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Financial Statements Analysis

Analysis means segregating of anything into its constituent elements. According to Metcalf and Tigard, “Analysis is the process of evaluating relationship between component parts of financial statements to obtain a better understanding of a firm’s position and performance”. Financial analysis refers to the process of evaluating the financial position and the results of operations of an organization. The focus of the financial position and the results of operations of an organization. The focus of financial analysis is on key figures contained in the financial statements and significant relationships the exist between tem. The steps in financial analysis are as follows:

(a)    to select information from the total information in the financial statements which is relevant for a decision.

(b)    to highlight significant relationships by arranging the information contained in the financial statements.

(c)    to interpret significant relationship and to give explanations of the significance.

The selection of relevant information is different for different users like shareholders, creditors, management, potential investors, government etc. Due to the varied demand, the conventional financial statements, i.e., Profit and Loss Account and Balance Sheet are not able to meet the decision-making requirements. Hence, there arises a need for different types of analysis of financials statements.

Types of Analysis of Financial Statements

1.    Trend Analysis
2.    Structural Analysis.

1.    Trend Analysis. The trends of movement in the assets, liabilities, expenses, incomes and profits of the enterprise are analyzed in trend analysis. The financial statements of a number of accounting periods are taken into consideration by preparing columnar comparative financial statements.

2.    Structural Analysis. The internal relationship on a particular data as disclosed by one set of financial statements is analyzed under structural analysis.

The basic difference between the two is that the former deals with many statements over a period, while the latter deals with one particular set of financial statements.

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