FINANCIAL ANALYSIS TOOLS
In order to understand financial statements one has to use financial analysis tools such as ratio analysis,
trend analysis, break even analysis and many more. Each and every analysis is
carried out for a different purpose which will interpret the financial
statements. Each of the analysis tool has its own importance, advantage and
limitations. Today let us try to explore and understand various financial
analysis tools
§ RATIO ANALYSIS:
It is the most
popular analysis carried out for understanding financial statements. It helps
to analyze how two variables are affecting and influencing each other. In helps may comparison between two firms.
It not only helps to speaks about financial position but at the same time it
also indicates the cause for the financial position to a large extent. It also
helps to indicate the change in the trend and helps to prepare future planning.
Apart from having all these merits ratio analysis has few demerits like the
ratios can only be reliable if the data is accurate, it can only be linked out
only to two figures of same financial statement, sometimes ratios can mislead
us. To know more about the Ratio Analysis and different types of ratios Click Here
§ TREND ANALYSIS:
It is the
comparison of past financial data to know the future trends. It tells about the
how company has performed in the past and what was the financial position by
comparing to previous years. To know more Click Here
§ COMPARATIVE FINANCIAL STATEMENT
ANALYSIS:
It is a
financial statement of business which gives the financial position of a
business to provide prospective consideration of various elements of financial
positions. I helps to carry out a comparative study of two or more financial
statements or financial items of a financial statement. It will help us to know
which is trends.
§ COMMON SIZE FINANCIAL STATEMENT
ANALYSIS:
It is a
comparative statement that gives only neutral percent or ratio or financial
states without given rupee value is called Common Size Statement. It mainly includes
common size income statement and balance sheet. A common size income statement is a statement
where net sales is taken as 100% and all other items of income statement or
expenses as a percentage of net sales.A Common Size
Balance Sheet is a statement in which the total of asset or total of
liabilities and capital is taken as 100%.
§ FUND FLOW ANALYSIS:
It is the
analysis of funds in the business or firm for a specific period of time. It
main intention is to tell about how the funds are flowing in the business. It
also helps to overcome the shortcomings of Cash flow statement. To know more
about Fund Flow Statement Click Here
§ CASH FLOW ANALYSIS:
It is the
analysis of cash inflow and cash outflow in a business over a specific period
of time. It begins with opening cash balance and then all the cash related
incomes and expenses transactions are entered and closing balance is obtained.
The main idea behind its preparation is to know the cash flow for a period of
time. To Know more about Cash Flow Analysis Click Here. To know about Cash Flow Statement Click Here
§ BREAK EVEN ANALYSIS:
It is a technique which is used by
production and management accountants to determine the break-even point so as to
know when the it reaches zero profit and loss by comparing sales revenue, sales
volume, sales value with fixed and variable costs. It helps to know the firm
how long will it take to reach the break-even point so that the firm can make
the necessary arrangements and effective planning and future estimations.
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