Published financial statements are the only source of information about the activities and affairs of a business entity available to the public, shareholders, investors and creditors, and the governments. These various groups are interested in the progress, position and prospects of such entity in various ways. But these statements howsoever, correctly and objectively prepared, by themselves do not reveal the significance, meaning and relationship of the information contained therein. For this purpose, financial statements have to be carefully studied, dispassionately analyzed and intelligently interpreted. This enables a forecasting of the prospects for future earnings, ability to pay interest, debt maturities both current as well as long-term, and probability of sound financial and dividend policies. According to Myers, “financial statement analysis is largely a study of relationship among the various financial factors in business as disclosed by a single set of statements and a study of the trend of these factors as shown in a series of statements”.
Objectives of Financial Statement Analysis
Financial statement analysis is very much helpful in assessing the financial position and profitability of a concern. The main objectives of analyzing the financial statements are as follows:
- The analysis would enable the present and the future earning capacity and the profitability of the concern.
- The operational efficiency of the concern as a whole as well as department wise can be assessed. Hence the management can easily locate the areas of efficiency and inefficiency.
- The solvency of the firm, both short-term and long-term, can be determined with the help of financial statement analysis which is beneficial to trade creditors and debenture holders.
- The comparative study in regard to one firm with another firm or one department with another department is possible by the analysis of financial statements.
- Analysis of past results in respects of earning and financial position of the enterprise is of great help in forecasting the future results. Hence it helps in preparing budgets.
- It facilitates the assessments of financial stability of the concern.
- The long-term liquidity position of funds can be assessed by the analysis of financial statements.