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Introduction to Financial Statement Analysis
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A financial statement is a report which describes the financial health of a company. Financial statements are usually compiled on a quarterly and annual basis and provide useful financial information to the user of financial statements. Financial statements are often audited by government agencies, accountants, firms, etc.
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Financial statements for businesses usually include
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The Balance Sheet portrays the financial position of the organization at a particular point in time. It shows what you own (assets), how much you owe to vendors and lenders (liabilities), and what is left (assets minus liabilities), known as equity or net worth). A balance sheet is a snapshot of the company's financial position as of on a certain date. The balance sheet equation can be stated as:
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Assets - Liabilities = Stockholders' Equity
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Income Statement
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The Income Statement, on the other hand, measures the operating performance for a specified period of time (e.g., for the year ended December 31, 2001). If the balance sheet is a snapshot, the income statement is a motion picture. The income statement serves as the bridge between two consecutive balance sheets. Simply put, the balance sheet indicates the wealth of a company and the income statement tells you how a company performed last year. The balance sheet and the income statement tell different things about a company. For example, the fact the company made a big profit last year does not necessarily mean it is liquid (has the ability to pay current liabilities using current assets) or solvent (noncurrent assets are enough to meet noncurrent liabilities). A company may have reported a significant net income but still have a deficient net worth. In other words, to find out how an organization is doing, you need both statements. The income statement summarizes your company's operating results for the accounting period; these results are reflected in the equity (net worth) on the balance sheet.
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Statement of Retained Earnings, also called a statement of changes in equity reflects the change in the company’s retained earnings over the reporting period. Items included in the statement of retained earnings include profits or losses from operations, dividends paid, shares issued or redeemed during the period, and any other items charged or credited to retained earnings.
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The Statement of Cash Flows provides useful information about the inflows and outflows of cash that cannot be found in the balance sheet and the income statement.
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FINANCIAL STATEMENT ANALYSIS
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Financial Statement Analysis (FSA) can also be defined as the process of identifying the financial strengths and weaknesses of the firm by properly establishing a relationship between the items of the balance sheet and the profit and loss account.
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Financial Ratios and Financial Statement Analysis emphasizes the influence of financial analysis in business. The important figures in a financial statement are intertwined by many a relationship. It helps the analyst in comprehending these relationships and how each one plays its vital role in understanding a business’s growth, performance, scalability and other zones of it.
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Any financial statement is known to be used in three main steps for analysis.
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The first is to find out the relevant information from all the available data which helps in decision making.
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The second is to organize the selected information in order to emphasize the relationships that exist between the crucial figures in a financial statement.
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The third is to draw conclusions, infer and evaluate the processed information for final results.
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Financial statement analysis, seeking to describe and explain:
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The demand and supply forces underlying the provision of financial statement data.
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The properties of numbers derived from financial statements.
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The key aspect of the decision that use financial statement information.
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The features of the environment in which these decisions are made.
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