What Is Financial Statement Analysis?

Financial statement analysis is the processing, analysis, comparison, evaluation and interpretation of the data provided by the company's financial statements. If it is said that bookkeeping and tabulation are accounting reflection functions, then financial statement analysis is under the interpretation and evaluation functions. The purpose of financial statement analysis is to judge the financial status of the enterprise and to inspect the gains and losses of the company's operation and management. Through analysis, you can determine whether the company's financial status is good, whether the company's business management is sound, and whether the business prospects of the company are bright. At the same time, through analysis, you can find out the crux of the business management and propose solutions to the problem. There are two main methods of financial statement analysis: trend analysis and ratio analysis. The trend analysis method refers to the comparison of the increase and decrease directions and inclination of each project according to the financial statements of successive periods, thereby revealing changes and trends in finance and operations. ^[1]

Financial Statement Analysis

(Economic Management Terminology)

The object of financial statement analysis is the basic activities of the enterprise. Financial statement analysis is to obtain information from the report that meets the analysis purpose of the users of the report, recognize the characteristics of corporate activities, evaluate its performance, and discover its problems.

Balance Sheet: Represents a company's assets and liabilities and shareholder equity.

Income Statement: Representing a company

Financial statement analysis is carried out by different users, each of whom has a different analysis focus and has common requirements. From the overall perspective of enterprises, the basic contents of financial statement analysis mainly include the following three aspects:

1.Analyze the company's

The general steps of financial statement analysis include:

(A) clear analysis purpose

(Two) design analysis procedures

(3) Collecting relevant information

(4) Dividing the whole into various parts

(5) Study the special nature of each part

(Six) study the links between the various parts

(VII) Conclusion of analysis

Basic methods of financial statement analysis

Financial statements are often seen in actual accounting work, so

Analysis of financial statements-related entries:

By right

The report is divided into three areas: analysis of financial ratios in a single year, comparative analysis in different periods, and comparison with other companies in the same industry. Financial ratio analysis

When making a decision, have you paid attention to the dashboard of the company ---

There are many types of users of financial statements, including equity investors, creditors, managers, government agencies, and others with an interest in the business. They use financial statements for different purposes, require different information, and use different analytical procedures.

(1) Creditors

A creditor is a person who borrows money from an enterprise and obtains an enterprise repayment commitment. Creditors care whether the company has the ability to pay its debts. Creditors can be divided into short-term creditors and long-term creditors.

Creditor's main decision: Decide whether to provide the enterprise

The analysis of financial statements has a significant effect on understanding the financial status and operating performance of the enterprise, evaluating the debt-repaying ability and profitability of the enterprise, and making economic decisions. However, due to various factors, the financial statement analysis and its analysis methods also have certain limitations. In the analysis, attention should be paid to the impact of these limitations to ensure the correctness of the analysis results.

(1) The impact of accounting treatment methods and analysis methods on the comparability of statements.

The data generated by different processing methods in accounting will be different. For example, fixed assets use straight-line depreciation or accelerated depreciation, and depreciation charges are also different. The long-term investment of enterprises using the cost method is not the same as the investment income recognized by the equity method. Therefore, if the company's accounting treatment methods change before and after, it will have an impact on the comparative analysis of the financial statements before and after. Similarly, if an enterprise compares with another enterprise, if the two companies' accounting methods for the same matter are different, the comparability of the data will also decrease. Therefore, when analyzing the report, you must pay attention to the notes to see what method the company uses and whether the method has changed.

Judging from the analysis methods of financial statements, different calculation methods of some indicators will also have different degrees of impact on the comparison between different enterprises. For example, accounts receivable turnover rate, inventory turnover rate, etc., the calculation of the average balance, due to data constraints, users of the report often use the beginning of the year and the end of the year to average the balance. Businesses that are more balanced in each month and quarter of the year are OK, but in the case of seasonally operated companies or where there is a large change in each month, if the beginning and end of the period are exactly the peak season, the average balance will be too large. If it is off-season, it will be too small, which will affect the accuracy of the indicator.

In addition, the analysis of financial statements and the evaluation of indicators are meaningful only when compared with other enterprises and industry average indicators. However, the different circumstances of each enterprise, such as environmental impacts, differences in enterprise size, and accounting methods, will affect comparability. The industry average index is often a combination or compromise of various situations. If the industry average index is obtained through sampling surveys, it will distort the entire industry when an extreme sample is taken. Therefore, in the comparative analysis, the industry average index should be used cautiously, and the impact of some incomparable factors should be adjusted when comparing different enterprises.

(2) The impact of inflation.

Because China's financial statements are prepared in accordance with the historical cost principle, during the inflation period, relevant data will be affected by price changes, making it unable to truly reflect the financial status and operating results of enterprises, causing misunderstandings by users of the statements. For example, the value of assets based on historical costs is necessarily less than the current value of the assets. The replacement cost of a fixed asset previously purchased for 5 million yuan may be 8 million yuan, but it is still reflected as 5 million yuan in fixed assets on the account and statements Original price. If you don't know the year in which the asset was bought, you cannot correctly understand the production scale of an enterprise based on this data alone. Furthermore, the depreciation fee is drawn based on the original price of the fixed asset, and the profit is calculated by deducting this depreciation fee. Because the depreciation fee is set low, the enterprise will be unable to replace the asset whose price has risen. If the profit is too much, it may cause the enterprise to pay more income tax and pay more profits, which may eventually make it difficult for the enterprise to maintain simple reproduction.

(3) Timeliness of information.

The data in the financial statements are the result of past economic activities of the company. The use of these data to predict the future dynamics of an enterprise has only reference values and is not absolutely reasonable and reliable. And when report users get various reports, it may be many days since the report preparation date.

(4) Limits on the amount of information in the report data.

Because of the report itself, the data it provides is limited. For report users, there may be a lot of information that needs to be used that cannot be found in the report or notes.

(5) Reliability of report data.

Sometimes, in order for the statements to show the good financial status and operating results of the enterprise, the company will use other methods to whiten the financial statements. At this time, the analysis of financial statements is easy to go astray.

The above descriptions of the limitations of financial statement analysis and its analysis methods do not negate the positive role of financial statement analysis. Understanding these limitations and paying attention to their impact when analyzing statements can improve the quality of financial statement analysis.

In addition, when reading and analyzing corporate financial statements, report users must not ignore the report schedules and notes. Careful reading of the relevant schedules and notes will enable people to correctly understand the information reflected in the statements, so as not to cause wrong judgments and conclusions. At the same time, when reading the statement, you should also pay attention to the opinions of the "Certified Accountant's" Audit Report ". From the standpoint of a third party's impartiality, and from the perspective of professionals, the CPA's assessment of the trueness, reliability, and verifiability of the company's statement data is very useful for the statement users.