Analysis[1] - ANALYSIS OF FINANCIAL STATEMENT We know that...

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ANALYSIS OF FINANCIAL STATEMENT We know that Financial Accounting ends with preparation of preparation of Financial Statements i.e. Profit and Loss Account, Balance Sheet (also Cash flow Statement in case of Listed Companies) So when we talk about Analysis of Financial Statement, we mean analysis of Profit and Loss Account, Balance Sheet etc. Then what is Analysis? As per Dictionary, it is the separation of a whole into its components for study and interpretation.
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So analysis of Financial Statement refers to classification of the various items given in Financial Statement and further its interpretation. It is the powerful mechanism of ascertaining the financial strengths and weaknesses of a firm. The importance of making analysis of Financial Statement may be better understood from this fact that Financial Statement, though itself reflects the net results for a particular period and state of affairs of the company on that date, but still we have to go for analysis of the same for more specific and deeper understanding of strengths and weaknesses . For example, NTPC Ltd., though a very good profit making company, but often it faces fund problem because of purchasing inputs from Coal India Ltd., GAIL etc on cash basis while selling electricity to various State Electricity Board on credit basis.
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Types of Financial Analysis : A) External Analysis : Done by outsiders like Shareholders, Banks, Creditors, Clients etc B) Internal Analysis : Done by Management, Employees etc C) Horizontal Analysis : Financial statements for a number of years are reviewed, compared and analyzed. D) Vertical Analysis : The Analysis is made by reviewing the relationship quantitatively of various items in the financial statement on a particular date.
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Techniques of Financial Analysis: - Comparative Statements : In this case Comparative Balance Sheet and Comparative Income Statement are prepared on the basis of financial statement of two periods. The objective is to see the increase or decrease in assets, liabilities, income and expenditure in the current year as compared to last year (Say). - Trend Analysis : Here one year is taken as the base year and increase or decrease in items of financial statements over a number of years is calculated based on the base year. - Common Size statement : In this case one item say Net Sales of any year is taken as the base and all other items of the Income statement are evaluated in terms of % of net sales and then over the years, the increase or decrease in every item is analyzed. - Ratio Analysis : So analysis is made on the basis of some important ratios. - Cash Flow Statement
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This note was uploaded on 11/15/2011 for the course ACCOUNTS 231 taught by Professor Majidkhan during the Winter '11 term at IIPM.

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Analysis[1] - ANALYSIS OF FINANCIAL STATEMENT We know that...

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