In: Economics
Financial Statement Analysis is a method of reviewing and
analyzing a company’s accounting reports (financial statements) in
order to gauge its past, present or projected future performance.
This process of reviewing the financial statements allows for
better economic decision making.
Globally, publicly listed companies are required by law to file
their financial statements with the relevant authorities. For
example, publicly listed firms in America are required to submit
their financial statements to the Securities and Exchange
Commission (SEC). Firms are also obligated to provide their
financial statements in the annual report that they share with
their stakeholders. As financial statements are prepared in order
to meet requirements, the second step in the process is to analyze
them effectively so that future profitability and cash flows can be
forecasted.
Therefore, the main purpose of financial statement analysis is to
utilize information about the past performance of the company in
order to predict how it will fare in the future. Another important
purpose of the analysis of financial statements is to identify
potential problem areas and troubleshoot those.