Meaning of Analysis of Financial Statements

Meaning of Financial Statement : Financial statements are summarised reports prepared by a company’s management to present the financial performance and position at a point in time. The detailed information contained therein is useful for assessing the operational efficiency and financial soundness of a company.

Financial statements generally include balance sheets, income statements, statement of owner’s equity and statement of cash flows. These statements are prepared to give users outside of the company such as the investors and creditors more information about the company’s financial positions. The meaning of analysis of financial statements is to evaluate the performance of the company with the help of its financial statements.

Balance sheet is a summary of the company’s position on one day at a certain point in time. It lists the assets, liabilities and owner’s equity on one specific date. Therefore, a balance sheet is used by investors and creditors to analyze how companies are funding capital assets and operation as well as current investor information.

The Income statement shows the revenue and expenses of the company over a period of time. It informs the users of financial statements about the profitability and efficiency of the business.

The statement of owner’s capital summarizes all owner investments and withdrawals from the company during a period of time. It also reports the current income or loss recorded in retained earnings.

The main source of financial information are the financial statements, that is why ‘financial accounting’ and ‘reporting’, puts such a high emphasis on the accuracy, reliability and relevance of the information on these financial statements.

Analysis of Financial Statements : The meaning of analysis of financial statements can be defined as the process of reviewing and critically analyzing a company’s financial statements to make better economic decisions. It is a way of determining financial strengths and weaknesses of the entity by establishing the strategic relationship between the items of the balance sheet, profit and loss account and other financial statements. The analysis of financial statements helps in better and improved decision making for the future.

Analysis of financial statements is done by rearranging and regrouping the information available in order to develop meaningful relationships between financial figures.

The term ‘financial analysis’ is not just restricted to analysis, rather it includes ‘interpretation” too. The term ‘analysis’ means the concerting the complex information into simplified and easily understandable financial data with the help of various methods, whereas, ‘interpretation’ means, detailed explanation of the data so analysed. Hence, analysis and interpretation are interlinked and complementary to each other. Analysis in itself has no significance if it is not followed by interpretation.

Analysis of financial statements is of utmost importance to compare the past and current financial positions of the company with industry. Analysis by itself does not provide the users with any useful information. A successful analysis is said to be one which is accompanied by interpretation of financial statements. Thus, both analysis and interpretation go hand in hand.

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