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Financial Statement Analysis
Page 2


Financial Statement Analysis
Business Survival:
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.
Page 3


Financial Statement Analysis
Business Survival:
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.
Financial Statement Analysis
•
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.
Page 4


Financial Statement Analysis
Business Survival:
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.
Financial Statement Analysis
•
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.
• Financial Statement Analysis is the 
collective name for the tools and 
techniques that are intended to provide 
relevant information to the decision 
makers. The purpose of the FSA is to 
assess the financial health and 
performance of the company. 
• FSA consist of the comparisons for the 
same company over the period of time and 
comparisions of different companies either 
in the same industry or in different 
industries.
© Mary Low
Page 5


Financial Statement Analysis
Business Survival:
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.
Financial Statement Analysis
•
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.
• Financial Statement Analysis is the 
collective name for the tools and 
techniques that are intended to provide 
relevant information to the decision 
makers. The purpose of the FSA is to 
assess the financial health and 
performance of the company. 
• FSA consist of the comparisons for the 
same company over the period of time and 
comparisions of different companies either 
in the same industry or in different 
industries.
© Mary Low
Financial Statement Analysis
Purpose:
•
To use financial statements to evaluate an 
organisation’s
–
Financial performance
–
Financial position
–
Prediction of future performance
•
To have a means of comparative analysis across time 
in terms of:
–
Intracompany basis (within the company itself)
–
Intercompany basis (between companies)
–
Industry Averages (against that particular industry’s averages)
•
To apply analytical tools and techniques to financial 
statements to obtain useful information to aid decision 
making.
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FAQs on PPT - Analysis of Financial Statements - Accountancy Class 12 - Commerce

1. What are financial statements and why are they important in commerce?
Ans. Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide valuable information about the financial performance, profitability, liquidity, and solvency of an organization. Financial statements are important in commerce as they help stakeholders, such as investors, lenders, and suppliers, to assess the financial health and viability of a company before making business decisions.
2. How can financial statements be analyzed to evaluate a company's performance?
Ans. Financial statements can be analyzed using various techniques and ratios to evaluate a company's performance. Some common methods include: - Ratio analysis: This involves calculating financial ratios like profitability ratios, liquidity ratios, and solvency ratios to assess different aspects of a company's performance. - Trend analysis: By comparing financial data over multiple periods, trends can be identified to understand if the company's performance is improving or deteriorating. - Comparative analysis: This involves comparing the financial performance of a company with its industry peers or competitors to evaluate its relative position in the market.
3. What are the key components of financial statements that need to be analyzed?
Ans. The key components of financial statements that need to be analyzed include: - Income statement: This statement shows the revenue, expenses, and profit or loss generated by a company during a specific period. - Balance sheet: It presents the assets, liabilities, and shareholders' equity of a company at a specific point in time, providing a snapshot of its financial position. - Cash flow statement: This statement tracks the inflow and outflow of cash from operating, investing, and financing activities, highlighting the company's ability to generate and manage cash. - Statement of changes in equity: It reflects the changes in shareholders' equity over a specific period, including contributions, distributions, and retained earnings.
4. What are the limitations of financial statement analysis?
Ans. Financial statement analysis has certain limitations that should be considered, including: - Historical data: Financial statements primarily provide historical information and may not reflect the current or future performance of a company accurately. - Subjectivity: The interpretation of financial statements involves subjective judgments, and different analysts may have varying opinions. - Incomplete information: Financial statements may not capture all relevant information about a company, such as non-financial factors and qualitative aspects. - Manipulation: Companies can manipulate financial statements through creative accounting practices, making it challenging to rely solely on the reported numbers.
5. How can financial statement analysis assist in decision-making for investors and lenders?
Ans. Financial statement analysis helps investors and lenders make informed decisions by providing insights into the financial health and performance of a company. It assists in assessing the profitability, liquidity, and solvency of a company, which are crucial factors for investment and lending decisions. By analyzing financial statements, investors and lenders can evaluate the company's ability to generate profits, repay debts, and generate cash flows. This analysis also helps in identifying potential risks and opportunities, enabling better decision-making for investors and lenders.
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