Financial Statement Analysis Assignment help Assignment Help

Financial Statement Analysis – Assignment help

Financial Statements are compilation of data which are logically and consistently organised according to the prevalent Generally Accepted Accounting Principles (GAAP). Common types of Financial Statements are

• Balance Sheet
• Income Statement
• Cash Flow Statement

Financial statement analysis involves application of analytical tools and techniques to financial statements in order to derive relationship between them so as to ease decision making. It forms the basis of most financial and investment decisions taken across the world for various purposes from buying a stock in the capital markets to buying a company to raising money from the investors or financial institutions. However, it only complements subjective and judgmental decision making.

Principal tools of financial statement analysis are:

Ratio Analysis

A ratio provides a mathematical relationship between two variables. Ratios help reveal relationship and analyse trends of various components in the financial statements. Different people use different ratios for various purposes. Most common ratios used are categorised into

Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets – Inventories) / Current Liabilities

Accounts Receivable Turnover Ratio = Net credit Sales / Average Accounts Receivable

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Profitability Ratios

Gross Profit Margin Ratio = Gross Profit / Net Sales

Net Profit Margin Ratio = Net Profit / Net Sales

Asset Turnover = Sales / Average Assets

Return on Equity = Net Income / Average Equity

Earning Power = EBIT / Average Total Assets

Comparative Analysis refers to preparation of financial statements for comparative periods or comparative companies and analysing trends.

Common Size Statements refers to analysing each component of Income statement as a percent of sales and each element of Balance sheet as a percent of Total Assets.

Du Pont Analysis refers to analysing the Return on Equity and breaking it down into various components like Net Profit Margin, Assets Turnover Ratio and the like.