drawbacks of varied ratios and an insight into the business economics. Continue Reading
- 8. Uses of Financial Statement Analysis Appropriately combined financial ratios may be used to evaluate corporate superiority, arbitrate creditworthiness, forecast bankruptcy, assess equity shares, forecast bond ratings and appraise market risk. At the same time as financial statement analysis can be a very constructive device, there are definite problems and matters stumbled upon in such analysis. Wide-ranging business analysis calls for going ahead of conventional financial appraisals to regard qualitative features pertinent for assessing the presentation and hopes of a company Continue Reading
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