A financial statement (or financial report) is a formal

record of the financial activities of a business, person, or

other entity.
Financial statements are meant to present the
financial information of the entity in question as clearly and
concisely as possible for both the entity and for readers.

Prof. K. Omprakash
Kakatiya University - Warangal

Financial statements for businesses usually

include:

balance

sheet,

income

statement,

statements of retained earnings and cash flows, as

well as other possible statements.

Prof. K. Omprakash
Kakatiya University - Warangal

Balance sheet and income statement are the key financial

statements of any entity.
Balance sheet: shows, at a given date, the companys financial
position: the economic resources (assets) it controls and where its
finance comes from (liabilities and equity)
Income statement: sets out the performance (results) of a
companys operations for the accounting period

Prof. K. Omprakash
Kakatiya University - Warangal

The income statement presents flow-data (covering a period),

while the balance sheet is a status report (a snapshot at a
specific moment in time)
Balance sheet
31/12/20X1

Income
statement 20X2

Balance sheet
31/12/20X2

Balance sheet
31/12/20X3

Income
statement 20X3

Prof. K. Omprakash
Kakatiya University - Warangal

Balance sheet
31/12/20X4

Income
statement 20X4

There are two key factors for business survival:

Profitability

Solvency

Profitability is important if the business is to generate

revenue (income) in excess of the expenses incurred in
operating that business.
The solvency of a business is important because it looks at
the ability of the business in meeting its financial
obligations.

Prof. K. Omprakash
Kakatiya University - Warangal

Financial statement analysis involves analysing the information

provided in the financial statements to:

Provide information about the organisations:

Past performance

Present condition

Future performance

Assess the organisations:

Earnings in terms of power, persistence, quality and

growth

Solvency
Prof. K. Omprakash
Kakatiya University - Warangal

Financial Statement Analysis will help business

owners and other interested people to analyse the
data in financial statements to provide them with
better information about such key factors for
decision making and ultimate business survival.

Prof. K. Omprakash
Kakatiya University - Warangal

IVE
T
C
E
OBJ

To use financial statements to evaluate an organisations:

Financial performance

Financial position

To have a means of comparative analysis across time in terms of:

Intra-company basis (within the company itself)

Intercompany basis (between companies)

Industry Averages (against that particular industrys averages)

To apply analytical tools and techniques to financial statements to obtain

useful information to aid decision making

Prof. K. Omprakash
Kakatiya University - Warangal

TE

IQU
CHN

ES

The commonly used tools for financial statement analysis are:

Comparative financial statements analysis

Common-size financial statement analysis
Trend analysis
Financial Ratio analysis
Funds (cash flow) analysis

Prof. K. Omprakash
Kakatiya University - Warangal

IC S
S
A
B

Application of
analytical Tools

Involves
transforming
data

Reduces
Uncertainty

Prof. K. Omprakash
Kakatiya University - Warangal

RS
E
S
U

Financial statement analysis helps users make better decisions

External Users

Internal Users

Shareholders
Lenders
Investors
Customers

Managers
Officers
Internal Auditors
Prof. K. Omprakash
Kakatiya University - Warangal

KS
C
O
BL
Ability to meet shortterm obligations and to
efficiently generate
revenues

Ability to operate or use

the resources efficiently

Liquidity

Efficiency

Solvency

Profitability

Prof. K. Omprakash
Kakatiya University - Warangal

Ability to generate
future revenues and
meet long-term
obligations

Ability to provide
rewards sufficient
to attract and
retain financing

Prof. K. Omprakash
Kakatiya University - Warangal