Reviewing and analyzing a company’s financial statements is referred to as financial statement analysis and reporting. It is primarily to develop strategies for the business to generate more future income and make wiser financial decisions.
What is Financial Statement Analysis and Reporting?
Financial statement analysis and reporting refer to the depiction of the systematic numerical interrelationships among different financial aspects. This process is used to evaluate the organization’s profitability, solvency, and growth prospects.
It primarily entails dividing the records of finances into various segments, organizing them according to a predetermined plan, and making them easier to use.
Financial Statement Analysis and Reporting Goals
After understanding its meaning, let’s learn why engaging in this field is necessary.
The objectives for financial statement analysis and reporting are given below.
- To assess the company’s financial health.
- To determine the business’s profitability.
- To compare the firm with other intra-firms and within the firm (inter-firm).
- To ascertain the company’s ability to pay dividends, interest, etc.
- To evaluate the success of management.
- To levy the firm’s long-term and short-term viability.
Different Categories of Financial Statements Analysis and Reporting
The following are the main categories of financial statement analysis and reporting:
1. Horizontal Analysis
This form of statement intimates the observation of dynamic financial statement data. The horizontal analysis contrasts two things that happened at different times. It examines the company’s financial performance year to year.
2. Vertical Analysis
Vertical analyses are for the relationships among different aspects of a financial statement. The vertical financial statements analysis and reporting express the proportion of the association in percentage.
3. Liquidity Analysis
The use of Liquidity Analysis is to assess a company’s ability to pay off debts and other obligations. Businesses can anticipate potential financial difficulties thanks to it. Lenders, creditors, and others who want to learn more about the company’s financial health before extending the amount can benefit from this financial reporting and financial statement analysis.
4. Profitability Analysis
Profitability Analysis analyses the company’s return rate. Every business strives to make a profit, so measuring costs and revenues over a specific period using the profitability analysis might be very advantageous. If a business’s revenue outpaces its expenses, it is said to be profitable.
5. Variance Analysis
Variance Analysis determines discrepancies between the budget and real costs of the organization. This financial statements analysis and reporting examine the existing value of the organization, and you can apply it in various situations.
6. Valuation Analysis
After the establishment of the company’s current ratios, you can contrast them with previous ratios, ratios of competitors, etc. Different valuation ratios help you to determine financial statement analysis.
The Value of Applications for Financial Statement Analysis
Let’s examine the significance of what is financial reporting and financial statement analysis. For investors, management, governments, etc., financial statement analysis has a variety of uses, some of which are listed below
1. For the Administration
Analysis of financial statements and reporting is to evaluate the company’s solvency, liquidity, and profitability. It provides a financial analysis report.
To evaluate the impacts of the choices and move forward with corrective actions.
2. For Customers
Analysis of financial statements and reporting is to be aware of the company’s longevity
3. For Employees
Analysis of financial statements and reporting assesses bonuses, wage increases, job stability, etc., based on the company’s progress.
4. For Investors
Investors should be aware of the company’s earning potential and upcoming growth possibilities to assess the security of their invested amount and good return.
5. For Creditors
Financial Statement Analysis evaluates the organization’s liquidity and solvency status.
6. For the Government
Financial Statement Analysis is to make price regulation decisions and determine the profitability for taxation reasons.
Financial statement analysis and reporting are crucial for a business to expand and boost its revenue. Since financial analysis report improves business operations’ efficiency, they shouldn’t be compromised. Improved procedures and knowledgeable analysts can aid the detailed analysis process. The financial analysis report also aids in corporate governance issues because top executives and other members of management depend on accounting to accurately depict the results of their decisions.
Financial Statement Analysis and Reporting – FAQs
What benefits do financial statement analysis and reporting offer?
Ans. Financial statement analysis analyses a company’s balance sheet, income statement, or statement of cash flows to assess its performance or value. Investors may create a more complex picture of a company’s financial analysis report using various techniques, such as horizontal, vertical, or ratio analysis.
Why is an analysis of financial statements and reporting performed?
Ans. Financial Statement Analysis is used to comprehend the company’s financial position, solvency, and profitability and improve future financial decisions.