Financial Statement Analysis

Financial statement analysis is the process of analyzing a company’s financial statements, such as its balance sheet, income statement, and cash flow statement, in order to assess its financial health and performance. This analysis typically involves comparing the company’s financial data to industry averages and other companies, as well as analyzing trends in the company’s performance over time. Financial statement analysis can be used to assess a company’s financial position, identify potential risks and opportunities, and make strategic decisions.


table of content


1. Introduction ...................................................... 2


2. Types of Financial Statement Analysis............... 3


3. Types of Financial Statements ........................... 4


4. Benefits of Financial Statement Analysis .......... 5


5. Conclusion ........................................................ 6


1. Introduction


Financial statement analysis is the process of analyzing a company’s financial statements, such as its balance sheet, income statement, and cash flow statement, in order to assess its financial health and performance. This analysis typically involves comparing the company’s financial data to industry averages and other companies, as well as analyzing trends in the company’s performance over time. Financial statement analysis can be used to assess a company’s financial position, identify potential risks and opportunities, and make strategic decisions.

what is the relevance to stakeholders


By analyzing a company’s financial statements, stakeholders can assess its financial health, identify potential risks and opportunities, and make informed decisions about the company. For investors, financial statement analysis can help to determine the value of a company’s stock and inform investment decisions. For creditors, financial statement analysis can provide an understanding of a company’s financial position and its ability to repay its debts. For company managers, financial statement analysis can provide valuable insight into the company’s strengths and weaknesses and can be used to inform strategic decisions.


2. Types of Financial Statement Analysis

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the business’s proportions. Ratio analysis uses important ratio metrics to calculate statistical relationships.


                3. Horizontal Analysis


For the chain restaurant company, a horizontal analysis would involve examining the financial data over different periods of time. For example, a horizontal analysis may examine the company’s sales, operating income, and total assets from one year to the next. This type of analysis can be used to identify trends in the company’s performance and to assess the impact of various events on the company’s financial results.


                2. Vertical Analysis


For the chain restaurant company, a vertical analysis would involve comparing different financial data items within the same financial period. For example, a vertical analysis may compare the company’s sales, operating income, and total assets. This type of analysis can be used to identify relationships between different financial data items and to compare the company’s performance to industry averages.




            3. Key Ratios and Metrics


Financial statement analysis typically involves calculating and analyzing key financial ratios and metrics. These ratios and metrics help to give a better understanding of a company’s financial performance and can be used to compare the company’s performance to industry averages and other companies. Common ratios and metrics used in financial statement analysis include the following:


• Return on Equity (ROE): Measures the company’s profitability in relation to its shareholders’ equity.

• Return on Assets (ROA): Measures the company’s profitability in relation to its total assets.

• Debt to Equity Ratio (D/E): Measures the company’s financial leverage.

• Current Ratio: Measures the company’s ability to pay its short-term debts.

• Earnings Per Share (EPS): Measures the company’s profitability on a per share basis.

• Price to Earnings Ratio (P/E): Measures the company’s stock price in relation to its earnings.


3. Types of Financial Statements

Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.


Balance Sheet

The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets, liabilities, and shareholder equity. Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s expense arrangements and the debt capital it is paying off; and shareholder equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance assets and liabilities to equal shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.


Income Statement

The income statement breaks down the revenue that a company earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is broken into three parts that help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit. It then moves to operating profit, which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, after deducting interest and taxes, the net income is reached.


Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.


Cash Flow Statement

The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available.

Income Statement


For the year ended December 31, 2021

Revenues  $1,200,000

Expenses $950,000

Net Income $250,000


Retained Earnings Statement

For the year ended December 31, 2021

Beginning balance $0

Net income $250,000

Dividends $50,000

Ending Balance $200,000


Balance Sheet

As of December 31, 2021


Assets

    Cash  $200,000

    Accounts Receivable $50,000

    Inventory $100,000

Total Assets $350,000

Liabilities

    Accounts Payable $50,000

    Loan Payable $20,000

    Total Liabilities $70,000

Shareholders’ Equity

    Common Stock $50,000

    Retained Earnings $200,000

Total Shareholders’ Equity $250,000

    Total Liabilities & Equity $350,000


project next year statements from this numbers


Income Statement

For the year ended December 31, 2022


Revenues  $1,420,000

Expenses $1,115,000

Net Income $305,000


Retained Earnings Statement

For the year ended December 31, 2022


Beginning balance $200,000

Net income $305,000

Dividends $50,000


Ending Balance $455,000


Balance Sheet

As of December 31, 2022


Assets

    Cash  $455,000

    Accounts Receivable $55,000

    Inventory $110,000


Total Assets $620,000


 Liabilities

    Accounts Payable $55,000

    Loan Payable $20,000


Total Liabilities $75,000


Shareholders’ Equity

    Common Stock $50,000

    Retained Earnings $455,000

    Total Shareholders’ Equity $505,000


Total Liabilities & Equity $620,000


4. Benefits of Financial Statement Analysis


Financial statement analysis can be used to assess a company’s financial health, identify potential risks and opportunities, and make strategic decisions. This type of analysis can help to determine the company’s strengths and weaknesses and can provide valuable insight into the company’s financial performance. Financial statement analysis can also be used to assess the company’s performance in relation to its peers and the industry in general. This type of analysis can be used to inform investment decisions and to help determine the value of a company’s stock.

income statement, retained earnings statement and  balance sheet consider loan 20000 to be pain in 5 years with 10 percent interest per year, share equity of50000 and etc



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