Define financial statement analysis in financial management.

Financial statements provide summary of the accounting of an organisation. The balance sheet reflects the assets and liabilities and capital as on certain data and the income statements tells about the results of operation in a certain period.

Financial statements consist of the following −

  • Income statements or Profit and loss account

It provides entire operational of the concern like total revenue generated and expenses incurred for earning that revenue. Income statement helps to understand the gross profit and net profit of the concern.

  • Balance sheet or the position statement

It helps to ascertain and understand the total assets, liabilities and capital of the firm. One can understand the strength and weakness with the help of position statement.

Business concern also prepares some of others parts of statements for internal purpose, which are as follows −

  • Statements of changes in owners’ equity

It provides information about changes or position of owners’ equity in the company. It is also termed as statement of retained earnings.

  • Statement of changes in financial position

It shows only about the position of finance. Statement of changes in financial position helps to identify the change in financial position of a company from one period to another period.

Types of financial statement analysis

The types of financial statement analysis are based on material used and on methods of operations.

  • Based on material used

External analysis

It is very much useful to understand the financial and operational position of business concern. It mainly depends on the published financial statement of the concern. This provides only limited information about the business concern.

Internal analysis

It helps in understanding the operational performances of each and every department and unit of the business concern. Internal analysis helps to make decisions accordingly to achieve goals.

  • Based on method of operations

Horizontal analysis

Financial statements are compared with several years and based on that decisions will be taken. This is also called as dynamic analysis.

Vertical analysis

Financial statements measure the quantities relationship of various items in the financial statement on a particular period. It is also called as static analysis.