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CHAPTER 2
FINANCIAL STATEMENT ANALYSIS
Meaning : Financial statement analysis is a systematic process of studying the
relationship among the various financial factors contained in the financial statements to
have a better understanding of the working and the financial position of a business.
"Financial Analysis consists in separating facts according to some definite plan,
arranging them in groups according to certain circumstances and then presenting
them in a convenient and easily able and understandable form."
— Finney and Miller
Objectives or Purposes of Financial Statement Analysis
· To measure the Profitability or Earning Capacity of the business
· To measure the Financial Strength of the business
· To make Comparative Study within the firm (intra-firm) and with other firms
(interfirm)
· To judge the Efficiency of Management
· To provide Useful Information's to the Management
· To find out the Capability for payment of interest, dividend etc.
· To measure the Short-term and Long-term Solvency of the business.
Financial Statement Analysis
· Based on basic financial statement which themselves suffer from certain limitations.
· Ignores changes in price level.
· Affected by the personal ability and bias of the analyst.
· Lack of qualitative analysis as only those transaction and events are recorded which
can be measured in terms of money.
· When different accounting policies are followed by the two firms then comparison
between their financial statement becomes unreliable.
· Analysis of single year's financial statement have limited use.
· Also affected by the Window dressing
317 [Class XII : Accountancy]
CHAPTER 2
FINANCIAL STATEMENT ANALYSIS
Meaning : Financial statement analysis is a systematic process of studying the
relationship among the various financial factors contained in the financial statements to
have a better understanding of the working and the financial position of a business.
"Financial Analysis consists in separating facts according to some definite plan,
arranging them in groups according to certain circumstances and then presenting
them in a convenient and easily able and understandable form."
— Finney and Miller
Objectives or Purposes of Financial Statement Analysis
· To measure the Profitability or Earning Capacity of the business
· To measure the Financial Strength of the business
· To make Comparative Study within the firm (intra-firm) and with other firms
(interfirm)
· To judge the Efficiency of Management
· To provide Useful Information's to the Management
· To find out the Capability for payment of interest, dividend etc.
· To measure the Short-term and Long-term Solvency of the business.
Financial Statement Analysis
· Based on basic financial statement which themselves suffer from certain limitations.
· Ignores changes in price level.
· Affected by the personal ability and bias of the analyst.
· Lack of qualitative analysis as only those transaction and events are recorded which
can be measured in terms of money.
· When different accounting policies are followed by the two firms then comparison
between their financial statement becomes unreliable.
· Analysis of single year's financial statement have limited use.
· Also affected by the Window dressing
317 [Class XII : Accountancy]
