Types of Financial Statement Analysis

TYPES OF FINANCIAL STATEMENT ANALYSISIt is depend upon the user for which purpose they have used financial statement. User used financial statement according to their purpose from different angles. Generally various type of financial statement are classify into three (03) group depending upon

• The nature of the analyst and material used by him.
• The objective of analysis.
• The modus operandi of analysis.

According to the analyst and material used by him: - There are two types of analysis.

1. External analysis
2. Internal analysis 

External analysis:-  External Analysis is comprises of those people who are not directly related or concern with the business. For examples include creditor, investor, government agency, etc. 
Internal analysis: - Internal Analysis is comprises of those people who are directly related or concern with the business and have the right to assess the book of accounts.  For examples Chairman Cum Managing, directors,  trustee, etc.
On the basis of objective of analysis:- There are two type of analysis 

1. Long term analysis  
2. Short term analysis

Long term analysis:-  It is very necessary to made long term analysis so that we know whether the business will able to earn that much of amount which will be required to fulfill the rate of return to  the investors. Long term financial stability is determined by the long term analysis of the business.Short run analysis:-  The short term financial stability, solvency and liquidity and profitability of concern are determined by the short term analysis
According to modus operandi of the analysis:-   There are two type of analysis

1. Horizontal  or dynamic analysis 
2. Vertical and static analysis

Horizontal or dynamic analysis:-  For comparing the financial data of the business year wise, it is necessary to made Horizontal or dynamic analysis. The figures in the Horizontal analysis are represented horizontally over a number of columns.Vertical and static analysis:-To review the analysis of financial statement for one particular year, Vertical and static analysis  to be made. The figure from financial statement of a year is compare with a base select from the same year’s statement in the vertical analysis.
QUALIFICATION OF THE ANALYST FOR ANALYZING FOR FINANCIAL STATEMENTThe analyst before analyze financial statement should be clear and sound knowledge of 

1. Business practices and system,
2. The main Purpose, Principle, characteristic and limitation of accounting systems of the business,  
3. All the Accounting terminology,
4. All the Tools and techniques of financial analysis.

He should know the following things about the firm to be more accurate

1. Financial history of the concern
2. Firm’s Depreciation and inventory policies,  
3. Types and Locations of company,
4. Non financial matters.

PROCEDURE OF FINANCIAL SYSTEMS ANALYSISFollowing are procedure of Financial Systems Analysis: -

• Compilation of information for purpose of analysis,
• Systematic categorization of data,
• Interpretation or drawing of conclusion.

The following procedure is adopted by the analyst for the analysis and interpretation of financial statement of a firm:

1. The analyst should have sound knowledge of principle and postulate of accounting. He should understand the plan and policies of the firm very clearly.
2. The scope of analysis should be determine so that the area of work may be decided.
3. The financial data should be re-arranging and re-organized given in financial statement.
4. A relationship must be set up among the financial analysis with help of tools and technique of analysis such as ratios, trend, common-size, fund flow etc.
5. The information must be interpreted in a very easy, simple, clear, and understandable way.
6. The conclusion drawn from interpretation of financial statement should be in form of report before presenting to the management.

METHODS OF FINANCIAL STATEMENT ANALYSIS1.  Trend analysis·  Trend percentage·  Trend ratio·  Graphic and Diagrammatic presentation2.  Comparative financial statement analysis.3.  Common size statement.4.  Average analysis5.  Funds statement analysis.6.  Ratio analysis.7.  Component percentage analysis method.8.  Break-even analysis method.