Financial analysis of financial statements
The financial analysis of the financial statements is defined as an assessment of the special financial situation in various establishments. This is done through the role of the accountant, who is responsible for carrying out a number of duties, including analyzing profits as well as losses, in addition to following up on administrative decisions as well as contributing to the preparation of financial statements.
The analysis of financial statements has another definition, as it is defined as the process that audits and examines the financial statements of the enterprise, and this helps to assess and determine the ability of the enterprise to implement its financial obligations.
Basic steps in financial analysis of financial statements
There are a number of steps that contribute mainly to the success of the application of financial statement analysis, and these steps are:
- Knowing the economic characteristics. Knowing the economic characteristics is the first step in analyzing the financial statements, as they constitute a series of activities that are related to industry or production, as well as the distribution of products in addition to special services in each facility.
- Defining the company’s strategies, which is the second step in the steps of analyzing the financial statements, which is concerned with identifying the nature of the services and products provided by the facility, and it studies the margins of the company’s profits, as well as studying the nature of its brand, as it works to control geographical and industrial diversity As well as costs.
- Evaluating the financial statements of the facility is the third step, which is concerned with reviewing all the financial statements that belong to the institution, within the accounting standards that are related to this field, and attention must be paid to ensuring the implementation of the evaluation as well as the classification and recognition of the basic characteristic of the correct evaluation, and this is done during the study of the financial accounts related to Balance Sheet.
- Profits that represent economic performance should also be evaluated when studying the income statement, and the evaluation of the cash flow statement works to provide information on financial liquidity in the institution, by following up on investments and activities that fall within the financial period.
- Profitability and risk analysis and this step help those in charge of financial analysis to evaluate the institution as well as the financial statements, and the profits of the institution’s operations must be determined for the institution, in the case of profitability analysis.
- Preparing the expected financial statements. This step is the last step for analyzing the financial statements, as it includes a number of assumptions that those in charge of financial analysis must prepare, and then the nature of the impact of these assumptions on cash flows and financing is measured.
Types of financial statement analysis:
There are 3 types of financial statement analysis, which are:
- Horizontal analysis, which is a comparison of the financial performance of the institution during two years or more, where the financial analyst compares the financial amounts and sales revenues, and this helps to calculate the percentages of changes for a number of years for all financial balances, such as cash and inventory balance.
- Vertical analysis, which is the analysis that is concerned with calculating each item within the items of the financial statements, by considering it as a percentage that is included in the total. Vertical analysis is also used because the annual figures of the institution are vertically included in the financial statements.
- Also, the total sum of the income statement is the net revenue from the sales process, while the balance sheet’s set is the number of assets in the enterprise.
Relative analysis, relative analysis is the analysis that provides the ability to compare the items of a single financial list for the financial analyst, in addition to his ability to examine the relationships between all items that exist within two consecutive lists.
Also, the financial analyst’s implementation of the ratios of the financial statements every year, enabling him to study the organization’s trends during a number of years, and the use of relative analysis facilitates the application of the process of comparison between different institutions, as it uses a number of terms as well as concepts in relative analysis, which include Financial suitability ratios, as well as liquidity ratios, profitability ratios.
Steps to analyze financial statements by ratios
- There are a number of steps related to the analysis of financial statements, through the use of ratios.
- Calculate the ratios related to the common size, and this step is calculated using the company’s balance sheet.
- Calculate the ratios of the joint size, which depend on the financial statements related to the income statement.
- Use balance sheet data to calculate quick financial ratios in addition to calculating current financial ratios.
- Carry out the application of calculating the ratio of debts as well as total sales in relation to the capital of the institution.
Objectives of financial statement analysis
The analysis of financial statements is one of the things that achieve a number of goals within any organization, and these goals are:
- Identify the financial status of the institutions.
- Provide a comprehensive view of the nature of the operational and financial performance of the institution.
- Carrying out an assessment of the possibility of paying obligations, whether these obligations are long-term or short-term, as well as repaying the debts incurred by the institution.
- Contribute to the preparation of future plans, which are concerned with activating the role of internal control of the institution.
- Identifying the weak points of the institutions, as well as searching for a number of solutions that contribute to the treatment of these points by providing the appropriate treatment.
Types of financial statements
Financial statements are one of the best elements that are used in the statement of the financial status of organizations, institutions, and companies, and there are different types of them, including:
- Income statement, which is the list that contains all the expenses and profits as well as losses and revenues of the establishment, and the revenues that constitute all the money obtained, as a result of a group of business operations. While expenses express the money and costs that are spent in exchange for the facility to obtain a thing, and the nature of expenses is related to its ability to generate revenues.
- The balance sheet list, which is the financial list that contains all the liabilities and assets as well as private property rights in a facility, and there must be equality between liabilities and assets in addition to intellectual property rights. Assets are also divided into current assets and fixed assets, while liabilities are divided into fixed liabilities and long-term liabilities.
- The statement of cash flows is the list that is concerned with clarifying the nature of money within the institution, and it also contains items that affect the financial balance of the institution.