Financial analysis

Topics: Balance sheet, Financial ratio, Generally Accepted Accounting Principles Pages: 12 (3272 words) Published: July 1, 2014

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT.

Introduction:
Financial statements are essentially historical and static documents. They tell us what has happened during a particular period or series of periods of time. The most valuable information to most users of financial statements or reports, however, concerns what probably will happen in the future. The purpose of financial statement analysis is to assist statement users in predicting the future by means of comparison, evaluation and trend analysis.

The first procedure in financial statement analysis is to obtain useful information. The main sources of financial information include, but are not limited to, the following:

(i) Published reports
Quoted companies normally issue both interim and annual reports, which contain comparative financial statements and notes thereto. Supplementary financial information and management discussion as well as analysis of the comparative years’ operations and prospects for the future will also be available. These reports are normally made available to the public as well as to the shareholders of the company.

(ii) Registrar of companies
Public companies are required by law to file annual reports with the registrar of companies. These reports are available for perusal at the registry upon payment of a minimum fee.

(iii) Credit and investment advisory agencies
Some firms specialize in compiling financial information for investors in annual supplements. Many trade associations also collect and publish financial information for enterprises in various industries. Major stock brokerage firms and investment advisory services compile financial information about public enterprises and make it available to their customers. Some brokerage firms maintain a staff or research analysis department that study business conditions, review published financial statements, meet with chief executives of enterprises to obtain information on new products, industry trends, negative changes and interpret the information for their clients.

(iv) Audit reports
When an independent auditor performs an audit, the audit report is usually addressed to the shareholders of the audited enterprise. The audit firms frequently also prepare a management report, which deals with a wide variety of issues encountered in the course of the audit. Such a management report is not a public document, however, it is a useful source of financial information.

(v) Government statistics and Market research organizations

Objectives of financial statement analysis

Financial analysis is the process of critically examining in detail, accounting information given in financial statements and reports. It is a process of evaluating relationships between component parts of financial statements to obtain a better understanding of a firm's performance and financial position. Financial statement analysis involves three basic procedures:

1. Selection
This involves the selection from the total information available about an enterprise, the information that is relevant to the decision under consideration.

2. Relation
This involves arranging the information in a manner that will bring out a significant relationship(s).

3. Evaluation
This involves the study of the relationship and interpretation of the result thereof.

The specific objectives of financial statement analysis

Financial statements are essentially a record of the past. Business decisions naturally affect the future. Analysts therefore study financial statements as evidence of past performance that may be used in the prediction of future performance.

The specific objectives of financial statement analysis are to: (a) assess the past, present and future earnings of an enterprise, (b) assess the operational efficiency of the firm as a whole and its various divisions or departments, (c) asses the short term and long term solvency of the firm, (d) assess the performance of one firm...
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