Analysis of financial statements refers to the treatment of information contained in the financial statement in a way so as to present the position of the firm and its profitability. The process of analyzing financial statements involves the rearranging comparing and measuring the significance of financial and operating data. Interpretation comes after the analysis of financial statement. Interpretation is an attempt to reach to logical conclusion regarding the position and progress of the business on the basis of analysis. Financial Statements comprise of Balance Sheet, Profit and Loss Account & Cash Flow Statement
Objectives of Financial Statement Analysis
- Financial statement analysis presents the picture of present and the future earning capacity and profitability of the business.
- By using the analysis result, management determines the areas of efficiency and inefficiency.
- Short term and long term solvency of the business could be determined with the help of the financial statement analysis.
- The long term liquidity position of the funds can also be assessed.
- It helps in the preparation of budget as, analysis of financial statement helps in forecasting of future results.
- You could do the comparative study of one firm with the other after their financial statement analysis.
- It tells about the financial stability of the business.
Limitations of Financial Statement Analysis
- The reliability of analysis depends on the accuracy of the figures used in the financial statements.
- It could be differently interpreted by different users.
- There are various tools available for the analysis and different tools are used in different situations by analysts. So, results could vary accordingly.
- Meaningful Interpretation of financial statements could only be done by an expert analyst.