Analysis of Financial Statements:
Financial Analysis is analysis of financial statements such as profit and loss statements, balance sheet, cash flow statement to conclude the financial performance in terms of profitability and cash flow of business entity.
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| Analysis of Financial Statements |
There are tools and techniques to analyse the financial statements such as
1. Cash flow Analysis
2. Ratio Analysis
3. Fund flow Analysis
These tools and techniques help to analyse financial statements to conclude the financial performance in terms of profitability and cash flow of business entity.
Cash Flow Analysis
Cash flow analysis is analysis of financial statements by preparation of Cash Flow Statements. Cash flow is inflow and outflow of cash and cash equivalents. Cash flow analysis is done by preparing Cash flow statement of business entity. Cash flow analysis helps to depict inflow and outflow of cash and
cash equivalents during the financial year. This helps in effective management of cash and cash equivalents. cash and cash equivalents include cash in hand, bank balance, short term investments which are easily convertible into known amounts of liquid cash without any significant change in value
Fund Flow Analysis
Fund means working capital. Working capital is the capital or amount of fund required to run the day to day operations of business organisation.
Working capital = Current assets - Current liabilities
Fund flow analysis is a sort of financial analysis. Fund flow analysis is done by preparing Fund flow statement in business entity. Fund flow statement is a statement to know changes in working capital at the end of year and reasons for change in working capital. Fund flow statement has inflow and outflow of funds. This statement is helps in fund flow analysis.
Ratio Analysis
Ratio analysis is done by comparision of two accounting terms in relation to each other to know the financial performance, profitability, Net worth, capital employed.
Ratio analysis is helpful for financial analyst to calculate liquidity, credit worthiness, profitability of business entity. For example current ratio is calculated to know repaying capability of business entity to creditors and suppliers.
The important ratios are:
Current ratio= current assets/current liability
liquid ratio= liquid assets/current liability
Gross profit ratio = gross profit/ sales
Net profit ratio = Net profit/ sales
Earning per share= Net income/ no. of equity shares
Conclusion:
Financial Analysis plays a vital role in business entity to conclude the profitability, credit worthiness of the business entity. This helps to enhance the financial performance and growth of the business entity.
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