What is techniques of Financial statement analysis?

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Financial statement analysis is used to understand the financial position during a particular period. According to Myres, Financial statement analysis is largely a study of the relationship among the various financial factors in the business as disclosed by a single set of statement and study of the trend these factors as shown in the series of statement.

Financial statement analysis on the basis of material used.

External Analysis: - outsiders of the business do normally external analysis but they are indirectly involved in the business concern such as investors, creditors, government organizations and credit agencies. External analysis is very useful to understand financial & operational position of the organization. It has been observe that the people who are keen in share market investment. They check comparative income & position statement of the organization, and understand the business position of the organization to scale on the various analysis. Like net sales, gross profit, net profit, reserve and surplus, sundry creditors, sundry debtors of organization for financial year.

Internal Analysis: it is used to understand about business unit, cell & divisional perforamce internally. Which department is performing well and which is not and what action should be taken to make that department profitable.

Financial Analysis on operational method 

Horizontal Analysis: Under horizontal analysis, financial statements are compared with several years and based on that, a firm may take decision, normally , the current year’s figure are compared with base year( base Year is considered 100) and how financial information’s are changed from one year to another year.

Vertical Analysis: Under Vertical analysis financial statement measures the quantities relationship of various items in the financial statement on particular period.

Techniques used for financial analysis.

There are lots of techniques used for financial analysis are Ratio Analysis, Comparative statement Analysis, Trend Analysis, Common Size Analysis, Fund Flow Statement.

Ratio Analysis: it is used to understand a mathematical relationship between one numbers to another number. Ratio is used as an index for evaluating the financial performance of the business concern. An accounting ratio show the mathematical relationship between two figures.

Ratio Analysis is used four ways.

Liquidity Ratio

Activity Ratio

Solvency Ratio

Profitability Ration.

A. Liquidity Ratio: This ratio is used to understand liquidity in the business. This ration express the relationship between current assets and current liabilities of concern business during a particular period of time.

B. Activity Ratio: it is called the turnover Ratio, this ratio measures the efficiency of the current assets and liabilities in the business concern during the period. This ratio is helpful to understand the performance of business concern.

C. Solvency Ratio: It is called as leverage ratio, which measures the log-term of the business concern. This ration helps to understand, how the long term fund are used in business concern.

D. Profitability Ratio: It helps to measure the profitability position of business concern.

Comparative Statement & Balance Sheet Analysis

Position Statement Analysis: It is an analysis of financial statement at different period of time. This statement helps to understand the comparative position of financial and operational performance at different period of time.

Comparative Balance sheet Analysis: Under this analysis balance sheet are compared with previous year’s figures or one year balance sheet figures are compared with other years.

Trends Analysis: It helps to understand the trend relationship with various items, which appear in financial statement.

Common Size Analysis: In this Analysis figures are reported are converted into percentage to some common base. In the balance sheet total assets assumed to be 100.and figures are expressed as percentage of this total.

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