Zulfiqar Hasan

A financial statement (or financial report) is a formal record of the financial activities of a corporation. A financial statement is often referred to as an account

Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions. These statements include the income statement, balance sheet, statement of cash flows, and a statement of changes in equity.

Major financial statements are: Income Statement (Profit and Loss Account), Balance Sheet, Statement of Retained Earnings and Cash Flow statement.

Importance of Financial Statement Analysis

By analyzing financial statements, managers and owners can identify the inernal and external problems of an organization. Followings are the importance of analyzing the financial statement of an organization:

1. All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time.
2. Comparison of one company with another can provide valuable clues about the financial health of an organization.
3. Stockholders are concerned with future earnings and dividends.
4. Creditors are concerned with the company's future ability to repay its debts.
5. Managers are concerned  with the company's ability to finance future expansion. 
6. Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns. 
7. Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. 
8. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios. 
9. Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing. 
10. Owners and managers require financial statements to make important business decisions that affect its continued operations 
11. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. 
12. Prospective investors make use of financial statements to assess the viability of investing in a business