Page 173 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting Pooja, Lovely Professional University

Notes Unit 10: Analysis of Financial Statements

CONTENTS

Objectives
Introduction
10.1 Meaning and Concept of Financial Statement Analysis
10.2 Tools for Analysis and Interpretation of Financial Statement
10.3 Comparative Statements
10.3.1 Comparative Balance Sheet
10.3.2 Comparative (Income) Financial Statement Analysis
10.4 Common-size Statements
10.5 Trend Analysis
10.6 Summary
10.7 Keywords

10.8 Review Questions
10.9 Further Readings

Objectives

After studying this unit, you will be able to:

Describe the tools of financial statement analysis
Prepare comparative fi nancial statements
Construct common size statements
Illustrate trend analysis

Introduction

Financial statement analysis is the process of examining relationships among fi nancial 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.
10.1 Meaning and Concept of Financial Statement Analysis

Analysts can obtain useful information by comparing a company’s most recent fi nancial
statements with its results in previous years and with the results of other companies in the same

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