Question

What is financial statement analysis? Describe three types of financial statement analysis.

Answer 1

Financial Statement Analysis is a process of studying the components of a financial statement to take business decisions mostly it is taken to examine financial statements and see whether the business is healthy enough to invest or not .

The three types of analysis are Horizontal analysis , Vertical analysis , Ratio analysis .

Horizontal Analysis - It is a comparison over a period of time like comaprison of two or more years . One year is set as a benchmark shown as 100 % and consecutive years increase or decline in percentages is accounted for .

Vertical Analysis - This type of analysis involves using one single financial statement item as a benchmark and rest of the items is compared with it . for examples Sale is taken as a benchmark.

Ratio Analysis - It is an analytical process in which relationship between different financial statement components and relatioship is analysed . Liquidity Ratios ( e.g Current Ratio , Quick Ratio ) , Profitability Ratios ( e.g Net Profit Ratio , Gross Profit Ratio ) , Activity Ratio ( e.g Inventory Turnover Ratio , Receivables Turnover Ratio ) , Solvency Ratio (e.g Debt Equity Ratio , Proprietary Ratio )