Analysis of Financial Statements
Financial statements are the basic and formal annual reports
through which the corporate management communicates financial information to its owners and
various other external parties which include investors, tax authorities,
government, employees, etc.
The financial statements of a company
generally include:
(a)
Balance Sheet (position statement), and
(b) Statement of Profit and Loss.
Financial statements: Financial statements are the end products of accounting
process, which reveal the financial results
of a specified period and financial position as on a particular date.
Apart from Balance Sheet and Statement of Profit and Loss, there is also a need to know about movements of cash during a year. Therefore, the Cash Flow Statement is also taken as an integral component of the financial statements of a company.
MEANING OF FINANCIAL STATEMENT ANALYSIS
Analysis of Financial Statements is a systematic process of analysing the financial information in the financial statements to understand and make decisions regarding the operations of the enterprise.
Purposes or Objectives of Financial Analysis
1. To assess an enterprise’s operating efficiency and profitability.
2. To assess financial stability of an enterprise.
3. To assess an enterprise’s short-term and long-term solvency.
4. To compare intra-firm position, inter-firm position and pattern position within the industry.
5. To assess the future prospects of an enterprise.
Limitations of Analysis of Financial Statements
1. Historical Analysis.
2. Ignores the price-level changes.
3. Qualitative Aspect is ignored.
4. Limitations of Financial Statements are also the limitations of Financial Statement Analysis.
5. Not free from bias.
6. Financial analysis identifies the symptoms but does not arrive at the diagnosis.
7. Variation in Accounting Practices.
8. Window Dressing.
Balance
Sheet of Company
Every company registered
under the Companies Act, 2013 shall prepare its balance sheet, statement of
profit and loss and notes to account thereto in accordance with the manner
prescribed in the revised Schedule III to the
Companies Act, 2013 to harmonize the disclosure requirement with the accounting
standards.
Classification of items in balance sheet of a company under Major heads and Sub-heads
Financial Statements of a Company
Format of Statement of Profit and Loss
Format of the Statement of Profit and Loss is prescribed in Part II of Schedule III of the Companies Act, 2013, as follows:
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