Introduction to Financial Statement Analysis
Meaning of Financial Analysis is to classify the data in simple form given in Financial Statements and to compare with each other to find out the strong points and weakness of the business and to take decisions for future. For instance, if all items relating to Current Assets and placed in one group while all items relating to Current Liabilities are placed in another group, the comparison between the two groups will provide useful information. Actually the figure given in financial statements do not speak anything themselves. The analysis of these figures helps the interested reader by given tongue to these mute heaps of figures.
Financial Analysis is prepared primarily for decision- making. They play a dominant role in setting the framework of managerial decisions. Financial statement analysis is ‘the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account’.
There are various methods or techniques used in analysing financial statement, such as comparative statements, trend analysis, and common – size statements, schedule of changes in working capital, fund flow and cash flow analysis, cost- volume- profit analysis and ratio analysis.
In the words of Myers, “Financial Statement Analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statements.” The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. The analysis and interpretation of financial statements is essential to bring out the mystery behind the figures in financial statements. Financial statements analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest, debt maturity and profitability of a sound dividend policy.
PARTIES INTERESTED IN FINANCAIL ANALYSIS
The following parties are interested in the analysis of financial statements: Investors or potential investors.
Creditors and suppliers.
Bankers and financial institutions
Economists and researchers.
METHODS OR DEVICES OF FINANCIAL ANALYSIS
The analysis and interpretation of financial statements is used to determine the financial position and results of operations as well. A number of methods or devices are used to study the relationship between different statements. The following methods of analysis are generally used: Comparative statements;
Common –size statements;
Funds flow analysis;
Cash flow analysis;
Cost – volume profit analysis.
For the purpose of my project, two methods have been used to analysis the financial statement of NEEPCO. The methods used are: Comparative Balance sheet
LIMITATION OF FINANCIAL ANALYSIS
Financial analysis is a powerful mechanism of determining financial strengths and weaknesses of a firm. But, the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitations of financial statements. The financial analyst has also to be careful about the impact of price level changes, window dressing of financial statements, changes in accounting policies of a firm, accounting concepts and conventions, and personal judgement, etc. The conclusions drawn from financial statements may not give a fair picture of the concern. The financial statements are expressed in monetary values, so they appear to give final and accurate position. Some of the important limitations of financial analysis are, however,...
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