Question

Hi there

Write a good summarize 1 page about (Understanding the Basics of Financial Statement Analysis)

use your own wording.

The course is Financial Management
Thank you!

Answer 1

Financial Statement Analysis

Basic Financial Statement are contain four main following statement :-

1. Balance Sheet ( Statement of Affairs)

2. Profit & Loss Account ( Statement of Financial Performance )

3. Statement of Cash Flow.

4. Statement of Changes in Equity (Owner's Stake)

To analyse financial statement, we normally use following method (most popular one):-

1. Comparatives.

a) With own performance :-It involves comparing entity's financial statement with its own previous years financial statement , resulting in comparison with own performance .  

b) With other's performance :-It involves comparing entity's financial statement with competitor or comparable entity .

2. Ratio Analysis with Industry Standard.

There are various ratios that that can derived from Balance Sheet as well as Profit & Loss Account, to understand performance as well as position of an organisation, when they compared with relevant Industry standard .

Various popular ratios are :- Debt Equity Ratio, Current Ratio, Asset Turnover Ratio, Debtor Turnover ratio, Gross Profit Ratio , Net Profit Ratio etc.   

To explain in brief, Current Ration = Current Assets / Current Liability , it reflect liquidity position of an organisation that is ability to meet day to day operational liability .

In the same way Debt Equity Ratio = Debt / Equity, it simply says how much money are invested by owners and how much is outside fund, a very large amount of outsider fund reflect company's profile as risk one .

In the last conclusively, predominantly all financial statement done from point of view of Investor, so any information which can influence their decision plays a very vital role in financial statement analysis.