FINANCIAL STATEMENT ANALYSIS
ACCOUNTANCY CLASS 12
Financial Statement Analysis is one of the important chapters of Accountancy Class 12. One needs to understand thoroughly about the Financial Statements= Analysis, Financial statements, Balance sheet, Cash flow statement, Income Statement, Profit and loss account etc which are discussed in this article.
Let’s dive in to learn:
WHAT IS FINANCIAL STATEMENT ANALYSIS?
Financial Statement Analysis is defined as the process of analyzing a company’s financial statements for decision-making purposes. It is used by external partners to understand the overall health of an organization and to evaluate its financial performance and business value. Internal factors use it as a monitoring tool to deal with financial factors.
Several techniques are often used as part of financial statement analysis. Among them the three most commonly used and important techniques are:
- Horizontal Analysis compares data horizontally by analyzing the value of line items between two or more years.
- Vertical analysis is concerned with the proportion of goods and occupations in other parts of the business.
- Proportional analysis uses principal ratio measurements to estimate statistical relationships.
Now it’s time to understand in depth about the Financial Statements;
WHAT IS FINACIAL STATEMENT?
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. A Financial statement includes:
- Balance sheet – It is a report of a company’s financial worth in terms of book value.
- Income statement – This breaks down the revenue a company earned against the expenses involved in its business to provide net income profit or loss.
- Cash flow statement – it is used to analyze the value of a company.
Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of the company’s stock price.
The Balance Sheet provides an overview of a company’s assets, liabilities, and owner’s or stockholders’ equity on a given date. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the fiscal year.
Assets = Liabilities + Owner’s Equity
The balance sheet identifies how assets are funded, either with liabilities, such as debt, or stockholders’ equity, such as retained earnings and additional paid-in capital. Assets are listed on the balance sheet in order of liquidity that is how quick an asset can be converted into cash either by sales or by any other form of exchange.
Liabilities are listed in the order in which they will be paid. Short-term or current liabilities are expected to be paid within the year, while long-term or noncurrent liabilities are debts expected to be paid in over one year.
There is a prescribed format for balance sheet, under the law. Companies registered under the Companies Act, 2013 are required to prepare the balance sheet every year end, in the format provided in the Act.
INCOME STATEMENT OR PROFIT & LOSS ACCOUNT
One of the important purposes of maintaining books of accounts and recording the transactions is to find out periodically the results of the business transactions undertaken during a particular period. The Profit & Loss Account or Income Statement is prepared to ascertain the results during a period. The period is known as accounting period. How does it differ from the Balance Sheet? At the outset, remember Balance Sheet is a statement and not an Account, as the profit & loss account. Just listing the Assets and liabilities of any entity, on any date, in a statement form is balance sheet. As Balance sheet depicts the organization, the Assets must be equal to Liabilities for any entity. Hence a statement shows the total of Assets and the total of Liabilities, which are same as Accounting Equation has stated. On the contrary, the profit & Loss account is prepared from various income and expenses accounts for the particular period. Like any account it has a balance which the balance of the totals of debits (expenses) and credits (income).
Once a trial balance is prepared, revenue nature of expenses and income are taken to profit and loss account to arrive at the profit. Those expenditures and receipts that are of capital in nature are classified as Assets (capital expenditures) and Liabilities (capital receipts). It is important to remember, that certain assets which are capital expenditures are, slowly over the accounting periods, charged to profit and loss account; like for example depreciation.
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