Question

If you were given a set of financial statements, how would you go about analyzing them to learn about the company?

Answer 1

We know that analysis of financial statements is key way to know about the financial position of the company. Such analysis can be made with the help of followings tools of financial analysis;

1. Ratios analysis;

With the help of various types of ratios such as (profitability ratio, solvency ratio, liquidity ratios and activity ratios) we can know about the profitability, solvency, liquidity and activity of a company. Thus ratios analysis is key tool for analysis of the company.

2. Trend analysis;

This tool will help in knowing a particular trend in the accounting figures during some previous years. Such as assets, liabilities, sales etc.

3. Common size income statement;

Common size income statement will provide relationship between sales and other items of the income statement. With the help of this statement we will be able to know the percentage of various types of expenses in relation to sales.

4. Common size balance sheet;

Common size balance sheet will provide relationship between total assets & total liabilities and other items of the balannce sheet. With the help of this statement we will be able to know the percentages of various types of assets & liabilities in relation to total assets and liabilities.

5. Statement of changes in working capital;

This statement will help in knowing the change in working capital and sources & uses of working capital detail.

6. Comparative income statement;

Comparative income statement will provide comparative study of two or more years between items of income statement.

7. Comparative balance sheet;

Comparative balance sheet will provide comparative study of two or more years between items of balance sheet.

8. Average analysis;

Average analysis will help in knowing the average changes in the overall financial condition of a company.

9. Fund flow analysis;

Fund flow analysis is very helpful tool in knowing the changes in funds during a specified period of time and also helps in knowing sources & uses of funds.

10. Cash flow analysis;

Cash flow analysis is very helpful tool in knowing the changes in cash balance during a specified period of time and also helps in knowing sources & uses of cash balance.

11. Cost volume profit analysis;

Cost volume profit analysis is helpful in knowing the impact of changes in costs on the operating income of a company.