Question

Write a one page essay on how important is it to know your basic accounting knowledge to analyze financial

statements

Answer 1

Ans : Importance is as follows :

* The following points highlight the top eight requisites of financial statement analysis. The requisites are: 1. Knowledge of Accounting 2. Objective of the Analysis 3. Techniques of Analysis 4. Rearrangement/Regrouping of Financial Data 5. Determination of the Extent of Analysis 6. Study of External and Internal Environment 7. Interpretation of Findings 8. Submission of Report.

* Knowledge of Accounting:

The analyst should have a sound knowledge in accounting, its principles, concepts, conventions. Otherwise he will not be able to analyse the financial statements in details. Moreover, practical application of accounting knowledge is absolutely required in order to accomplish his objectives.

* Objective of the Analysis/Study:

The analyst must be clear about the objective or purpose of the analysis. Usually, he is entrusted to do so for his client. Naturally, he should know his client and his requirements. Accordingly, he will analyse the financial statements for collecting such information which are desired by his clients.

* Techniques of Analysis:

The analyst must select the appropriate techniques for the purpose of analysis. He may apply a particular technique in one place whereas a different technique in other places.

* Rearrangement/Regrouping of Financial Data:

The analyst must rearrange or regroup the primary data collected by him from financial statements for the purpose of his needs and uses of financial statements. For example, if he wants to know the working capital position he must know the total current assets and total current liabilities position from the data contained in financial statements.

* Determination of the Extent of Analysis:

The analyst must determine first the extent of his analysis which will facilitate him to make plans for his work and also to prepare a schedule of work for the study.

* Study of External and Internal Environment:

The analyst should be well acquainted with the external as well as the internal environment which is faced by the firms; e.g. competitors, attitude of the creditors and debtors etc. Similarly, he must study the internal environment of the company also, e.g. structural changes, employee morale etc. which will practically help him to study and analyse the financial statements and to prepare a report.

* Interpretation of Findings:

The analyst must interpreted his findings in a lucid style in simple form which is easily understandable by the common users of financial statements.

* Submission of Report:

After proper interpretation he must prepare a report on the basis of his findings and submit the same to his client for taking decisions on future courses of action.