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Review the summary of all financial events of the company
Financial statements are designed to show the performance, financial condition, and cash flows of a business. The Interpretation of Financial Statements reveals how to convert these statements into an open book that can be explored in depth, giving crucial insights to investors, lenders, and creditors. It does so by describing the structure of the financial statements, noting a number of tools for extracting information from the statements, and providing a wealth of additional insights into the reasons for the presence of or changes in certain numbers within the statements. In short, this book contains the complete set of tools for breaking down and examining a set of financial
Interpretation of Financial statement (analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions.
Drawings result from the financial position and making decisions.
Financial statements include a balance sheet and an income statement, commonly referred to as a profit and loss statement. The balance sheet presents a company’s assets, liabilities and equity as of a specific date in time. An income statement presents a company’s revenue, expenses and net income for a specific period, such as one year or six months. Depending on the company’s intended use of the financial statements, the statements can be audited, reviewed or compiled by a Certified Public Accountant. Financial statement interpretation is an important management tool as it identifies trends and unusual or unexpected anomalies.
1-Prepare a common sized statement for the financial statements presented. A common sized balance sheet shows the dollar value of each asset, liability and equity account as a percent of total assets for each balance sheet account. A common sized income statement shows the dollar value of each income and expense account as a percent of total revenue. The best and easiest way to do this is to use a spreadsheet program, such as Excel.
2-Analyze the common sized financial statements for unusual trends. For example, if a company’s cash balance was 5 percent of total assets over the course of four years and in the fifth, or most recent, year cash dipped to only 2 percent of total assets, a question should be posed to management to confirm the reasons for the drop. If the company purchased fixed assets near the end of the year or paid off a mortgage in full, the drop in cash is adequately explained.
3-Prepare a ratio analysis for the financial statements presented. Ratios commonly used to analyze balance sheet accounts include working capital and debt to equity ratio. Working capital is calculated by subtracting total current liabilities from total current assets for a specific year. Working capital is a measure of a company’s liquidity. A working capital ratio in excess of 5:1 may be an indication of excess cash on hand or poor inventory management.
4-Determine the company’s debt to equity ratio. Divide total debt by the company’s total equity. The greater the ratio, the greater the company risk. For example, a company with a debt to equity ratio of 5:1 has greater risk than a company with a ratio of 2:1. Simply put, a higher ratio indicates a company with greater, and often excess, amounts of debt that can be handled by the company.
5-Calculate the company’s gross profit by dividing total cost of goods sold by total revenues. Gross profit may vary from industry to industry. However, a company’s gross profit should remain somewhat consistent from one year to the next. If a company’s gross profit increases dramatically, it may be an indication of skyrocketing material or labor costs or a poorly managed project.
Financial Statement Interpretation or Financial Statement Analysis involves evaluating the whole financial statement and calculates some ratios or turn over to assess the liquidity, profitability and solvency of the Company. All ratios and turnover are then compared to prior period and or benchmark criteria. This will serve as a basis for making some managerial decisions.
Analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest, debt maturities, both current as well as long term, and profitability of sound dividend policy.
The main function of financial analysis is the pinpointing of the strength and weaknesses of a business undertaking by regrouping and analysis of figures contained in financial statements, by making comparisons of various components and by examining their content. The analysis and interpretation of financial statements represent the last of the four major steps of accounting.
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It means the actual enterprise's "Financial position" through specific financial period.
Interpretation of Financial Statements means to convert/explain the Financial Position, Profitability, Cash Flow of a Company to its Shareholder's, Investors and Creditors. The main purpose of Analysis/interpretation of Financial Statements is to provide information in such a way that Non Financial Managers can easily understand the Financial Position of a Company.
