Page 205 - DMGT104_FINANCIAL_ACCOUNTING

Unit 9: Analysis and Interpretation of Financial Statements

In the words of John M. Myer - “Financial statement analysis is largely a study of relationship Notes
among the various financial factors in a business as disclosed by a single set of statements and a
study of the trends of these factors as shown in a series of statements”.
Thus, the financial statement analysis refers to the classification, diagnosis and comparison of
the data of financial statements so that the profitability, financial position managerial efficiency
and weakness of the business may be disclosed.

9.1.1 Meaning of Financial Statement Interpretation

Interpretation is relating to the drawing of conclusion, inference and criticism of the analysed
financial data to judge the profitability & financial soundness of firm. Interpretation comes next
to the analysis of financial statements. Interpretation of financial statement is not possible
without analysis of financial data.

In the words of Spiecer and Peglar, “Interpretation of accounts may be defined as the art and
science of translating the figures, in such a way, as to reveal the financial strength and weakness
of the business and the causes which have contributed therein”.

9.2 Analysis and Interpretation of Financial Statements

Analysis and interpretation of financial statements are two different terms but are closely
associated because without interpretation analysis is useless and without analysis interpretation
is impossible. Analysis not only classifies the financial data into simple form but also helps in
creating a relationship of one accounting figure with another so that the meaningful conclusion
of the financial data may be drawn by the interpreter. For this purpose the interpreter must be
well experienced and quite intelligent to read and understand the analysed data.
As per Kennedy and McMullar, “The analysis and interpretation of financial statements are an
attempt to determine the significance and meaning of financial statements data so that a forecast
may be made of the prospects for future earnings, ability to pay interest and debt maturities
(both current and long-term) and probability of a sound dividend policy”.

9.2.1 Procedure for Analysis and Interpretation

Generally the following procedure is adopted for the analysis and interpretation of financial
statements:
1. Before the analysis, the objective and extent of analysis and interpretation should be
determined. Extent of analysis is based on the objectives of analysis.
2. All the required financial data should be collected and studied from financial statements.
If required, the financial statements should be rearranged or reorganized to find the same
nature items.
3. To reduce the complexity of the financial statements, the figures of the financial statements
should be approximated to the thousand or hundred.
4. To create a relationship among the income statement and financial position statement,
different analysis techniques as ratio analysis, trend and common size should be used.

5. If there are given some additional information relating to interpretation except financial
statement those must also be collected.
6. If it is required for the comparison, the financial data should be rearranged in the tables in
a logical way.

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