What Is Financial Statement Analysis?

Financial statement analysis is the process of reviewing and analyzing a company's financial statements to evaluate its performance and value. Stakeholders use this information to make informed economic decisions for the company.

Creditors rely on these reports when deciding writing paper online to extend credit, investors analyze them when assessing risk and management utilizes them to evaluate progress and identify areas of improvement. There are several ways to learn to perform financial statement analysis, including self-study and taking a class.

Analysis of Financial Statements

Financial statement analysis involves evaluating financial reports, including audited financial statements, additional disclosures and management’s commentary or discussion of the company’s financial results. It is a key tool for creditors, investors and management, who use it to evaluate the strength of a business’s financial position, performance and cash flows.

The most important financial statements are the balance sheet, income statement and statement of cash flows. The three provide a comprehensive NRS 493 Literature Review of the company’s financial health.

Horizontal analysis compares data from two different points in time and determines the dollar change or percentage change. For example, if Banyan Goods made $20,000 in net sales during the first year of analysis and $18,000 during the second year, the change is $20,000. When divided by the base (or old) number, the percentage is 20%. The same technique can be used for the line items of the balance sheet and income statement. It is also possible to conduct vertical and ratio analyses.

Ratio Analysis

Ratio analysis is a way to compare financial statements. It uses ratios to analyze the underlying data contained in the balance sheet, income statement and statement of cash flows. It helps businesses and average investors assess profitability, liquidity, coverage and solvency.

The values used in ratio analysis are derived from the accounting records of your business firm. These figures are collected over several reporting periods in order to detect trends. It is important that you understand the meaning of these numbers and how they relate to each other.

Financial ratios are classified into five categories – liquidity, profitability, activity, solvency and market. Each ratio has its own specificity and nuances but they are a basic tool for analysing the performance of your business and drawing comparisons with competitors. financial statement analysis ratios tell you whether you have enough short-term assets (excluding inventory that can’t be quickly converted to cash) to pay your current liabilities. They also indicate if you can easily fulfill your debt commitments as they come due for payment.

Vertical Analysis

When analyzing an income statement or balance sheet, the vertical analysis method allows the analyst to compare line items in terms of percentages. This makes it easy to understand changes in the proportion of account balances within a report as well as comparing reports from different time periods or even companies of varying sizes.

The analyst starts by choosing a base figure to use as a benchmark for the reporting period. This is often total revenue or total assets, for example. Then all other line item amounts are expressed as percentages of this figure. For an income statement this would nhs fpx 4000 assessment 2 applying research skills that each individual item like marketing expenses and salaries are shown as a percentage of sales.

By performing this analysis it is possible to see how each cost area is contributing to the company’s profitability. For example, in year one and two the company’s marketing expenses rose but their contribution to sales remained the same; however, in year three these expenses were much higher and this is reflected in a fall in net income.

Horizontal Analysis

While horizontal analysis provides a helpful way to identify growth patterns, it is best used when combined with other types of financial statement analyses. Horizontal analysis works by comparing specific line items of an income or balance sheet from one year to the next. A baseline year is chosen, which acts as a peg for the other numbers in the comparison statement and allows you to see how much each item increased or decreased in the subsequent years.

Vertical analysis, on the other hand, restates the amounts in a balance sheet or income statement by expressing them as percentages of another line item. This makes it easier to compare different periods, as well as the relative proportions of line items within a statement. It also helps you spot any numbers that are unusually high or low in comparison to the information for the bracketing period, which may require further analysis. It is a common method of reading and interpreting financial statements.