Financial statements are final result of accounting work done during the accounting period. Financial statements normally include Trading, Profit and Loss Account and Balance Sheet. The users of accounting information may not be able to get direct reply to certain questions from the above statements. However, by expressing the items in the financial statements, in relation to each other we can get meaningful information.
Analysis of financial statement has been defined as “a process of evaluating the relationship between the component parts of the financial statements to obtain a better understanding of a firm’s position and performance”.
Financial statements are a collection of reports about an organization’s financial results, financial condition, and cash flows. They are useful for the following reasons:
- To determine the ability of a business to generate cash, and the sources and uses of that cash.
- To determine whether a business has the capability to pay back its debts.
- To track financial results on a trend line to spot any looming profitability issues.
Financial statement analysis is an important part of the overall financial assessment. The different users look at the business concern from their respective view point and are interested in knowing about its profitability and financial condition. A detailed cause and effect study of the profitability and financial condition is the overall objective of financial statement analysis.