Financial statement analysis is a technique of answering various questions regarding the performance of a firm in the past, present, and future. The analysis enables financial managers to recommend steps to be taken for the correction of faults. Here is a brief introduction to the process and techniques of financial statement analysis. The need for the analysis of financial statement arises to address the following questions;

• How was the firm doing in the past? Was there any problem? If so in what areas,
• How is it doing at present? Is it doing better compared to past performance, competitors, and industry average? Is there any problem at present? If so, in what areas,
• What about the future? Are there any likely problems on the way in the future? What will be its position in the future?
• What corrective actions can we take now to solve the problems and improve the performance? How will the recommendation of any course of action or changes in the policy or practice help solve problems and improve the company’s position?
• What are the expected results of recommendations? Are they improvements?

Such questions suggest to follow steps such as fires identification and analysis of problems to come up with appropriate recommendations, and then to project the expected results and examine them if they are improvements before implementing such recommendations.

Process of Financial Statement Analysis

The overall process to be followed in financial analysis is presented with a given flow chart;

Techniques of Financial Statement Analysis

There are various tools and techniques of financial statement analysis each of which used according to the purpose for which the analysis is carried out. The extensively applied techniques are as follows;

• Ratio Analysis
• Du Point System of Financial Analysis
• Analysis of Changes in Financial Position
• The analysis of Sources and Uses of Funds
• Analysis of Retained Earnings and Changes in Equity

(Note: These techniques will be discussed in coming posts)

Conclusion

Financial analysis refers to the renovation of financial data into valuable information to assist decision making. Therefore, any use of financial statements or other financial data for some purpose is financial analysis, and essentially it is the primary concern of accounting and auditing and finance professionals.

Financial statement analysis may be both internal as well as external. The essence of financial statements analysis is always linked with how it supports to decision making of the corporation.  In a more specific saying, financial statement analysis is done to determine the relative strength and weakness of the corporation and to provide a framework for financial planning and control with appropriate techniques and systematized process of analysis.

References  

Pradhan, S. (1992). Basis of Financial Management. Kathmandu: Educational Enterprise (P) Ltd.