Analysis of Financial Statements and Steps Involved In It
Analysis of financial statements is basically a study of the relationship among the various financial facts and figures as given in a set of these statements. The complex figures as given in these financial statements are broken into simple and valuable elements and significant relationship are established between the elements of different financial statements., following steps are required during such analysis of financial statements –
1. Information selection – The first step is to select the information relevant to the decision under consideration from the total information contained in the financial statements. It is because a specific aspect of financial operation may be more important for the group which is doing financial analysis than the other and hence it differs according to the person doing such analysis.
2. Establishment of Relationship – It involves grouping of the information in such a way that significant relationship is established. For example to know the relationship between current assets and current liabilities both should be arranged in such a way that capacity of the company to pay its short term obligations is known and one can take decision quickly on the basis of such information.
3. Assessment – The last step involves interpretation and drawing of inferences and conclusions from the collected information with the help of various ratios and hence to make sure that company is going in right direction and to take corrective actions as soon as possible if one the basis of above information it is found that company is in trouble.
Hence it can be said that analysis of financial statements requires an in depth knowledge of all the aspects of the finance as well as company’s financial position and hence it should be taken by the person who is an expert and has required knowledge.
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