Page 1 of 9
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 235
A Study on Financial Statement Analysis
Dr.I.Satyanarayana1
, N.B.C. Sidhu*2
, Palle Kalpana3 (15X31E0021)
Abstract:
Financial statements are prepared primarily for
decision-making. They play a dominant role in
setting the frame-work of managerial decisions. The
term financial analyses refers to the process of
determining financial strengths and weaknesses of
the firm by establishing strategic relationship
between the item of balance sheet, profit and loss
account and other operative data. Financial
Statement Analysis is a method of reviewing and
analyzing a company’s accounting reports (financial
statements) in order to gauge its past, present or
projected future performance. This process of
reviewing the financial statements allows for better
economic decision making. Globally, publicly listed
companies are required by law to file their financial
statements with the relevant authorities. For
example, publicly listed firms in America are
required to submit their financial statements to the
Securities and Exchange Commission (SEC). Firms
are also obligated to provide their financial
statements in the annual report that they share with
their stakeholders. As financial statements are
prepared in order to meet requirements, the second
step in the process is to analyze them effectively so
that future profitability and cash flows can be
forecasted.
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1.Principal, Sri Indu institute of Engineering & Technology, Sheriguda, Ibrahimpatnam,Telangana, India.
2.Assoc. Prof & HOD, Dept. of Master of Business Administration, Sri Indu Institute of Engineering & Technology,
Sheriguda, Ibrahimpatnam, Telangna, India.
3.Student, Dept. of Master of Business Administration, Sri Indu Institute of Engineering & Technology, Sheriguda,
Ibrahimpatnam, Telangna, India.
Key words: Financial Markets and functions, financial Policy, preparation of financial Statement analysis...
Introduction:
profitability and cash flows can be forecasted.
Therefore, the main purpose of financial statement
analysis is to utilize information about the past
performance of the company in order to predict how
it will fare in the future. Another important purpose
of the analysis of financial statements is to identify
potential problem areas and troubleshoot those.
There are different users of financial statement
analysis. These can be classified into internal and
external users. Internal users refer to the
management of the company who analyzes financial
statements in order to make decisions related to the
operations of the company. On the other hand,
external users do not necessarily belong to the
company but still hold some sort of financial interest.
These include owners, investors, creditors,
government, employees, customers, and the general
public. These users are elaborated on below:
MANAGEMENT
The managers of the company use their financial
statement analysis to make intelligent decisions about
their performance. For instance, they may gauge cost
per distribution channel, or how much cash they have
left, from their accounting reports and make
decisions from these analysis results.
2. OWNERS
Small business owners need financial information
from their operations to determine whether the
business is profitable. It helps in making decisions
like whether to continue operating the business,
whether to improve business strategies or whether to
give up on the business altogether.
3. INVESTORS
People who have purchased stock or shares in a
company need financial information to analyze the
way the company is performing. They use financial
statement analysis to determine what to do with their
investments in the company. So depending on how
the company is doing, they will either hold onto their
stock, sell it or buy more.
4. CREDITORS
Creditors are interested in knowing if a company will
be able to honor its payments as they become due.
They use cash flow analysis of the company’s
accounting records to measure the company’s
liquidity, or its ability to make short-term payments.
5. GOVERNMENT
Governing and regulating bodies of the state look at
financial statement analysis to determine how the
economy is performing in general so they can plan
their financial and industrial policies. Tax authorities
Page 2 of 9
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 236
also analyze a company’s statements to calculate the
tax burden that the company has to pay.
6. EMPLOYEES
Employees need to know if their employment is
secure and if there is a possibility of a pay raise. They
want to be abreast of their company’s profitability
and stability. Employees may also be interested in
knowing the company’s financial position to see
whether there may be plans for expansion and hence,
career prospects for them.
7. CUSTOMERS
Customers need to know about the ability of the
company to service its clients into the future. The
need to know about the company’s stability of
operations is heightened if the customer (i.e. a
distributor or procurer of specialized products) is
dependent wholly on the company for its supplies.
8. GENERAL PUBLIC
Anyone in the general public, like students, analysts
and researchers, may be interested in using a
company’s financial statement analysis. They may
wish to evaluate the effects of the firm on the
environment, or the economy or even the local
community. For instance, if the company is running
corporate social responsibility programs for
improving the community, the public may want to be
aware of the future operations of the company.
METHODS OF DATA ANALYSIS
The data collected were edited, classified and
tabulated for analysis. The analytical tools used in
this study are:
ANALYTICAL TOOLS APPLIED:
The study employs the following analytical tools:
• Comparative statement.
• Trend Percentage.
• Ratio Analysis
FINANCIAL STATEMENT ANALYSIS
In the works of Metcalf and Tigard, Analyzing
financial statement is a Process of evaluating the
relationship between components parts of financial
Statement to obtain a better understanding of firm’s
positions/and Performance.
Meaning of Financial Statements
Financial statements refer to such statements which
contains financial information about an enterprise.
They report profitability and the financial position of
the business at the end of accounting period. The
team financial statement includes at least two
statements which the accountant prepares at the end
of an accounting period. The two statements are: -
The Balance Sheet
Profit And Loss Account
They provide some extremely useful information to
the extent that balance Sheet mirrors the financial
position on a particular date in terms of the structure
of assets, liabilities and owners equity, and so on and
the Profit And Loss account shows the results of
operations during a certain period of time in terms of
the revenues obtained and the cost incurred during
the year. Thus the financial statement provides a
summarized view of financial positions and
operations of a firm.
Purpose of Analysis of financial statements:
To know the earning capacity or
profitability.
To know the solvency.
To know the financial strengths.
To know the capability of payment of
interest & dividends.
To make comparative study with other
firms.
To know the trend of business.
To know the efficiency of mgt.
To provide useful information to mgt.
METHODS OF FINANCIAL ANALYSIS:
A number of methods are used to study the
relationship between different Statements. An effort
is made to use those devices, which clearly analyze
the Position of the enterprise.
The following methods of analysis are generally
used.
1. Comparative Statements
2. Trend Analysis
3. Ratio Analysis
Comparative Statements
The comparative financial statements are
statements of the financial position at different
periods of time. Any statement prepared in a
comparative form will be covered in comparative
statement.
Generally, two financial statements viz,
balance sheet and income statement are prepared in
comparison from for financial analysis purposes. Not
only the comparison of the figure of two periods by
also the relation ship between balance sheet and
income statement enables an in depth study of
financial position and operative result.
Page 3 of 9
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 237
The financial data will be comparative only
when some accounting principles are used
consistently in preparing these statements.
Trend Analysis.
These financial statements may be analyzed by
computing trends of series on information. This
method determines the directions up wards or
downwards and involves the computations of the
percentages relationships that each statement item
beard to the same item in base year. The information
for a base year is taken as 100 and trend for the other
years are calculated on the basis of base year. The
analyst is able to see the trend of figure whether up
ward or down word.
The interpretation of trend analysis involves
a cautious study. The mere increase or decrease in
trend parentages my give misleading result of studied
in isolation. The base period should be carefully
selected.
The base period should be a normal period.
The accounting procedures and conventions use for
collections use for collecting data and preparation of
financial statements should be similar other wise the
figures will no be comparable.
Ratio Analysis.
Ratio analysis is a widely used toll of financial
analysis. It is defined as the systematic use of ratio to
interpret the financial statements so that the strength
and weakness of a firm as well sits historical
Performance and current financial condition can be
determined. The term ratio refers to the numerical or
quantitative relationship between two items or
variable.
Classification of Ratios
The use of ratio analysis is not confined to the
financial manager only. There are different parties
interested in the ratio analysis for knowing the
financial position of the firm for different purpose.
In view of the various users of ratios, there are many
types of ratios, which can be calculated for the given
information in the financial statements.
Following is the classification of ratios:
Liquidity Ratio
Leverage Ratio
Profitability Ratio
Activity Ratio
Liquidity Ratios
Liquidity refers to the ability of the concern to
meet its current obligations as and when they,
become due. These ratios are calculated to comment
upon the short term paying capacity of the concern or
the firm’s ability to meet its current obligations.
Much insight could be obtained into the present cash
solvency of the firm and its ability to remain solvent
in the event of emergent: i.e. the firm should ensure
that it does not suffer from any lack of liquidity and
also that it is necessary to strike a proper balance
between high liquidity and lack of liquidity.
Leverage Ratios
The short-term creditors like the bankers and
the suppliers of raw materials are more concerned
with the firm’s current debt paying ability. On the
other hand, long terms creditors like debenture
holders, financial institutions, etc, are more
concerned with the firm’s long-term financial
position. To judge the long-term financial position of
the firm, financial leverage or capital structure ratio is
used. The shareholders, debenture holders and other
long-termed creditors like financial institutions are
more interested in the long term financial position or
long term solvency of the firm. Leverage or solvency
ratios are used for such an analysis. These ratios are
also used to analyze the capital structure of a
company. That is only these are also called capital- structure ratios. The term solvency generally refers to
the firm ability to pay the interest regularly and repay
the principal amount of debt on due date.
There are two aspects of long-term solvency
of a firm. They are:
1. Ability to repay the principal amount of loan
on the due date.
2. Regular payment of interest.
Accordingly, there are two types of leverage
ratios. The first type of leverage ratio is based on the
relationship between owned-capital and borrowed
capital. These ratios are calculated from the balance
items. The second type of leverage ratio is coverage
ratios. These are computed from the profit and loss
account.
Profitability ratio
Profit reflects the final result of the business
operations. There is two types of profitability ratios
namely margin ratio and ratio on returns rates. Profit
margin ratios show the relation between sales and
profits.
The ultimate aim of any business enterprise is
to earn maximum profit. Lord keens remarked,
“Profit is the engine that drives the business
enterprise”, a firm should earn profit to survive and
grow for a long period of time. To the management
profit is a measurement of efficiency and control. To
the owners it is to measure the worth of their
investment. To the creditors it is the margin of safety.
The management of the company should know
how efficiently they carry out business operation. In
other words, the management of the company is very
