Financial Statement Analysis (25% beneficiary set to Null)

Financial Statement Analysis

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This is an official document of a firm which explains its whole financial information and experience in the last accounting year.

It focuses on laying out statistics and abetting in comprehending the monetary aspect of the company being evaluated.

Financial statements are the synopsis of the auditing process that provides credible information to intrinsic and extrinsic parties.

This statement consists of two major components that make up the entire body of credible financial statement analysis. They are;

• Income Statement
• Position Statement

Income Statement

It considers the viable situation of the enterprise during a single balancing of books period or year. It's an element of the entire practical conduct of the business operations.

It affirms to regulate the inflow of money in terms of gross and net profit of the firm gotten by providing the trading/manufacturing accounts, and profit and loss account for the year in view.

Position Statement

This shows the financial state of the business at the tail end of the accounting year. It assists in determining and understanding the current state of the firm's assets and liabilities.

It shows the strength and weaknesses of the firm through its total assets, liabilities, and initial capital base of the business company.

Types of Financial Statements

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There are four basic types of financial statements namely;

• Compiled Statement
• Reviewed Statement
• Audited Statement
• Unaudited Statement

A. Compiled Statement

This statement contains financial data from a company reported in a financial statement format by a Certified Public Accountant (CPA). It does not include any analysis of the financial statement.

B. Reviewed Statement

This statement includes an analysis of the Certified Public Accountant (CPA). Here, the CPA outlines bizarre items or progressions in the financial statement that are duly explained in clearer terms.

C. Audited Statement

This statement is prepared by the Certified Public Accountant (CPA) who carries relevant information and analysis of the financial statement.

This analysis encompasses data with external parties involved, physical inspection of the from being audited, observations, and all financial transactions made directly or indirectly, traced to aiding registers.

An audited statement of analysis provides the best level of accuracy in describing the financial capacity of a company. It boosts performance level

D. Unaudited Statement

This statement is prepared by the internal staff of the company which hasn't undergone compilation, review, and auditing by a Certified Public Accountant (CPA).

Techniques of Financial Statement Analysis

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• Comparative Financial Statement Analysis.
• Common Size Financial Statement Analysis.
• Trend Financial Statement Analysis.
• Fund Flow Financial Statement Analysis.
• Cash Flow Financial Statement Analysis.
• Ratio Financial Statement Analysis.

Comparative Financial Statement Analysis

This is a financial statement analysis created and revised at different periods usually for two or more years.

This aids in comparison and determining the contingent situation of the monetary and viable performance of the business at various points in time.

Under this category of statement analysis, it can be grouped into different accounts namely; Comparative Account, Balance Sheet, and Profit and Loss Account.

Common Size Financial Statement Analysis

The numbers computed in common size financial statement analysis are translated into proportions using a common denomination.

The balance sheet here outlines the total assets and the figures are summed to 100 while all others are denoted as a percentage of the sum figure.

This happens to be one of the cheapest forms of computing statement analysis and it shows the similarity of every single asset in the common size of 100.

Trend Financial Statement Analysis

It makes provision for a means to estimate a company's data over a given period by channeling its energy on the shift in the exact line of items traded within the income statement and balance sheet of the firm.

An increase or decrease in the line of production due to demand and supply of the market is measured by percentage rates.

Fund Flow Financial Statement Analysis

Another term for this as referred to by different firms is statement of origin, benefits, and utilization of funds.

It can be explicitly explained as "a description, eventual or reflective stating the origin and utilization of funds of a business or company.

The use of this statement of analysis is to detect and state the exigencies of funds and how they're supposed to be gathered, effectively, and efficiently used, and applied.

Cash Flow Financial Statement Analysis

This statement of analysis gives a clearer indication of how funds are being raised and ultimately utilized during running the business.

It summarises the mode of operation, investment, and finances of the firm at the same time harmonizes them with differences in its cash and monetary correspondence.

Differences Between Fund Flow Financial Statement and Cash Flow Financial Statement

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Fund Flow Financial Statement	Cash Flow Financial Statement
It shows the financial report of funds movement that is working capital.	It dictates the raising and utilization of funds.
The main objective of this statement is to show how the resources gathered have been scaled, disbursed, and utilized.	The main objective of this statement is the reason for the change in cash when compared to the two balance sheet dates.
It shows the outcome of financial administration.	It indicates the reasons causing the reduction of cash balances regardless of the increase in profit and vice versa.
This statement of analysis doesn't have an opening and closing cash counterbalance	This statement of analysis has an opening and closing cash counterbalance.
When there's an increase or decrease in working capital, there is a correspondent record in the books of account.	Here, the firm records only payments made in cash and receipts of payments made at the bank.

Ratio Financial Statement Analysis

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The affiliation between the figures expressed which are in mathematical terms is referred to as the ratio.

Ordinary figures expressed in financial languages in statement analysis don't make any meaning to the firm owners.

These numbers don't relate much meaning from less expressed by simply dividing one number by another.

Ratios are expressed in terms of:
Simple Ratio: It's expressed by simply dividing one number by another. Number of times and rates: it's expressed by the number of times one figure is over another. Percentage: Here the affiliation between figures is represented in the base of 100.

Uses of Ratio Financial Statement Analysis

• It is used in financial statement analysis.
• It can be used in predicting or predetermining.
• It makes accounting data look easy to comprehend.
• It can be used to know the flow of business whether in a positive or negative direction.
• It can be used to create standard ideals.

Limitations of Ratio Financial Statement Analysis

• If it's computed using the wrong data, it will create inaccurate results cause what you input is what you get as an output.
• It doesn't automatically correct itself once a piece of wrong information is updated.
• When there's a price change, this analysis is no longer useful.
• It can't be used to compare other firms adopting different forms of statement analysis.
• The result gotten isn't adequate for investors to make decisions.

Conclusion

Companies might present false information on their statement of accounts to prove they're doing well while in a real sense they aren't, this can hinder a successful financial statement analysis.