Definition and Explanation of Financial Statement Analysis:

Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis. Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis 2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis: Comparison of two or more year's financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form. Click here to read full article. Trend Percentage: Horizontal analysis of financial statements can also be carried out by computing trend percentages. Trend percentage states several years' financial data in terms of a base year. The base year equals 100%, with all other years stated in some percentage of this base. Click here to read full article. Vertical Analysis: Vertical analysis is the procedure of preparing and presenting common size statements. Common size statement is one that shows the items appearing on it in percentage form as well as in dollar form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by the use of common size statements. Click here to read full article.

2. Ratios Analysis:
Accounting Ratios Definition, Advantages, Classification and Limitations: The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another. Click here to read full article.

Profitability Ratios:
Profitability ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most popular profitability ratios are as under:

Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) Ratio Dividend yield ratio Dividend payout ratio Earnings Per Share (EPS) Ratio Price earning ratio

Liquidity Ratios:
Liquidity ratios measure the short term solvency of financial position of a firm. These ratios are calculated to comment upon the short term paying capacity of a concern or the firm's ability to meet its current obligations. Following are the most important liquidity ratios.

Current ratio Liquid / Acid test / Quick ratio

Activity Ratios:
Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. Following are the most important activity ratios:

Inventory / Stock turnover ratio Debtors / Receivables turnover ratio Average collection period Creditors / Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading

Long Term Solvency or Leverage Ratios:

Long term solvency or leverage ratios convey a firm's ability to meet the interest costs and payment schedules of its long term obligations. Following are some of the most important long term solvency or leverage ratios.

Debt-to-equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage ratio Capital gearing ratio

Over and under capitalization

Financial-Accounting- Ratios Formulas: A collection of financial ratios formulas which can help you calculate financial ratios in a given problem. Click here. Limitations of Financial Statement Analysis: Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios. Click here to read full article.

Advantages of Financial Statement Analysis:

There are various advantages of financial statements analysis. The major benefit is that the investors get enough idea to decide about the investments of their funds in the specific company. Secondly, regulatory authorities like International Accounting Standards Board can ensure whether the company is following accounting standards or not. Thirdly, financial statements analysis can help the government agencies to analyze the taxation due to the company. Moreover, company can analyze its own performance over the period of time through financial statements analysis.

Financial-Accounting-Ratios Formulas:
This is a collection of financial ratio formulas which can help you calculate financial ratios in a given problem.

Analysis of Profitability:
General profitability:

Gross profit ratio = (Gross profit / Net sales) 100 Operating ratio = (Operating cost / Net sales) 100 Expense ratio = (Particular expense / Net sales) 100 Operating profit ratio = (Operating profit / Net sales) 100 Return on shareholders' investment or net worth = Net profit after interest and tax / Shareholders' funds Return on equity capital = (Net profit after tax Preference dividend) / Paid up equity capital Earnings per share (EPS) ratio = (Net profit after tax Preference dividend) / Number of equity shares Return on gross capital employed = (Adjusted net profit / Gross capital employed) 100

Overall profitability:

Return on net capital employed = (Adjusted net profit / Net capital employed) 100 Dividend yield ratio = Dividend per share / Market value per share Dividend payout ratio or pay-out ratio = Dividend per equity share / Earnings per share

Short Term Financial Position or Test of Solvency:

Current ratio = Current assets / Current liabilities Quick or acid test of liquid ratio (for immediate solvency) = Liquid assets / Current liabilities Absolute liquid ratio = Absolute liquid assets / Current liabilities

Current Assets Movement, Efficiency or Activity Ratios:

Inventory / Stock turnover ratio = Cost of goods sold / Average inventory at cost Debtors of receivables turnover ratios = Net credit sales / Average trade debtors Average collection period = (Trade debtors No. of working days) / Net credit sales Creditors or payables turnover ratio = Net credit purchase / Average trade creditors Average payment period = (Trade creditors No. of working days) / Net credit purchase Working capital turnover ratio = Cost of sales / Net working capital

Analysis of Long Term Solvency:

Debt to equity ratio = Outsiders funds / Shareholders funds or External funds / Internal funds Ratio of long term debt to shareholders funds (Debt equity) = Long term debt / Shareholders funds Proprietary of equity ratio = Shareholders funds / Total assets Fixed assets to net worth = Fixed assets after depreciation / Shareholders' funds Fixed assets ratio or fixed assets to long term funds = Fixed assets after depreciation / Total long term funds Ratio of current assets proprietors' funds = Current assets / Shareholders' funds Debt service or interest coverage ratio = Net profit before interest and tax / Fixed interest charges Capital gearing ratio = Equity share capital / Fixed interest bearing funds

Profitability ratios
Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return
Gross margin (also called gross profit margin or gross profit rate) is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold

(production or acquisition costs, essentially).The purpose of margins is "to determine the value of incremental sales, and to guide pricing and promotion decision."Gross margin can be expressed as a percentage or in total financial terms. If the latter, it can be reported on a per-unit basis or on a per-period basis for a company.

Gross margin, Gross profit margin or Gross Profit Rate[7][8]

OR

In business, operating margin also known as operating income margin, operating profit margin and return on sales (ROS) is the ratio of operating income ("operating profit" in the UK) divided by net sales, usually presented in percent.

Operating margin, Operating Income Margin, Operating profit margin or Return on sales (ROS)[8][9]

Note: Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[10] This is true if the firm has no non-operating income.
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.Profit margin is an indicator of a company's pricing strategies and how well it controls costs.

Profit margin, net margin or net profit margin[13]

Return on equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a

company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirablROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.

Return on equity (ROE)[13]

"Return on investment is one way of considering profits in relation to capital invested. Return on assets (ROA), return on net assets (RONA), return on capital (ROC) and return on invested capital (ROIC) are similar measures with variations on how 'investment' is defined."The purpose of the "return on investment" metric is "to measure per period rates of return on dollars invested in an economic entity. ROI and related metrics (ROA, ROC, RONA and ROIC) provide a snapshot of profitability adjusted for the size of the investment assets tied up in the enterprise. Marketing decisions have obvious potential connection to the numerator of ROI (profits), but these same decisions often influence assets usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected. ROI is often compared to expected (or required) rates of return on dollars invested

Return on investment (ROI ratio or Du Pont Ratio)[6]

The return on assets (ROA) percentage shows how profitable a company's assets are in generating revenue.This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets.

Return on assets (ROA)[14]

The return on net assets (RONA) is a measure of financial performance of a company which takes the use of assets into account. The higher the RONA is the better it is. Higher RONA means that the company is using its assets and working capital efficiently and effectively.

You should not mix up "Return on net assets" and "Net assets". Net assets or net worth is the company assets minus liabilities. Return on net assets (RONA)

Return on capital (ROC) is a ratio used in finance, valuation, and accounting. The ratio is estimated by dividing the after-tax operating income (NOPAT) by the book value of invested capital.This differs from ROIC. Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as net operating profit less adjusted taxes divided by invested capital and is usually expressed as a percentage. In this calculation, capital invested includes all monetary capital invested: long-term debt, common and preferred shares.

Return on capital (ROC)

Risk adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers Trust and principal designer Dan Borge in the late 1970s.[1] Note, however, that more and more Return on risk Adjusted Capital (RORAC) is used as a measure, whereby the risk adjustment of Capital is based on the capital adequacy guidelines as outlined by the Basel Committee, currently Basel III.RAROC is defined as the ratio of risk adjusted return to economic capital. The economic capital is the amount of money which is needed to secure the survival in a worst case scenario, it is a buffer against expected shocks in market values. Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate.

Risk adjusted return on capital (RAROC)

OR

Return on capital employed is a ratio used in finance, valuation, and accountinOCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing. NOPAT is equal to EBIT * (1 - tax) -- the return on the capital employed should be measured in after tax terms.

Return on capital employed (ROCE)

Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity Cash flow return on investment is a valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings. CFROI = Cash Flow / Market Recapitalization For the corporation, it is essentially internal rate of return (IRR). CFROI is compared to a hurdle rate to determine if investment/product is performing adequately. The hurdle rate is the total cost of capital for the corporation calculated by a mix of cost of debt financing plus investors `expected return on equity investments. The CFROI must exceed the hurdle rate to satisfy both the debt financing and the investors expected return. Cash flow return on investment (CFROI)

The efficiency ratio, a ratio that is typically applied to banks, in simple terms is defined as expenses as a percentage of revenue (expenses / revenue), with a few variations. A lower percentage is better since that means expenses are low and earnings are high. It is related to operating leverage, which measures the ratio between fixed costs and variable costs.

Efficiency ratio

[edit] Liquidity ratios

Liquidity ratios measure the availability of cash to pay debt.
the current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilitiesThe current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If a company's current ratio is in this range, then it is generally considered to have good short-term financial strength. If current liabilities

exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management.

Current ratio (Working Capital Ratio)[17]

in finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. A company with a Quick Ratio of less than 1 can not currently pay back its current liabilities.

Acid-test ratio (Quick ratio)[17]

Cash ratio[17]

In financial accounting, operating cash flow (OCF), cash flow provided by operations or cash flow from operating activities (CFO), refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities.[1] The International Financial Reporting Standards defines operating cash flow as cash generated from operations less taxation and interest paid, investment income received and less dividends paid gives rise to operating cash flows.[2] To calculate cash generated from operations, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations.

Operation cash flow ratio

[edit] Activity ratios (Efficiency Ratios)

Activity ratios measure the effectiveness of the firms use of resources. Average collection period[3]

Degree of Operating Leverage (DOL)

DSO Ratio.[18]

Average payment period[3]

Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.[1] Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Companies in the retail industry tend to have a very high turnover ratio due mainly to cutthroat and competitive pricing. Asset turnover[19]

in accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock turnover.

Stock turnover ratio[20][21]

Receivable Turnover Ratio is one of the accounting activity ratios, a financial ratio. This ratio measures the number of times, on average, receivables (e.g. Accounts Receivable) are collected during the period. A popular variant of the receivables turnover ratio is to convert it into an Average Collection Period in terms of days. Remember that the Receivable turnover ratio is figured as "turnover times" and the Average collection period is in "days". Receivables Turnover Ratio[22]

Inventory conversion ratio[4]

Inventory conversion period (essentially same thing as above)

Receivables conversion period

Payables conversion period

Cash Conversion Cycle Inventory Conversion Period + Receivables Conversion Period - Payables Conversion Period

[edit] Debt ratios (leveraging ratios)

Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage.
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

Debt ratio[23]

Debt tThe debt-to-equity ratio (D/E) is a indicating the relative proportion

of and used to finance a company's assets. Closely related to , the ratio is also known as Risk, Gearing or Leverage. The two components are often taken from the firm's or statement of financial position (so-called ), but the ratio may also be calculated using market values for both, if the company's debt and equity are , or using a combination of book value for debt and market value for equity financially.o equity ratio[24]

Long-term Debt to equity (LT Debt to Equity)[24]

Times interest-earned ratio / Interest Coverage Ratio[24]

OR

Debt service coverage ratio

[edit] Market ratios

Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in companys shares. Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock. In the United States, the Financial Accounting Standards Board (FASB) requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income. Earnings per share (EPS)[25]

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as DPS/EPS.

Payout ratio[25][26]

OR

Dividend cover is the ratio of company's earnings (net income) over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share.[1] So, if a company has earnings per share of $10.00 and it pays out a dividend of $2.00, the dividend cover is 5.0x.

Dividend cover (the inverse of Payout Ratio)

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.[2] The P/E ratio can therefore be calculated aggregately by dividing the company's market capitalization by its total annual earnings.The P/E ratio can be seen as being expressed in years, [note 1] in the sense that it shows the number of years of earnings which would be required to pay back purchase price, ignoring inflation and time value of money. The P/E ratio also shows current investor demand for a company share. The reciprocal of the P/E ratio is known as the earnings yield.[

P/E ratio

The dividend yield or the dividend-price ratio on a company stock is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.

Dividend yield

The price/cash flow ratio (also called price-to-cash flow ratio or P/CF), is a ratio used to compare a company's market value to its cash flow. It is calculated by dividing the company's market cap by the company's operating cash flow in the most recent fiscal year (or the most recent four fiscal quarters); or, equivalently, divide the per-share stock price by the per-share operating cash flow. In theory, the lower a stock's price/cash flow ratio is, the better value that stock is. CFPS = (NI + Depreciation + Amortization)/ Common Shares Outstanding Cash flow ratio or Price/cash flow ratio[27]

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's book value to its current market price. The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).This ratio also gives some idea of whether an investor is paying too much for what would be left if the company went bankrupt immediately. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a "diluted" basis, because stock options may well vest on sale of the company or change of control or firing of management.It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio

Price to book value ratio (P/B or PBV)[27]

Price-to-sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company's market cap by the company's revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue. Unless otherwise stated, P/S is "trailing twelve months" (TTM), the reported sales for the four previous quarters, although of course longer time periods can be examined.
The smaller this ratio (i.e. less than 1.0) is usually thought to be a better investment since the investor is paying less for each unit of sales. However, sales do not reveal the whole picture, as the company may be unprofitable with a low P/S ratio. Because of the limitations, this ratio is usually used only for unprofitable companies, since they don't have a price/earnings ratio (P/E ratio). PSRs vary greatly from sector to sector, so they are most useful in comparing similar stocks within a sector or sub-sector.

Price/sales ratio

The PEG ratio (Price/Earnings To Growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.[1] The PEG ratio is considered to be a convenient approximation.

PEG ratio

Other Market Ratios

EV/EBITDA (Enterprise Value/EBITDA) is a valuation multiple used in finance and investment to measure the value of a company. This important multiple is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.The EV/EBITDA multiple requires prudent use for companies with low profit margins; i.e. for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability.[2Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest, i.e. as a benchmark. An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone

EV/EBITDA

Enterprise Value/Sales is a financial ratio that compares the total value (as measured by enterprise value) of the company to its sales. Generally, the lower the ratio, the cheaper the company is.[1] Some investment professionals believeas enterprise value and sales both consider debt and equity holders Enterprise Value/Sales is superior to the oft quoted price/sales ratio.[2

EV/Sales

Trend analysis
From Wikipedia, the free encyclopedia

Trend Analysis is the practice of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has more formallydefined meanings.[1][2][3] Although trend analysis is often used to predict future events, it could be used to estimate uncertain events in the past, such as how many ancient kings probably ruled between two dates, based on data such as the average years which other known kings reigned.
In project management trend analysis is a mathematical technique that uses historical results to predict future outcome. This is achieved by tracking variances in cost and schedule performance. In this context, it is a project management quality control tool.[In statistics, trend analysis often refers to techniques for extracting an underlying pattern of behaviour in a time series which would otherwise be partly or nearly completely hidden by noise. A simple description of these techniques is trend estimation, which can be undertaken within a formal regression analysis.In management accounting, we calculate the trends. By its analysis, we check our company's past performance and financial position's growth.[Today, trend analysis often refers to the science of studying changes in social patterns, including fashion, technology and consumer behavior. Trend analysis tries to predict a trend like a bull market run and ride that trend until data suggests a trend reversal (e.g. bull to bear market). Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor. "Trend analysis Definition" (2005), WebFinance, Inc., web: Investor-TA: defined as: a comparative analysis of a company's financial ratios over time.

Definition of 'Comparative Statement'

A statement which compares financial data from different periods of time. The comparative statement lines up a section of the income statement, balance sheet or cash flow statement with its corresponding section from a previous period. It can also be used to compare financial data from different companies over time, thus revealing the trend in the financials.
Comparative statements are financial statements that cover a different time frame, but are formatted in a manner that makes comparing line items from one period to those of a different period an easy process. This quality means that the comparative statement is a financial statement that lends itself well to the process of comparative analysis. Many companies make use of standardized formats in accounting functions that make the generation of a comparative statement quick and easy.

Comparative Income Statement on wiseGEEK:

When a business wants to get a view of how the company is progressing or regressing over a period of time, a comparative income statement is often used as that starting point to get an overall picture or help identify potential issues. The comparative income statement is prepared with multi-columns across the page, identifying each period of income. Comparative financial statements include the current and previous periods' financial information for review. The balance sheet and income statement are the two most common statements prepared in this format.

common-size statement
The is a financial document that is often utilized as a quick and easy reference for the finances of a corporation or business. Unlike balance sheets and other financial statements, the common-size statement does not reflect exact figures for each line item. Instead, the structure of the common size statement uses a common base figure, and assigns a percentage of that figure to each line item or category reflected on the document.

A company may choose to utilize financial statements of this type to present a quick snapshot of how much of the companys collected or generated revenue is going toward each operational function within the organization. The use of a common-size statement can make it possible to quickly identify areas that may be utilizing more of the operating capital than is practical at the time, and allow budgetary changes to be implemented to correct the situation. The common size statement can also be a helpful tool in comparing the financial structures and operation strategies of two different companies. The use of percentages in the common size statements removes the issue of which company generates more revenue, and brings the focus on how the revenue is utilized within each of the two businesses. Often, the use of a common-size statement in this manner can help to identify areas where each company is utilizing resources efficiently, as well as areas where there is room for improvement.

Cash flow statement

n financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.The cash flow statement was previously known as the flow of Cash statement.[2] The cash flow statement reflects a firm's liquidity.

the cash flow statement is partitioned into three segments, namely: 1) cash flow resulting from operating activities; 2) cash flow resulting from investing activities;and 3) cash flow resulting from financing activities. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

The advantages of the cash flow over the profit and loss account

1- The profit and loss account sets out the revenue and expense rather than the cash receipts and cash payments for the period. 2- When a company makes a sale on credit this will be reflected as an increase in the wealth in the profit and loss account but there is no cash collected. 3- It shows the cash coming from the operation 4- It shows the cash used in the investing activities 5- It shows the cash used in the financing activities The disadvantages of the cash flow over the profit and loss account

1- Businesses providing recurring services or poduct orders which are good candidates, while invoices for one-time orders might find it difficult to gain this type of funding. 2- If the mark up sale price of the goods or service provided is less than the amount of the invoice finance fee.

FUND FLOW STATEMENT A fund flow statement is a summary of a firm's inflow and outflow of funds. It tells us from where funds have come and where funds have gone. Fund flows statement can indicate whether sourcing of funds and their use match in ALM sense and also reveal the prudence or otherwise of a firm's financing and investment decisions
Income accrued but received and expenses incurred but not received reckoned in the profit and loss account should not be excluded from the profit figure for the purpose of Fund Flow Statement. The rationale for this rule is that so long as accrued incomes are expected to be received and outstanding expenses are expected to be paid in the normal course of business there is no harm in treating these as inflow or outflow of funds, albeit with a lag.

Therefore, preparation of fund flow statement involves the followings steps: Take balance sheets as at two dates covering the period for which fund flows statement is intended to be prepared. Work out increase /decrease in each of items Classify change in each item under any of the four heads: (1) Long term sources (2) Long term uses (3) Short term sources (4) Short term uses. The deficit or the surplus in the long term category will be equal to the surplus or deficit in the short term category.

Funds flow statement is prepared to show changes in the assets, liabilities and equity between two balance sheet dates, it is also called statement of sources and uses of funds. Lets look at some of the advantages of preparing funds flow statement 1. Funds flow statement reveals the net result of operations done by the company during the year.

2. In addition to the balance sheet, it serves as an additional reference for many interested parties like creditors, suppliers, government etc to look into financial position of the company. 3. It shows how the funds were raised from various sources and also how those funds were put to use in the business, therefore it is a great tool for management when it wants to know about where and from funds were raised and also how those funds got utilized into the business. 4. It reveals the causes for the changes in liabilities and assets between the two balance sheet dates therefore providing a detailed analysis of the balance sheet of the company. 5. Funds flow statement helps the management in deciding its future course of plans and also it acts as a control tool for the management. Funds flow statement should not be looked alone rather it should be used along with balance sheet in order judge the financial position of the company in a better way.

The Advantages of Financial Ratios

Financial ratios are tools used to assess the relative strength of companies by performing simple calculations on items on income statements, balance sheets and cash flow statements. Ratios measure companies' operational efficiency, liquidity, stability and profitability, giving investors more relevant information than raw financial data Financial ratios provide a standardized method with which to compare companies and industries. Using ratios puts all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their performance rather than their size, sales volume or market share. Comparing the raw financial data of two companies in the same industry offers only limited insight. Ratios can reveal trends in particular industries, creating benchmarks against which the performance of all industry players can be measured. Small businesses can use industry benchmarks to craft organizational strategy and clearly measure their own performance against the industry as a whole.

The common language and understanding of ratios helps investors and analysts to evaluate and communicate the strengths and weaknesses of individual companies or industries. Fundamental analysis is the term given to the use of financial ratios in determining the relative strength of companies for investing purposes. Ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for lenders and investors. Using industry trends as a baseline, small-business owners can set time-bound performance goals in terms of specific ratios to give investors a glimpse into the potential of the new company.