Financial Statement Analysis: •the process of properly establishing the relationships between the items of the IS & BS, correlating them until hidden meanings are unraveled; interpreting the information to identify the financial strengths and weaknesses of the firm in comparison to other firms in the same industry.
Understanding the Financial Statements: Income Statement •Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. •It lets investors know how well the company’s business is performing, whether the company is bringing in money or not. •It identifies companies with low expenses relative to revenue - or high profits relative to revenue - signal strong fundamentals to investors.Multi-Step Income Statement: •involves more than one subtraction to arrive at net income and it provides more information than a single-step income statement. •The most important of which are the gross profit and the operating profit figures.
•It’s divided into two main sections: the operating section and the non-operating sections.Single-step Income Statement •It uses just one subtraction. •This is done by subtotaling all the revenues and gains together at the top of income statement and subtotaling all the expenses and losses together below revenues. The sum of expenses and losses is then subtracted from the sum of revenues and gains to arrive at net income. Format:Revenue Less: ExpensesBalance Sheet •A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. •These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
•It's called a balance sheet because the two sides balance out. •This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity)Tools and Techniques in Financial Statement Analysis: 1.Horizontal Analysis 2. Vertical Analysis 3.
Ratio Analysis1.Horizontal Analysis: •Also known as TREND ANALYSIS or index analysis •Comparison of two or more consecutive year’s financial data •Facilitated by showing changes between years in both peso and percentage form2.Vertical Analysis •process of comparing figures in the financial statements of a single period. •conversion of figures in the statement to a common base •Used for comparing multiple years of data from the same firm / company. •Compares company to industry averages3. Ratio Analysis •Involves development of mathematical relationships among accounts in the FS.
•Ratios calculated provide users and analysts with relevant information about the firms liquidity, solvency and profitability.
