Question

In 200 words What is the importance of financial statement analysis?

Answer 1

Financial Statements are the statements prepared at the end of the accounting period to show the financial performance of the enterprise. Financial Statement are prepared to show the profit & loss of the enterprise during the accounting period and also show the assets owned and liabilities owed by preparing balance sheet.

Financial Statement includes

1. Balance Sheet
2. Trading & Profit & Loss Accounts
3. Schedules and Notes to accounts forming part of balance sheet.

Importance of Financial Statement:

1. Helps in determine Gross Profit/Loss, Net Profit/Net Loss: It is an importance tool in determining the financial performance of the company. Trading Account helps in knowing the gross profit earned during the accounting period & Net Profit helps in determining net profit or loss earned by the business during the accounting period.
2. Comparison with the previous year:   It helps to ascertain whether the business is progressing and financial performance of the business has improved or not by comparing financial statements of current year with previous year.
3. Useful for External Users:

Creditors: Financial statement is helpful for creditors to determine the extent of credit.

Shareholders: Shareholders are the suppliers of funds to run the businesses are interested in the profitability, dividend declared, market value which is identified on the basis of financial statement.

Banks & financial Institutions: Banks who provides loans to the organizations on the basis of financial statements.

1. Useful for Internal Users

Management: Management needs financial statement to make various decisions like selling price, cost control etc.

Employees and Workers: They are interested in financial statement to determine the profitability and stability of the enterprise.