You already know the preparation of financial statements such as balance sheet and profit and loss account for the profitable and nonprofit able organizations. When the financial statement prepared different people interested in analyzing the financial statements by using different methods. These are comparative statement, Common size statement, Ratio analysis, Trend analysis, Fund flow analysis, etc. This procedure gives a important link between the accounting figure for comparison. * Purpose:
* It tells us the importance, requirement and function of financial statement analysis * It also tells us people are investor interested in financial statement analysis. * It show the different technique and tools use in financial statement analysis. * Financial Statement Analysis:
Financial activity is major activity of the business. Every business prepares statement to validate the financial situation of the business this is called financial statements. It’s main purpose to prepare it for decision making. The data in the financial statement is not sufficiently useful for making conclusion. Therefore it is necessary to make effective analysis and explanation of financial statements. Analysis means productive relationship between different elements of the two financial statements with each other in order to give conclusion. Here financial statement required two statements. * Balance Sheet
* Income Statements
The income statement and balance sheet are constructing at the closing stages of specified time period. These two statements give the profitability and financial position of the business. Analysis of financial statement means to know the performance and the competency of an organization. So it is very important to measure the organization operations and success and its future position. There are the following objectives of financial analysis:
* Measuring the profitability: People do business for earning money on his investments. The financial analysis assists the investor to find out how much profit did he earned on the investment he made in business. It also helps to know the amount of dividend and interest. * Indication the trend. The previous year statement is match to current year financial statement to know the trend of the business concerning operating cost, revenue, profit and net profit. Then analysis of asset and liability and compared it to find out the future forecast of business. * Assessing the development prospective of the company: It provides enough information to know about the growth possibility of the company. * Firm Strength in relation to other firms: The main objective of the study is that to compare own firm profitability to different companies involve in same business. It also assists the management to know the firm sales, cost, profitability and resources employment. * Assess overall financial strength: It help to find out the financial strength of the firm. It also assist in decision making that inform about that fund will use from internal source or external source to purchase new machine and equipment. * Assess solvency of the firm: It’s also indicate the firm has enough money to pay its current and long term liability or not. * Interested Parties:
Financial statement analysis is very important therefore there are many parties interest in the business. The interested parties in the analysis of financial statement are following: * Investor: These are the share holders or sole owner of the business and are interested in the growth and profit of the business. * Management: the management also wants to know the growth and performance of the different units of the firm. Because this is their responsibility to understand how to make a budgets and different unit performance. * Trade unions: They have concern in the financial statement for dealing the rate of wages, bonus settlement with the...