TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
Various
techniques have been developed for analysis of financial statements. The
selection of appropriate analytical techniques would depend upon the objectives
of the analysis. Usually a group of techniques is used for a result oriented
analysis. The commonly used techniques are discussed below;
Comparative Statement Analysis
The
comparison of data of two or more consecutive accounting period is known as
comparative financial statements such as income statement and balance sheet, it
is designed to provide time perspective to consideration of various elements of
financial position embodied in such statement. The statement also provides for
columns to indicate change from one year to another in absolute terms and also
in percentage.
Common Size Statement
Financial
statements displays data in the shape of vertical percentage are known as
common size statement, all the figures in financial statements are converted to
a common unit by expressing them as percentage of a key. It allows
for easy analysis between companies or between time periods of a company.
Trend Analysis
Trend
analysis one of the most important tools analysing of financial data. It
computes the percentage changes for different variables over a long period.
This analysis indicates the progress of business by showing ups and down in its
activities, It involves the computation of the percentage relationship that
each item in the statement bears to the same item in the base year.
Ratio Analysis
Ratio
analysis is the one of the popular tools of financial statement analysis. A
financial ratio is defined as relationship between two variables taken from a
financial statement of a concern. It is a mathematical yardstick that measures
the relationship between two financial figures. It involves breakdown for the
examined financial report into components parts which are then evaluated in
relation to each other and to exogenous standards. Ratio analysis is an
instrument for diagnosis for the financial health of an enterprise.
Fund Flow Statement
Fund flow
statement is a technique used to summarise a financial operations of a concern
by studying the sources and application funds during the accounting period.
Such a statement helps to identify the changes which have taken place, and to
demonstrate their impact upon the liquid resource of the business. It provides
a clear indication of the changes which have taken place in the financial
position of the enterprise, particularly for those not versed in reading
balance sheets.
Cash Flow Statement
Cash flow
statement is setting out of the flow of cash and different head of sources of
funds and their utilisation to determine the requirement of cash during the
given period and to prepare for its adequate provision. However, a cash flow
statement is a statement which provides a detailed explanation for the change
in a firm’s cash during a particular period by indicating the firm’s source and
uses of cash during the period.
