Financial Statement Analysis: Understanding the Basics
Explore the meaning, nature, objectives, elements, and types of financial statements crucial for analyzing and reporting the financial health of businesses. Discover the essential components such as balance sheets, income statements, and more. Gain insights into how financial statements provide vital information for decision-making and assessing economic resources and obligations within a business entity.
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Presentation Transcript
thsemester semester dse- -2(Accounting) 2(Accounting) 5 5th dse Financial statement analysis and reporting Financial statement analysis and reporting (Financial Statements, its analysis and interpretation) By Dr. Pradeep Kumar Prusty, Assistant Professor of Commerce(Stage III), B.J.B.(Autonomous) College, Bhubaneswar.
Meaning of Financial Statements Meaning of Financial Statements Financial statements, essentially, are interim reports, presented annually and reflect a division of the life of an enterprise into more or less arbitrary accounting period-more frequently a year . According to Section 2(40) of the Companies Act, 2013, Financial Statements in relation to a company include: a. A balance sheet as at the end of the financial year; b. A statement of profit and loss for the financial year; c. Cash flow statement for the financial year; d. A statement of changes in equity, if applicable, and; e. Explanatory notes.
Nature of Financial Statements 1. Recorded facts concerning the business transactions. 2. Accounting conventions adopted to facilitate the accounting technique. 3. Postulates or assumptions made to 4. Personal judgments used in the application of the conventions and postulates.
Objectives of Financial Statements a. To provide reliable financial information about economic resources and obligations of a business firm. b. To provide other needed information about changes in such economic resources and obligation. c. To provide reliable information about changes in net resources arising out of business activities. d. To provide financial information that assists in estimating the earning potentials of business. e. To disclose, to the extent possible, other information related to the financial statements that is relevant to the needs of the users of these statements.
Elements of Financial Statements Elements of Financial Statements Relating to Balance Sheet Relating to Income Statement or Statement of Profit and Loss Assets Liabilities Equity Incomes Expenses
Types of Financial Statements Financial Statements Position Statement Income Statement Statement of changes Statement of Or Or in owner s equity changes in Balance Sheet Statement of Profit Or Financial Position and Loss Retained Earnings Fund Flow Statement Cash Flow Statement
Characteristics of Ideal Financial Statements a. Depict true financial position b. Effective presentation c. Relevance d. Attractive e. Easily prepared f. Comparability g. Analytical representation h. Brief i. Promptness
Use and Importance of Financial Statements a. As a report of stewardship b. As a basis of fiscal policy c. To determine the legality of dividends d. As guide to advise dividend action e. As basis for granting of credit f. As informative for prospective investors in an enterprise g. As a guide to the value of investment already made h. As an aid to government supervision i. As a basis for price or rate regulation j. As a basis for taxation
Limitations of Financial Statements a. Provide only interim reports not final reports b. Do not give exact position c. Historical cost d. Impact of Non-monetary factors ignored e. No precision
Objectives and importance of financial statement analysis a. To assess the earning capacity or probability of the firm b. To assess the operational efficiency and managerial effectiveness c. To assess the short term as well as long term solvency position of the firm d. To identify the reasons for change in profitability and financial position of the firm e. To make inter-firm comparison f. To make forecasts about future prospects of the firm g. To assess the progress of the firm over a period of time h. To help in decision making and control i. To guide and determine the dividend action j. To provide important information for granting credit
Types of financial statement analysis Types of financial statement analysis On the basis of materials used modes of operation entities involved time horizon On the basis of On the basis of On the basis of External Internal Horizontal Vertical Cross Time Long- Short- sectional series term term inter-firm Intra-firm
Techniques of financial statement analysis a. Comparative Statement b. Common-size statements c. Trend analysis d. Funds flow analysis e. Cash flow analysis f. Ratio analysis g. Cost- volume-profit analysis
Parties interested in financial statement analysis a. Investors or potential investors b. Management c. Creditors or suppliers d. Bankers and financial institutions e. Employees f. Government g. Trade Associations h. Stock Exchanges i. Economists and Researchers j. Taxation authorities
