Tools Of Financial Analysis

1) Balance sheet: It is a statement of financial position of a firm at a particular point of time.

2) Income statement: It is also called profit-loss statement. It shows firm’s earnings for the period covered, usually half yearly or yearly.

Balance Sheet
From an analyst point of view, it is a written representation of resources and liabilities of the business firm. It shows the financial condition of the business firm at a given date. The balance sheet contains and reports on assets, liabilities and net worth of a firm. Assets must always equal the sum of liabilities and net worth. What is owned by or owed to firm (assets) must equal what the firm owes to its creditors plus what is owed to its owners (net worth). Balance sheet indicates the sources from which business obtained capital for its operations and the form in which that capital is invested on a specific date. Net worth represents owner’s equity in the business.

Limitation : It is an interim statement between two operating periods. It summarizes solvency of business at a given time rather than financial transactions occurred in business during an accounting period.

benefit to owner:
• It determines the safety of their investments.
• The probability of additional capital requirements.
• Possibility of withdrawals or dividends.
• Need for reorganization or liquidation.

benefit to creditors:
• Help in determining the involved in granting credit.
• How much money safely be granted.

How helpful to management?
• Helps to judge the results of its operating activities and in planning for proper financing of future operations.

2. Income Statement
It is also called profit and loss statement. It states the source of firm’s incomes, describes the nature of the expenses, and shows the net profit earned ( or net loss incurred) during an accounting period. It is supporting evidence to balance sheet, in the sense, that it explains the change in retained earnings on the balance sheet.

Uses of Income Statement
􀂃 Can determine what profit is earned by the business.
􀂃 Can find particular causes of low profit or operating losses.
􀂃 Management can take action to prevent the occurrences of future losses or to prevent further decline in profits.

Cash flow statement
The cash flow statement is a measure of changes in cash the business has on hand from month to month. It records or projects all cash receipts less all cash disbursements. A business may use the cash flow statement as a record of what has occurred to cash or as a projection into the future to determine future needs for cash or as both.
The cash flow statement is accurate when it is a record of past receipts and disbursements and an estimate when it is projected for future months. The cash flow statement is usually calculated on a monthly basis for an entire year.