Tools of Analysis of Financial Statements

Different stakeholders employ financial statement analysis to assess firm value and performance. All businesses must prepare a balance sheet, income statement, and cash flow statement, the foundation for financial statement analysis. When analysing financial accounts, analysts employ three techniques: vertical, horizontal, and ratio analysis. A firm’s financial statements record critical financial data on all aspects of its operations. Consequently, they can be examined based on their past, recent, and coming performance. Some useful tools for analysing financial statements are comparative statements, common-size statements, and cash flow analysis. 

Types of Financial Statements

The balance sheet, income statement, and cash flow statement are used by businesses to manage their operations and provide transparency to their stakeholders. All three assertions are linked and produce diverse perspectives on a company’s operations and success.

Balance Sheet

A balance sheet is a statement that shows the financial worth of a corporation regarding book value. The assets, liabilities, and shareholders’ assets of a firm are divided into three sections. Short-term assets, such as cash and accounts receivable, reveal a lot about a company’s operational efficiency. Liabilities reveal the company’s expense arrangements and the debt capital it is repaying, and shareholder’s equity reveals information on equity investments and retained earnings from periodic net income.

Income Statement 

The income statement compares a company’s revenue to its operating expenses to arrive at a bottom line or net profit or loss. At three separate points, the statement aids in analysing corporate efficiency. Evaluating gross profit starts with revenues and the direct costs linked with it. After that, it continues to operate profit, which subtracts indirect expenditures like marketing, general, and depreciation. The net income is calculated after deducting interest and taxes.

Cash Flow Statement 

The cash flow statement shows how the company’s cash flows from operating, investment, and financing activities are distributed. The top-line item for operating operations is net income, which is carried over to the cash flow statement. 

Tools of Analysis of Financial Statements

Comparative Statements 

• Comparative Financial Statements are the financial statements of an organisation for different periods. Users must also utilise financial statement analysis tools or techniques to learn about comparative financial statements.
• A table may be used to present several financial statement components in a comparative format.
• It allows for a quick comparison of multiple parameters over two or more periods. In terms of financial instruments and strategies, a comparative statement is critical.

Common Size Statements 

A common size statement is an important part of the financial statement analysis tools and procedures. It directly impacts the organisation’s financial statements because it displays every item as a percent of a common base figure. The Common size statements are what they’re called. It allows for comparisons between two or more companies or between two or more eras within a corporation.

Cash Flow Analysis 

A cash flow analysis is a financial statement that demonstrates how changes in a corporation affect Cash and Cash Equivalents. It also includes how-to guides for various Balance Sheets and Profit and Loss Account components. It outlines the reasons for changes in a corporate entity’s cash position between the periods of two balance sheets.

Trend Analysis 

Trend analysis is an important aspect of financial statement analysis tools and procedures. It is founded on the notion that what has occurred in the past foreshadows what will occur in the future. It’s a mathematical technique for predicting future outcomes based on historical data. Trend analysis can be performed on two organisations over the same period or on one organisation over a separate period. A trend is a collection of data from financial statements that have been studied to reach relevant conclusions. The instruments of financial statement analysis must be used to learn about the financial trend.

Ratio Analysis 

Ratio Analysis is a quantitative analysis method for identifying the relationship between two or more financial statement elements. The Balance Sheet, Income Statement, and Cash Flow Statement are all the same. It’s most commonly used to assess its operational and financial performance. That financial performance, such as efficiency, liquidity, profitability, and solvency, aids management in making key decisions.

Cost Volume Profit Analysis 

The current relationship between sales, cost, and profit is revealed in this analysis. The expense is split into two halves. There are two types of costs: fixed and variable. Sales and variable costs have a consistent relationship. Cost analysis allows managers to better plan profits.

Conclusion 

There are different tools on the market to do financial analysis depending on varied requirements. Organisations also develop various in-house systems that assist them in tracking their requirements based on their circumstances. In today’s competitive world, it is critical to monitor the performance of both the organisation and the rival, as this will assist the firm in maintaining and thriving. Internal and external beneficiaries use the horizontal and vertical approaches to perform financial statement analysis for various purposes. They employ comparative statements, common-size statements, ratio analysis, trend analysis, cash flow statements, and fund flow statements.