Page 32 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 3: Analysis of Financial Statements
Gopika Juneja, Lovely Professional University

Unit 3: Analysis of Financial Statements Notes

CONTENTS

Objectives
Introduction
3.1 Meaning and Concept of Financial Statement Analysis
3.2 Tools for Analysis and Interpretation of Financial Statement
3.3 Common-size Statements
3.4 Comparative Statements

3.4.1 Comparative Balance Sheet
3.4.2 Comparative (Income) Financial Statement Analysis
3.5 Trend Analysis
3.6 Summary

3.7 Keywords
3.8 Review Questions
3.9 Further Readings

Objectives

After studying this unit, you will be able to:

z z Identify the tools of financial statement analysis
z z Prepare common size statements
z z Construct comparative financial statements

z z Illustrate trend analysis
Introduction

Financial statement analysis is the process of examining relationships among financial statement
elements and making comparisons with relevant information. It is a valuable tool used by
investors and creditors, financial analysts, and others in their decision-making processes related
to stocks, bonds, and other financial instruments. The goal in analyzing financial statements is to
assess past performance and current financial position and to make predictions about the future
performance of a company. Investors who buy stock are primarily interested in a company’s
profitability and their prospects for earning a return on their investment by receiving dividends
and/or increasing the market value of their stock holdings. Creditors and investors who buy debt
securities, such as bonds, are more interested in liquidity and solvency: the company’s short-
and long-run ability to pay its debts. Financial analysts, who frequently specialize in following
certain industries, routinely assess the profitability, liquidity, and solvency of companies in order
to make recommendations about the purchase or sale of securities, such as stocks and bonds.

LOVELY PROFESSIONAL UNIVERSITY 27