Analysis of Financial Statement.
The analysis of financial information refers to the process of the critical examination of the financial information contained in the financial statements in order to understand and make the decisions regarding the operations of the firm.
There are four kinds of analysis namely; external analysis, internal analysis, horizontal analysis and vertical analysis. The external analysis is done by outsiders who do not have access to the detailed internal accounting records of the business firm. When it comes to internal analysis, it is conducted by the persons who have access to the internal accounting records of a business firm. In the case of horizontal analysis, it refers to the comparison of financial data of a company for several years.
When it comes to vertical analysis, it refers to the study of the relationship of the various items in the financial statements of one accounting period.
The comparative financial statements are statements of the financial position at different periods of time. When it comes to trend analysis, it involves the computation of the percentage relationship that each item bears to the same item in the base year. The common size statement shows the financial statement in analytical percentage.
However, there are certain limitations when it comes to financial statement analysis:
Financial analysis if a powerful mechanism of determining financial strengths and weaknesses of a firm, but the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitations of financial statements. The financial analyst has also to be careful about the impact of price level changes, window dressing of financial statements, changes in accounting policies of a firm, accounting concepts and conventions, and personal judgment etc., Some of the important limitations of financial analysis are; however, summarized as detailed below:
i) It is a study of interim reports;
ii)
There are four kinds of analysis namely; external analysis, internal analysis, horizontal analysis and vertical analysis. The external analysis is done by outsiders who do not have access to the detailed internal accounting records of the business firm. When it comes to internal analysis, it is conducted by the persons who have access to the internal accounting records of a business firm. In the case of horizontal analysis, it refers to the comparison of financial data of a company for several years.
When it comes to vertical analysis, it refers to the study of the relationship of the various items in the financial statements of one accounting period.
The comparative financial statements are statements of the financial position at different periods of time. When it comes to trend analysis, it involves the computation of the percentage relationship that each item bears to the same item in the base year. The common size statement shows the financial statement in analytical percentage.
However, there are certain limitations when it comes to financial statement analysis:
Financial analysis if a powerful mechanism of determining financial strengths and weaknesses of a firm, but the analysis is based on the information available in the financial statements. Thus, the financial analysis suffers from serious inherent limitations of financial statements. The financial analyst has also to be careful about the impact of price level changes, window dressing of financial statements, changes in accounting policies of a firm, accounting concepts and conventions, and personal judgment etc., Some of the important limitations of financial analysis are; however, summarized as detailed below:
i) It is a study of interim reports;
ii)