Financial Statement Analysis

Financial Statement depth psychologyFinancial mental process, as a part of fiscal management, is the main indicator of the success or failure of the companies. Financial action abstract ignore be considered as the heart of the fiscal decisions. rational evaluation of the transaction of the companies is essential to correct sound fiscal policies and to attract potential investors. Sh atomic number 18holders argon fire in EPS, dividend, net worth and market value per sh atomic number 18. Management is evoke in all aspects of financial public presentation to adopt a good financial management system and for the internal control of the corporation. The creditors are primarily interested in the fluidness of the party. Government is interested from the regulatory point of view. Besides, some other(a) stakeholders such as economists, trade associations, competitors, etc are also interested in the financial execution of instrument of the company. Therefore, all the stakeho lders are interested in the transaction of the companies but their perspective may be different.Financial analysis helps to sidle up the financial performance of the company. It is the process of identifying the financial strength and weakness of a unbendable by properly establishing the relationship in the midst of the incidents on the eternal sleep Sheet and those on the Profit and Loss Account (Pandey 1992, p109). It is a world(a) term referring to the process of extracting and studying information in financial reports for social occasion in management decision making, for example, financial analysis typically involves the mapping of ratios, comparison with prior stopovers and budget, and other such procedures. Financial appraisal is a scientific evaluation of the profitability and strength of any business concerns (Jain 1996, p36). It seeks to cotton up the significant impacts and relationships concerning managerial performance, corporate efficiency, financial streng th and weakness and creditworthiness of the company (Srivastava 1985, p59).The objective of financial analysis is a detailed cause and result study of the profitability and financial fructify (Hingorani and Ramnthan 1992).According to Hampton, Financial synopsis is the process of determining the significant in operation(p) and financial characteristics of a firm from report entropy and financial statement. The goal of such analysis is to jog the efficiency and performance of the firms management, as reflected in the financial records and reports(Hampton 1986, p85). Financial statements are such records and reports, which contain the data required for performance management. It is therefore of import to analyze the financial statements to identify the strengths and weaknesses of the company.The financial statements of a business endeavour are intended to provide much of the basic data apply for decision making, and in general, evaluation of performance by various groups s uch as current owners, potential investors, creditors, government agencies, and in some instance, competitors (Benjamin et al 1975, p412). Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of a accounts of the company- the Balance Sheet reflecting the assets, liabilities and capital as of a certain date and the Profit and Loss Account present the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures (Hampton 1986, p85). The function of financial statement is to convey an understanding of some financial aspects of the company.Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be do by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a companys previous financial performance and its future potential (Shim and Siegel 1989, p197). The analysis of a financial statement is d virtuoso and only(a) to obtain a give way taste into a firms moorage and performance (Munakarmi 2000). Analyzing a financial statement is a process of evaluating the relationship between comp one and only(a)nt parts of financial statement to obtain a better understanding of the firms position and performance (Metcalf and Titard 1976, p157). The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio compend, Trend Analysis, comparative degree Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.Financial statement analysis involves the reckoning of ratios to evaluate a companys financial position and results of operation (Shim and Siegel 1989, p196). Ratio is an important tool of financial statem ent analysis. The relationship between two accounting figures, expressed mathematically is known as financial ratio (Pandey 1992, p110). Ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgement about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in couch to appraise financial performance (Munakarmi 2000). Ratio analysis is such a powerful tools of financial analysis that through it, the economic and financial position of a business unit can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms (Brealey and Myeres 2003). Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time (Srivastava 1985, p63). Performance ratio can provide an insight into a banks profit ability, strike on investment, capital adequacy and liquidity (Clark 1999, p257).The supra theories suggest that financial analysis helps to measure the performance of the companies. Different analysts believe different types of ratios, depending largely on whom the analysts are and why the firm is existence evaluated. Short-term creditors are concerned with the firms ability to pay its bills promptly. In the neat run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-terms creditors hold bonds or debentures mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal. The company must be sufficiently liquid in the short-term and fetch adequate profits for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firms billet. Without liquidity, the fi rm could not pay the exchange dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the putting surface stock would trade at a lower price in the market (Hampton 1986, p124).Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a lifelong period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change (Pandey 1992, p51). This system involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favourable and unfavourable tendencies are reflected by the data. Comparative Statement Analysis is another method of measuring the performance of the company. It is used to compare the performance and position of the firm with the average performance of the pains or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.From the above discussion, it is clear that performance is the result of various financials variables. Analysis of performance is not limited to analyzing one or two variable(s). it could be analyzed with the help of various financial indicators. Most of the studies, however, devoted to measure the performance in terms of profitability, stock returns, and turnover, risk adjusted returns on investment, dividends, growth of sales, market capitalization. Analyzing stock return constitutes market price per share and dividend per share. The trend of such variables over the period and comparison of the results with the results of the same variables of another firm or another industry indicates the relative performance of the firm or i ndustry.