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The financial information contained in accounts is so important in guiding decisions and assessing the organisation's stability and ability to meet its financial short or long term obligations.
1)Trend Analysis-It helps a firm's financial manager determine how the firm is likely to perform over time. Trend analysis is based on historical data from the firm's financial statements and forecasted data.
2) Common Size financial statement analysis-It Includes analyzing the balance sheet and income statement using percentages. All income statement line items are stated as a percentage of sales. All balance sheet line items are stated as a percentage of total assets
3) Percentage Change financial statement-In this, you calculate growth rates for all income statement items and balance sheet accounts relative to a base year. It will actually help you see how different income statement items and balance sheet accounts grew or declined relative to grows or declines in sales and total assets.
4) Benchmarking- It involves comparing a company to other companies in the same industry in order to see how a company is doing financially as compared to the industry. This type of analysis is very helpful to the financial manager as it helps him/her to see if any financial adjustments are needed to be made.
Thanks for this important question, you can refer to the following link (https://en.wikipedia.org/wiki/Financial_statement_analysis) where it's minsioned clearly and the simple answer is: Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, financial health, and future prospects of an organization.
Overview of Financial Statement Analysis
Financial statement analysis involves the identification of the following items for a company's financial statements over a series of reporting periods:
Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements, each having different objectives in learning about the financial circumstances of the entity.
Users of Financial Statement Analysis
There are a number of users of financial statement analysis. They are:
Methods of Financial Statement Analysis
There are two key methods for analyzing financial statements. The first method is the use of horizontal and vertical analysis. Horizontal analysis is the comparison of financial information over a series of reporting periods, while vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. Thus, horizontal analysis is the review of the results of multiple time periods, whiile vertical analysis is the review of the proportion of accounts to each other within a single period. The following links will direct you to more information about horizontal and vertical analyis:
The second method for analyzing financial statements is the use of many kinds of ratios. You use ratios to calculate the relative size of one number in relation to another. After you calculate a ratio, you can then compare it to the same ratio calculated for a prior period, or that is based on an industry average, to see if the company is performing in accordance with expectations. In a typical financial statement analysis, most ratios will be within expectations, while a small number will flag potential problems that will attract the attention of the reviewer.
There are several general categories of ratios, each designed to examine a different aspect of a company's performance. The general groups of ratios are:
Problems with Financial Statement Analysis
While financial statement analysis is an excellent tool, there are several issues to be aware of that can interfere with your interpretation of the analysis results. These issues are: