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F inancial analysis

F inancial analysis. Meaning. I t is a systematic process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.

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F inancial analysis

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  1. Financial analysis

  2. Meaning • It is a systematic process of the critical examination of the financial information contained in the financial statements in order to understand and make decisions regarding the operations of the firm.

  3. Financial analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and a study of trends of these factors as shown in a series of statements.

  4. Tools and techniques of financial analysis

  5. Typesof financial analysis • 1. External analysis: Conducted by those persons who do not have access to the detailed record of the enterprise and depend on the published reports. • 2. Internal analysis: Conducted by management so as to know the financial position nd operational efficiency of the organization.

  6. 3. Horizontal analysis: This analysis is made to review and analyse the financial statements for number of years and are therefore based on the financial data based on those years. • 4. Vertical analysis: This is made to review and analyse the financial statements of one year only.

  7. Importance of financial analysis • Judging the earning capacity or profitabilty: The earning capacity of the business firm may be computed. The future earning capacity can also be forecasted. • Judging the managerial efficiency: It helps to pinpoint the areas where the managers have shown better efficiency and the areas of inefficiencies. • Judging the long term and short term solvency of the firm • Inter firm comparison • Making forecasts

  8. Limitations • Historical analysis: It is historical analysis. It analyses what has happended till date. It does not reflect the future. • Ignores price level changes: Accounting records ignore change in value of money.

  9. Qualitative aspect ignored: the aspects like quality of management, public relations etc are ignored while carrying out the analysis of financial statements. • Not free from bias: the accountant has to make a choice from the alternatives available. So subjectivity can lead to biasness.

  10. Comparative statements • It is a tool of financial analysis that depicts change in each item of the financial statement in both absolute amount and percentage terms.

  11. Objevtives of comparative statements • It gives information about the nature of changes influencing financial position and performance of an enterprise. • These pinpoint the weakness and soundness of an enterprise. • The statements help the management in forecasting and planning.

  12. Comparative Balance Sheet • Comparative balance sheet analysis is the study of trend in two or more balance sheets of the same business enterpise on different dates.

  13. Question Balance Sheet

  14. Comparative Income statements • Comparative income statement shows the operating results for a number of accounting periods so that changes in data in terms of money and percentage from one period to another may be known.

  15. Question • From the following information prepare comparative income statement:

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