Objectives of Analysis of Financial Statements Class 12 Notes
The financial statements are the summarised report of an enterprise that contains information related to the financial position of the company. The analysis of financial statements is very useful in deciding the financial strengths and weaknesses of a company.
With the help of financial analysis, one can judge the effectiveness of a company’s managerial performance and the progress of activities being carried out by the company.
This analysis of financial statements helps the management and other members of the company review the results of their activities. It brings to light any variations or deviations from the agreed plans. Not only does it help in controlling, but it also helps them in making better and improved decisions for the future.
The analysis of financial statements does not only serve the management of the company rather it has something in store for all the stakeholders of the company too. It is with the help of financial analysis, the investors, creditors, government and others assess the performance and credit worthiness of the company.
Other objectives of analysis of financial statements are –
- To judge the financial health – Financial analysis assesses the financial position of the company. It ascertains the level of profitability and judges the operational efficiency of the company.
- Establish relationships – Financial analysis tends to develop relationships between different components of the financial statements. Using these relationships, various performance indicators are ascertained.
- Reasons for change – One of the major objectives of analysis of financial statements is to carry out comparison of performance of a company over the last years. This helps in evaluating any change in profitability, liquidity levels etc.
- Assess the creditworthiness – Company owes money to its creditors, lenders, or banks. These parties are interested in knowing the capability of the company in paying back these loans. Financial analysis can judge whether the company has enough resources to ensure smooth repayment.
- Basis for governmental actions – While making policies related to licensing, taxation, price fixation etc., government officials study the financial analysis of various companies to reach at a conclusion. Thus, the financial analysis forms the base for such decisions.
Preparation of financial statements is always followed by analysis of financial statements to provide useful information about the financial position and performance of the company. There are various objectives which financial analysis fulfills. It informs about the profitability levels of the company, ability to repay short term and long term debts, managerial efficiency and operational efficiency of the company as a whole.
Chapter 4 – Analysis of Financial Statements