REVIEW OF LITERATURE Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. It is a tool in decision-making processes related to stocks, bonds, and other financial instruments. Analysis of financial statements provides valuable information for managerial decision. Financial analysis is commonly called analysis and interpretation offinancial statement. Analysis of financial statements means establishing relationship between the items in financial statements for determining the financial strength and weakness of business. It is the process of scanning of the financial statements to judge profitability solvency, stability, …show more content…
Other factors should also be considered such as a company's products, management, competitors, and vision for the future. (Fieldsend, Longford and McLeay, 1987). Following are the cautions while doing financial analysis. First, a single ratio does not generally provide sufficient information from which to judge the overall performance and status of the firm. Only when a group of ratios is used can reasonable judgments be made. If an analysis is concerned only with certain specific aspects of a firm’s financial position, one or two ratios may be sufficient. Second, It is preferable to use audited financial statements for ratio analysis. If the statements have not been audited, there may be no reason to believe that the data contained in them reflect the firm’s true financial condition. Third, the financial data being compared should have been developed in the same way. The use of differing accounting treatments, especially relative to inventory and depreciation can distort the results. (Whitis and Keith, 1993). Time-series analysis is applied when a financial analysts evaluates performance over time. Comparison of current to past performance, using ratio analysis, allows the firm to determine whether it is progressing as planned. Using multiyear comparisons can see developing trends, and knowledge of these trends should assist the firm in planning future operations. As in cross-sectional analysis, any
1. What is the purpose of financial statement analysis? The purpose of financial statement analysis is to provide information used by the business, potential creditors and investors.
3. Financial analysis seeks to use financial data to evaluate the performance of a firm. The outcome from financial analysis is incorporated into prospective analysis, the next step in financial statement analysis.
Financial Statement Analysis is the process of reviewing and analyzing a company’s financial statements to make better decisions. These statement includes the Income statement, Balance sheet, Statement of cash flows and a statement of changes in equity.
The analysis of financial statements is based on the use of ratios or relative values. Financial statements are used to evaluate the condition of a firm and its financial performance. The measurement and evaluation of information presented in the financial statement is known as analysis and interpretation of financial statement, of which is the relationship between financial statements and decision making process.
Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.
Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.
Ratio analysis will be used to measure the profitability, liquidity and efficiency of the named business and to analyse the performance of the business using ratio analysis.
The financial analysis of a business organization involves the complete assessment of the liquidity, profitability, competitiveness and stability of the business. The process is done through using the financial statements of the business. The financial reports are generally presented to top management for purposes of decision making and setting up goals.
Ratio analysis: Perform trend and ratio analysis on current and fixed assets, current and long term liabilities, owner’s equity, sales revenues, EBIT, net income, and earnings per share. Project these trends
Analysis of financial statements is necessary to understanding performance. According to Investopedia (2015), there are two methods of analysis, trend or horizontal analysis and vertical analysis. As horizontal analysis is a comparison over a period of time, vertical analysis compares items within a specific financial statement based on a total amount, such as assets or liabilities. Common size financial statements are utilized to conduct vertical analysis (Vitez, 2015). With the amount of comprehensive information available, business managers are better equipped to make
There are three basic financial statement analysis, which consist of Horizontal, Vertical and Ratio (Edmonds, Tsay, & Olds, 2011). Each analysis play a very important part by allowing the company to see how the company is functioning daily. The Horizontal analysis is a trending way to compare multiple accounts over a monthly or year period. Being able to compare overall performance of different accounts will be very beneficial for the organization.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
Financial analysis is the examination of pecuniary and financial information to accomplish the companies’ commitment. This investigation resolves the migration of organizations’ possessions, to explicate external and internal operations (Berman & Knight, 2012, p 38). This just says, a way to gauge an organization achieved and failed operations. In this logic, one may agrees that a financial analysis appraises businesses’ operating effectiveness, liquidity, and capital structure.
have explained that the Financial statements provide asummarized view of the financial position and operations of a firm. Therefore, much can belearnt about a firm from a careful examination of its financial statements as invaluabledocuments / performance reports. The analysis of financial statements is, thus, an important aidto financial analysis.
Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.