In a company, financial statements are a crucial source of data for evaluating the company's finances over a period. Therefore, financial statements must be prepared systematically, using the appropriate financial statement analysis approach/method.
The right financial statement analysis method will provide a clear picture of the company's financial condition. This enables management and external parties, such as investors or creditors, to make better decisions.
The choice of financial statement analysis method should be based on the objectives of the analysis, the type of information required, and the company's conditions and needs. Each financial statement analysis method certainly has its own advantages and disadvantages, which can help a company achieve the best results.
So, what are the various methods of financial statement analysis in a company? To learn more, here's information about financial statement analysis methods you need to know. Let's take a look!
What Are Company Financial Statements?
Before discussing financial statement analysis methods, let's first understand what a company's financial statements are. A company's financial statements are a document that presents information about a company's financial performance over a specific period.
These financial statements are prepared based on accepted accounting principles. The purpose of preparing financial statements is to provide a clear picture of the company's financial condition to stakeholders.
After the financial statements are prepared, the results are analyzed to assess the company's financial performance over the period specified in the report. Financial statement analysis is generally conducted to inform decision-making related to the company's finances.
This analysis will identify the company's financial strengths and weaknesses. This allows the company to make quick decisions if financial problems arise.
Company Financial Statement Analysis Methods
When analyzing a company's financial statements, there are several analysis methods that can be used. Ensure the method used is appropriate for your company's needs. Here are some financial statement analysis methods you should know.
1. Financial Ratio Analysis Method
The first method of financial statement analysis is the financial ratio analysis method. In this method, various financial ratios are calculated to assess important aspects of the financial statements. Some commonly used financial ratios include:
• Liquidity Ratios (Current Ratio and Quick Ratio)
• Profitability Ratios (Return on Assets (ROA) and Net Profit Margin)
• Solvency Ratios (Debt to Equity Ratio)
• Activity Ratios (Asset Turnover and Inventory Turnover)
2. Vertical Analysis Method
The next method of financial statement analysis is the vertical method. This method compares different financial items within the same period.
The vertical analysis method calculates each revenue and expense item as a percentage of total revenue. This aims to measure how large the proportion of costs or profits is to the company's income.
3. Horizontal Analysis Method
The next financial statement analysis method is the horizontal method. This is a financial statement analysis technique that compares each item in the financial statement across different periods. Generally, the period used as a comparison is the last two to three years.
This method is generally used to compare the percentage increase or decrease in each financial item across the two periods being compared. This method is often referred to as the dynamic method.
4. Industry Analysis Method
An equally important financial statement analysis method is the industry analysis method. This method is used to evaluate and understand the characteristics and dynamics of an industry.
This analysis allows companies, investors, and other decision-makers to gain insight into the competition, opportunities, and threats within the industry.
5. Index Time Series Method
The index time series method is also a financial statement analysis method that companies can use. The index time series method is a financial statement analysis method that uses a time index to measure the comparison between the value of a variable in a specific period and a base period.
This method is generally used to measure the movement of variables such as prices, production, demand, and so on. The selected period will then be assigned a value of 100.
6. Growth Analysis Method
One popular method of financial statement analysis is the growth analysis method. This method is used to measure the development or growth of financial variables over a specific period.
This method is carried out by comparing the increase in the financial statement position in one period with another. The comparison is usually measured based on a percentage level.
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