Question

What is the purpose of Financial Statement Analysis? How do the three types of financial statement analysis differ from each other and when is each used?

Types- Vertical, Horizontal, and Ratio

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Answer 1

Financial statements analysis is done by the company's management, investors, creditors, and other stakeholders in order to determine the financial condition of the company. Its aim is to know how the company is operating, whats is its position compared to its peers in the industry etc. Management analysis the financial statements to make policies for the further improvement of the company whereas investors and lenders analyse so as to know that their money is safe or not. Financial statements analysis include the analysis of 3 financial statements namely:

1. Profit and loss account / Income statement: It record all the income and revenues generated by the company during the financial period to reach to the net income. The items shown in income statement include revenue, operating expenses, EBIT, interest expense, pre tax income, net income etc.

2. Balance sheet: It shows the net financial position of the company as on date. In particular it lists all the assets and liabilities of the company as on date. Assets include property plant and equipement, intangible assets, debtors etc. while liabilities include creditors, loans and borrowings etc.. Balance sheet also includes shareholders equity balance as on date.

3. Cash flow statement: It shows cash flows i.e. inflows and outflows by the company during the the financial period. It calculates cash flow from operating activities,investing activities and financing activities and the net result is change in cash and cash at the period end.