10-04-2017, 09:22 PM
FINANCIAL STATEMENTS ANALYSIS - AN INTRODUCTION
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Financial Statements Analysis - An Introduction
Analysis means establishing a meaningful relationship between various
items of the two financial statements with each other in such a way that
a conclusion is drawn. By financial statements we mean two statements :
(i) Profit and loss Account or Income Statement
(ii) Balance Sheet or Position Statement
These are prepared at the end of a given period of time. They are the
indicators of profitability and financial soundness of the business concern.
Measuring the profitability
The main objective of a business is to earn a satisfactory return on the
funds invested in it. Financial analysis helps in ascertaining whether
adequate profits are being earned on the capital invested in the business
or not. It also helps in knowing the capacity to pay the interest and
dividend.
Indicating the trend of Achievements
Financial statements of the previous years can be compared and the
trend regarding various expenses, purchases, sales, gross profits and net
profit etc. can be ascertained. Value of assets and liabilities can be
compared and the future prospects of the business can be envisaged.
Assessing the growth potential of the business
The trend and other analysis of the business provides sufficient
information indicating the growth potential of the business.