FINANCIAL ANALYSIS

• 1380
• 1381
• 1382
• 1383
• 1385
 FINANCIAL ANALYSIS
• It is a process of :
Analyzing and interpreting financial statements.
Analyzing means simplifying the data and interpreting means explaining the
meaning and significance of data so simplified.
Critically examining the accounting information given in the financial
statements.
Evaluating relationships between the component parts of financial
statements to obtain a better understanding of firm’s position and
performance.
 FINANCIAL STATEMENTS

It is the outcome of summarizing process of accounting.

Means of conveying to management, owners and to interested outsiders a

concise picture of profitability and financial position of the business.

Its purpose is to convey an understanding of financial aspects of business

firm.
 POTENTIAL FINANCIAL STATEMENT
USERS:
• Creditors
• Investors
• Managers
• Employees
• Taxation authorities
• Shareholders
 OBJECTIVES / IMPORTANCE:
• To assess the earning capacity and profitability of firm
• To assess the operational efficiency and managerial effectiveness.
• To make inter-firm comparisons.
• To make forecasts about future prospects of firm
• To help in decision making and control
• To guide or determine the dividend action
• To identify the reason for change in profitability and financial position of the firm.
• To assess the progress of firm over a period of time.
 POTENTIAL FINANCIAL STATEMENT
USERS:
• Creditors
• Investors
• Managers
• Employees
• Taxation authorities
• Shareholders
External analysis is conducted by persons outsiders who don’t have access to the
internal accounting records of business firm such as investors, creditors, govt. agencies,
credit agencies and general public.

Internal analysis is conducted by persons who have access to internal accounting

records of a business firm, such as executives and employees of organization.
• Horizontal analysis: It refers to the comparison of financial data of a
company for several years. This type is also called ‘ dynamic analysis’ as it is
based on the data from year to year rather than single year.

• Vertical analysis: it refers to the study of relationships of the various items in

the financial statements of one accounting period. It is also called as ‘ static
analysis’.
 STEPS OF FINANCIAL ANALYSIS:
• Establish objectives of the analysis.
• Defining extent of analysis.
• Re- organization and rearrangement of financial data.
• Relationship among financial statements with help of tools and techniques
• Interpretation of information
• Drawing a conclusion.
 LIMITATIONS:
• It is based on monetary information and non-monetary factors are ignored
• It doesn’t consider changes in price level.
• Changes in accounting procedures by a firm may often make financial
analysis misleading
• Analysis is only a means and not the end itself. The analyst has to make
interpretation and draw his own conclusions.
• Different people may interpret same analysis in different ways.
 TOOLS AND TECHNIQUES
• Comparative statements
• Trend- analysis
• Fund flow analysis
• Cash flow analysis
• Ratio analysis
• Common-size statements