Page 206 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 7. To interpret the financial data and to draw a conclusion, the proper tool (technique) as
average comparative statement should be used.
8. The analysed trend of the data should be interpreted keeping in mind the economic fact of
the business.
9. The interpreted data and conclusion drawn should be presented to the management in a
brief and clear report.

Self Assessment

Fill in the blanks
1. …………………… is relating to the drawing of conclusion, inference and criticism of the
analysed financial data.
2. To reduce the complexity of the financial statements, the figures of the financial statements
should be approximated to the …………………….

9.3 Types of Financial Statement Analysis

There are different parties who have their interest in the financial statements. Their purposes of
analysis of the financial statements are also different. On the basis of their usage and purposes
the financial analysis is classified as below:

Figure 9.1: Classification of Financial Analysis
Analysis of Financial Statements

According to Material Used According to Modus Operandi

Internal External Horizontal Vertical
Analysis Analysis Analysis Analysis

According to Material Used

On the basis of materials used by the analyst, the analysis is classified into following two:
1. Internal Analysis: Internal analysis of financial statements is done by such person who
can access the books of accounts and other related information of the business. Generally,
such persons are the employees, management executives, sometimes government,
regulatory bodies, or court. Generally internal analysis of financial statement is done for
the purpose of management.
2. External Analysis: External analysis of financial statement is done by such parties who
cannot approach the books of accounts as investors, creditors and general public. This analysis
is based on the published financial statements. They cannot access to the enterprise for data.

According to Modus Operandi

On the basis of this, the financial analysis is classified into following two:
1. Horizontal Analysis: It is also known as dynamic analysis or trend analysis. When the
financial data of a company for several years are analysed and compared, such type of

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