ANALYSIS OF FINANCIAL STATEMENTS

LEARNING OBJECTIVES
After going through this chapter, the reader is expected to –
1. Understand what is meant by Financial Statement Analysis
2. Identify the objectives of Financial Statement Analysis
3. Understand the various types of financial analysis
4. Understand and analyse the various tools and techniques of Financial Statement Analysis
5. Understand how to prepare and interpret Comparative and Common size Financial Statements and Trend analysis
6. Understand the concept of Ratio anlaysis, its respective merits, demerits and the various classifications of ratios etc
7. Understand the concept of Funds Flow Analysis – its merits, demerits, meaning of the work fund, movement of funds, etc and also preparation of Funds Flow Analysis
8. Understand the concept of Cash Flow Analysis – its merits, demerits, distinction between Cash Flow and Funds Flow concepts, Preparation of Cash Flow Analysis etc


OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
Financial Statements are analysed by different users for different purposes. Some of the
objectives are as under-
1. To understand and estimate the present and potential profitability/earning capacity of the enterprise
2. To aid in economic decision making
3. To understand and estimate the financial position and performance of the concern
4. To measure the efficiency of business operations
5. To calculate and analyse the various financial ratios and flow of funds/cash
6. To identify areas of mismanagement and potential danger so that corrective
actions can be taken
7. To ascertain the maintenance of financial leverage by the enterprise
8. To determine the movement of inventory in the enterprise
9. To identify diversion of funds etc.