Financial statement analysis is a formal record of the financial activities of a business, person, or other entity. A financial statement analysis is often referred to as accounting activities, although the term financial statement is also used, particularly by accountants.
2. Statement of Comprehensive
Income analysis referred to as Profit and
Loss statement analysis, reports on a compani's income. expenses, and profits over a period of time.
3. A Financial statement analysis provides information on the
operation of the enterprise. These include sale and the various expenses
incurred during the processing state.
4. Financial statement analysis gives
information about the of changes in equity which helps to explain the changes of the company's
equit\ throughout the
reporting period
5. Financial statement analysis provides information about cash t1o\\s which helps to prepare reports on a company's cash
flovv activities, particularly its operating, investing and financing activities.
6. Financial
statement analysis gives information to owners and managers to make important
business decisions that affect its continued operations.
7. Financial
statement analysis is
performed a more detailed understanding of the figures which provide relevant information to
management.
8. Employees
also need these reports in making collective bargaining agreements (CBA) with the
management, in the case of labor unions or for individuals in discussing their compensation,
promotion and rankings,
at these points financial statement analysis helps to them.
9. Prospective investors make use of financial statements to
assess the viability
of investing in a business. Financial analyses are often used by investors and are prepared by
professionals (financial analysts), thus providing them with the basis for making investment
decisions.
l0.Financial institutions (banks
and other lending companies) use them to decide whether to grant a company with fresh working
capital or extend debt
securities (such as a long-term bank loan or debentures) to finance expansion and other
significant expenditures.
1 l. Government entities (tax
authorities) need financial statements to ascertain
the propriety and accuracy of taxes and other duties declared and paid by a company.
12. Vendors who extend
credit to a business require financial statemems to assess the creditworthiness
of the business.
13.Media
and the general public are also interested in financial statements for a variety of reasons.
Limitations of Financial Statement Analysis:
Although financial
statement analysis is highly useful tool, it has limitations also. The limitations involve the
comparability of financial data between companies and the need to look beyond ratios.
Comparison of one
company xith another can provide valuable clues about the financial health of
an organization. Unfortunately, differences in accounting methods between companies sometimes
make it difficult tO compare
the companies' financial data.
The analyst should keep in mind
the lack of comparability of the data before
drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios
with other companies and with
industry average often suggest avenues for further investigation.
An inexperienced analyst may
assume that ratios are sufficient in themselves
as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on
ratios analysis must be regarded as
tentative. In addition to ratios, other sources of data should be analyzed in order to make judgment about the future
of an organization.