Introduction
Financial statements analysis includes gaining an idea of an entity's financial situation by analysing the financial statements of the company. You will use three main financial statements—statement of income, balance sheet and cash flow statement.
Analysis of these financial statements is also submitted to the board of directors and senior management committees. They use the information in their decision-making process as input. This research is also used by third stakeholders, such as regulatory authorities and investors, to gain insight into the organisation.
Users
There are various applications of the analysis of the financial statements. They include:
Company Management: The company's financial controller performs an ongoing review of the company's financial statements, particularly operating metrics, such as profit per product, cost per channel of distribution, cost per delivery, etc., not seen by external organisations.
Investors: Present, as well as potential investors, will evaluate the organisation's performance by conducting financial statements analysis. They do so to consider the ability of the organisation to continue as a concern, issue dividends, produce cash flows, and ensure that at least the business continues to grow at least at the historical rate.
Creditors: A creditor or someone in this respect who has provided the company with funds would be interested in understanding the company's ability to repay the loan and its other cash management steps.
Regulatory Authorities: In the case of publicly held companies, the Securities and Exchange Board of India (SEBI) reviews their financial statements to decide if the accounts comply with accounting principles as well as with the SEBI rules and guidelines.
Methods Used
Each of the following methods gives visibility of variances, market trends, and also flags various problems. They pose questions about the company, which needs to be answered. The ultimate objectives of the review of the financial statements are analysing the company, finding rational reasons for the variances, and making adjustments based on the positive or negative trends.
There are various methods and techniques for the analysis of financial statements. However, the most common approaches for analysing the financial statements are:
- Horizontal analysis
- Vertical analysis
- Ratio analysis
