What is Financial Statement Analysis?
Financial statement analysis is the branch of accounting which deals with the form and content of presentation of financial statements. The purpose of financial statement analysis is to segregate and assess information in order to give an understanding of how a company operates, as well as how profitable it has been at doing so.
According to Fintalent’s financial statement analysis consultants, a company can be organized into different departments or divisions as well as into various subsidiaries or affiliates. The subsidiaries are considered in the year that their profits are earned and the subsidiaries are part of the parent company or owner in the next year, when profits are assessed. The results of each subsidiary and affiliates (from subsidiaries to affiliates) is then added together, along with any other entities that may be directly or indirectly owned by a company.
Income Statements and Balance Sheets.
The income statement will show us how much money was earned in a given year by what source; while Balance will show us how much cash was received or used during those same periods. This can be done manually or automatically through accounting software.
Based on that information, we need to look at the trend of net income. Net income is normally found in the income statement and represents the amount of money that a company made or lost from its operations; from interest, from sales and/or cost of goods sold (COGS), and any other revenues as well as any other costs for that same period. We will want to see if there are any abnormal fluctuations in net income; this may be both positive or negative.
In order to determine if the company has made a loss or no gain for the period, we need to see if there is any information about profit after tax or P/T. P/T is a mathematical calculation that measures the amount of profit for a given period after subtracting all of the expenses from revenues; in this case, from sales and COGS. Ideally, you want to see that only interest expenses and taxes have been deducted from net income (net income after deductions) then added together to reach that final result.
After that, you want to look at the assets and liabilities of the company; this will tell us how much the company is worth according to those items. The balance sheet shows us the values of assets divided by liabilities and net worth. Net worth is the current value of all assets minus liabilities for a given period. Liabilities are debts owed by a company, while assets are what it owns (in this case).
The next step is to determine if there have been any changes in values; both asset as well as liability or net worth.
If everything in the financial statement analysis report looks in order, then that part of your analysis will be finished. After that, you need to look at all of your notes, as well as financial statements from the previous year, in order to determine how the company has changed from one period to another. You also want to look for any trends and/or changes over time, along with any other reports (such as income statements for subsidiaries or affiliates).
After you have looked at these other reports and figures along with all of your notes, you will want to write a conclusion. This conclusion must include all of the pertinent information so that others will be able to understand what you have discovered. The conclusion should also include any information that you have discovered on trends and changes, as well as any changes in financial or corporate policy.
Financial statement analysis is a useful tool to help one determine if a company is financially viable and if the company’s financials are in line with management’s expectations. Financial effectiveness (or efficiency) is a measure of how well a company has used its resources and how effectively it manages its internal affairs (such as profit, debt, loss, and cash flow) over time. Financial statements can be compared with each other to identify strengths and weaknesses of how different segments are performing, as well as whether the total picture is improving or deteriorating.
Financial analysis is an extremely important tool for not just financial performance, but also for the overall group of companies.
Difference between Financial Statement and Balance Sheet
The major differences between a financial statement and a balance sheet are that while they both include the same items, they tend to have different information. While both financial statements and balance sheets do show assets and liabilities, they do not normally show any of the company’s equity unless specifically stated. Common items on a balance sheet include liabilities (ordinary, accrued or other), stockholders’ equity (common stock & retained earnings) and total assets minus current liabilities.
Profit and loss statements differ from income statements in that profit and loss statements will show how much net profit or loss a company had for a given period, while the other will show revenues, costs and expenses in order to get to the same result. The balance sheet is made up of three columns: assets, liabilities and stockholders’ equity. On the left side of the balance sheet are listed assets (property, plant & equipment), while on the right side you have liabilities (obligations) with stockholder’s equity (net worth or total assets minus total liabilities) separating them.
The balance sheet shows the value of the assets owned by a company. They used to be displayed as a set of numbers, but now they are displayed in what is known as “accounting language”, which is a standardized format used to show the values of assets, liabilities and stockholders’ equity (stockholders are also known as common shareholders). Thus, assets are classified according to four types: current assets, fixed assets, inventories and other assets.
Current Assets consist of all cash in hand (such as money in checking accounts). Cash is usually valued at face value because it can practically be used right away. Debits and credits have been placed on each of the assets to show their values in units (or hundreds). Current Assets also include all accounts receivable, which are bills sent to clients/customers and have not yet been paid to the company. They also consist of other paper assets, such as intangibles, equipment leasing contracts and some bonds. These are all called current assets because they can be used within one year and will be turned into cash within that year.
Other Assets can contain any other assets that aren’t already included in the other classes. They often hold accounts receivable that are due within one year. Other longer-term assets may also be included here. Inventories can consist of raw materials or parts that are ready to be used or sold.
“Note: Assets are listed on the balance sheet in order of liquidity, with cash being the most liquid (easiest to sell), followed by receivables, inventory, and lastly fixed assets.”
Liabilities are divided into four groups as well. They include accounts payable (which includes bills due but have not yet been paid), notes payable, bonds payable and other liabilities. The third group is bonds payable. Bonds are debts that can be traded in certain financial markets such as the stock market.
The last group of liabilities is other liabilities, which can contain items such as deferred income and accrued expenses.
Stockholders’ equity is the net value of a company. It is the difference between assets and liabilities plus any retained earnings that have been previously accumulated before book value. The balance sheet holds useful information in many ways. It shows you how well a company can use its money while at the same time showing how well they are being run by management.
All financial statements are affected by common-size analysis (and also by trend analysis). Common-size analysis compares a company’s financial statement figures to those of earlier periods, to those of other companies in the same industry or economic sector, or to some standard.