A financial statement (or financial report) is a formal record of the financial activities of a corporation. They typically include four basic financial statements, accompanied by -----
Income Statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time.
Balance Sheet also referred to as statement of financial position or condition, reports on a company's Assets, Liabilities, and ownership equity at a given point in time.
Statement of Retain Earnings: explains the changes in a company's retained earnings over the reporting period.
Statement of Cash Flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.
A financial statement (or financial report) is a formal record of the financial activities of a corporation.
Importance of Financial Statement Analysis
01. All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time.
02. Comparison of one company with another can provide valuable clues about the financial health of an organization.
03. Stockholders are concerned with future earnings and dividends.
04. Creditors are concerned with the company's future ability to repay its debts.
05. Managers are concerned with the company's ability to finance future expansion.
06. Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns.
07. Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company.
08. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.
09. Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing.
10. Owners and managers require financial statements to make important business decisions that affect its continued operations
11. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.
12. Prospective investors make use of financial statements to assess the viability of investing in a business.
Five important methods of corporate financial statement analysis are: Horizontal analysis, Vertical Analysis, Trend Analysis, Common Size analysis and Ratio Analysis.