Financial Statements Analysis
It is a process of analyzing data from a company's financial documents and statements. This offers insight into the business by referring to different financial aspects via different methods including Vertical analysis, Horizontal analysis & Ratio analysis such as liquidity ratios, profitability ratios, leverage ratios, debt ratios, turnover ratios, and solvency ratios.
A casual brief on Balance sheet analysis:
The balance sheet is a summary of all the assets and liabilities of the business. It lists all the assets, or things of value, on the left side, while listing all liabilities, things owed, and shareholders' equity on the right. The purpose of the balance sheet is to ensure all assets and liabilities are balanced out.
A casual brief on Income Statement analysis:
It is a financial document that displays both the revenue generated by the company and the costs incurred. All income and costs are listed in sections on one page until the amount reaches the net income or the bottom line. This is the net book income that is generally considered for tax purposes to which any other taxable allowances or disallowances are made.
A casual brief on Cash Flow Statement:
The statement of cash flow shows how cash flows both into and out of the business. It is divided into three sections or categories namely operating activities, investing activities, and financing activities. The bottom of the statement shows the cash balance of the business after all three types of activities are accounted for.
Why is it essential?
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To track the progress and performance of the business and evaluate its financial health.
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To determine or measure the value of the company.
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To facilitate complying with regulations and corporate governance.
Moreover, If a business can show its financial health to its potential investors, it may be successful in gaining investors to grow the business. In the same way, the business can prove to lenders they are worthy and qualify for capital loans. Financial statement analysis is also beneficial in complying with regulations and corporate governance.
Why is Ratio Analysis required?
The use of ratios is a very important aspect of any firm. It helps in offering information regarding the management performance in the usage of resources, demonstrating the business’s ability to pay its present obligations, examining the extent to which the company has depended on borrowing so that it can finance its operations, and assessing the firm’s credit use, assets, and Inventory.