why do we need different tools for financial analysis?
Tools of Financial Analysis.
Ratios are the traditional tools used to analyse financial statements. Ratio analysis examines four aspects of a company's financial condition and performance: profits, liquidity, financial leverage and efficiency. The ultimate objective of a business is to make a profit.
Comparative Statements
Comparative statements deal with the comparison of different items of the Profit and Loss Account and Balance Sheets of two or more periods. Separate comparative statements are prepared for Profit and Loss Account as Comparative Income Statement and for Balance Sheets.
As a rule, any financial statement can be presented in the form of comparative statement such as comparative balance sheet, comparative profit and loss account, comparative cost of production statement, comparative statement of working capital and the like.
Comparative Income Statement
Three important information are obtained from the Comparative Income Statement. They are Gross Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability of the business concern is find out over a period of time. If the changes or improvement is not satisfactory, the management can find out the reasons for it and some corrective action can be taken.
Comparative Balance Sheet
The financial condition of the business concern can be find out by preparing comparative balance sheet. The various items of Balance sheet for two different periods are used. The assets are classified as current assets and fixed assets for comparison. Likewise, the liabilities are classified as current liabilities, long term liabilities and shareholders’ net worth. The term shareholders’ net worth includes Equity Share Capital, Preference Share Capital, Reserves and Surplus and the like.
Common Size Statements
A vertical presentation of financial information is followed for preparing common-size statements. Besides, the rupee value of financial statement contents is not taken into consideration. But, only percentage is considered for preparing common size statement.
The total assets or total liabilities or sales is taken as 100 and the balance items are compared to the total assets, total liabilities or sales in terms of percentage. Thus, a common size statement shows the relation of each component to the whole. Separate common size statement is prepared for profit and loss account as Common Size Income Statement and for balance sheet as Common Size Balance Sheet.
Trend Analysis
The ratios of different items for various periods are find out and then compared under this analysis. The analysis of the ratios over a period of years gives an idea of whether the business concern is trending upward or downward. This analysis is otherwise called as Pyramid Method.
Average Analysis
Whenever, the trend ratios are calculated for a business concern, such ratios are compared with industry average. These both trends can be presented on the graph paper also in the shape of curves. This presentation of facts in the shape of pictures makes the analysis and comparison more comprehensive and impressive.
Statement of Changes in Working Capital
The extent of increase or decrease of working capital is identified by preparing the statement of changes in working capital. The amount of net working capital is calculated by subtracting the sum of current liabilities from the sum of current assets. It does not detail the reasons for changes in working capital.
Fund Flow Analysis
Fund flow analysis deals with detailed sources and application of funds of the business concern for a specific period. It indicates where funds come from and how they are used during the period under review. It highlights the changes in the financial structure of the company.
Cash Flow Analysis
Cash flow analysis is based on the movement of cash and bank balances. In other words, the movement of cash instead of movement of working capital would be considered in the cash flow analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.
Cost Volume Profit Analysis.
This analysis discloses the prevailing relationship among sales, cost and profit. The cost is divided into two. They are fixed cost and variable cost. There is a constant relationship between sales and variable cost. Cost analysis enables the management for better profit planning.
Why do we need different tools for analyzing the financial statements? Don't the numbers in the financial statements speak for themselves?
There are different tools for analyzing the financial statements of a company, such as horizontal analysis, vertical analysis, ratios for measuring financial health and profitability, and so forth. But before we begin using these tools, it is important to know the purpose of each tool. Why do we need different tools for analyzing financial statements? Don't the numbers in the financial statements speak for themselves?
Discuss the pros and cons of these methods of financial statement analysis: ratio analysis, vertical analysis, and horizontal analysis. What do they tell us? Why do we need so many different methods?
Why do organizations need to perform financial analysis? Explain each of the steps involved.
Discuss the pros and cons of these methods of financial statement analysis: ratio analysis, vertical analysis, and horizontal analysis. What do they tell us? Why do we need so many different methods?
Why do we need a Conceptual Framework? What is the objective of Financial Reporting?
When evaluating financial statements, why do we care about the industry? Why is this part of the first steps of financial statement analysis?
Financial Statement Analysis Identify the tools used for Financial Statement Analysis Horizontal Trend Analysis Vertical Common Size Analysis Ratio Analysis Performance Liquidity Solvency Identify the comparison and use of the tools above Intra Company Inter company Industry
The topic is: Tools for Financial Statement Analysis - What are the tools used to analyze financial statements ? Identification: Identify the topic and explain why you believe the topic is important. Explanation: Explain the calculations or concepts, and how it can be used in decision-making. Application: Assuming your audience knows nothing about the topic, explain how to apply it: As an entry-level professional. As a mid-level professional. As an executive-level professional. Ethics: Identify 1 ethical issue related to this...
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