financial lists analysis
The analysis of financial statements is the evaluation of the special financial condition of various establishments; Through the role of the accountant responsible for the implementation of a set of duties that include profit and loss analysis, follow-up to administrative decisions, and contribute to the preparation of financial statements, financial statement analysis is defined as the process that contributes to the application of an audit of all financial statements, such as the balance sheet Which contributes to understanding the special financial situation in the facility, and providing assistance to take effective decisions. Another definition of financial statement analysis is the audit and examination of the financial statements of a particular facility; Which contributes to evaluating it and determining the extent of its ability to implement its financial obligations.
Financial statement analysis steps
The success of the application of financial statement analysis depends on major steps, the most important of which are:
Knowing the economic characteristics: It is the first step in analyzing the financial statements, and it constitutes a series of activities related to production or industry, and the distribution of special products or services in the facility.
Determining the company’s strategies: It is the second step in analyzing the financial statements, and it is concerned with identifying the nature of the products or services provided through the facility, and also studies the level of special margins in profits, the nature of the brand, cost control, and industrial and geographical diversity.
Evaluation of the financial statements of the facility: It is a review of all the financial statements of the facility within the accounting standards associated in this field, and when studying the special financial accounts in the balance sheet, it is important to ensure the implementation of the evaluation, classification, and recognition as the correct income statement, and when studying the main elements of the evaluation It is important to evaluate profits as they represent the company’s own economic performance, while evaluating the cash flow statement provides information on the nature of the company’s own financial liquidity; By following up its activities and investments within the financial period.
Profitability and risk analysis: It is the step that helps financial statement analysts to evaluate the facility and its financial statements. When analyzing profitability, it is important to determine the extent of the profits of the facility’s operations relative to its assets, and the shareholders’ opinion on the nature of its profits, and also the nature of the risks affecting the facility must be evaluated.
Preparing the expected financial statements: It is the last step in analyzing the financial statements, and it includes a set of assumptions that financial analysts must prepare; In order to predict the future of the facility and its field of work, and then measure the nature of the impact of these assumptions on financing and cash flows.
Types of financial statement analysis
The analysis of financial statements is divided into three main types:
Horizontal analysis: It is a comparison of the financial performance of the company during two years or more. The financial analyst compares the special revenue in sales and the sums of money, which helps to calculate the percentages of changes between years for all financial balances, such as the inventory balance and the cash balance.
Vertical analysis: It is the calculation of each item in the financial statements as a percentage of the total, and the term vertical analysis is used; Because the annual figures are inserted vertically in the financial statements; The total income statement is the net revenue from sales, and the total balance sheet is the amount of assets in the facility.
Relative analysis: It is the analysis that provides the financial analyst with the ability to compare the items of one financial statement, or to examine the relationships between all the items within two financial statements. The financial analyst’s implementation of calculating the ratios of the financial statements in each year helps him to study the trends of the facility during a set of years, and the use of this type of financial analysis facilitates the application of the process of comparison between companies, and a set of terms and concepts are used in the relative analysis, including profitability ratios, and financial suitability ratios , and liquidity ratios.
Financial statement analysis objectives
The analysis of financial statements contributes to achieving many goals in the work environment, including:
Identify the special financial situation in the establishments.
Provide a perception of the nature of the operational and financial performance of the establishments.
Assessing the possibility of paying obligations, whether short or long-term, and repaying the debts incurred by the establishments.
Contribute to the preparation of special future plans in activating the role of internal control.
Determining the weaknesses of the facilities, and searching for suggested solutions that contribute to providing the appropriate treatment for them.