Financial Analysis with reference to Ratio Analysis

Type :

Term papers

Pages :

14 pages

Format :

.doc

Published date :

08/25/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Nature of financial statements
Importance of financial statements
Limitations of financial statements
Meaning of analysis of financial statements
Objectives of financial analysis
Types of financial statements analysis
1. The nature of the analyst and the material used by him
2. The objective of the analysis
3. The modus operandi of the analysis
Limitations of financial statements analysis
1. Historical nature of financial statements
2. No substitute for judgment
3. Reliability of figures
4. Reliability of figures
5. Single year analysis is not valuable and useful
6. Results may have different interpretation
7. Change in accounting methods
8. Shortcoming of the tool of analysis
Detailed information on financial analysis in respect with ratio analysis
Importance of ratio analysis
1. Useful in financial position analysis
2. Useful in simplifying accounting figures
3. Useful in assessing the operational efficiency
4. Useful in forecasting purpose
5. Useful in locating the weak spots of the business
6. Useful in comparison of performance
Classification of ratios
1. Profitability ratios
2. Financial ratios
3. Stability ratios
4. Solvency ratios
Conclusion

Abstract

financial statements are prepared for the purpose of presenting a periodical review or report by the management and deal with state of investment in business and result achieved during the period under view. They reflect a combination of recorded facts, accounting conventions and personal judgments. From this it is clear that financial statements are affected by three things i.e. recorded facts, accounting conventions and personal judgments. Only those facts which are recorded in the business books will be reflected in the financial statements.

The following points reflect truly the nature of financial statements of business entities:
(i) These are reports or summarized reviews about the performance, achievements and weaknesses of the concern.
(ii) These are prepared at the end of the accounting period so that various parties may take decisions of their future actions in respect of the relationship with the concerns.
(iii) The reliability of financial statements depends on the reliability of the accounting data. These statements cannot be said to be true and fair representatives of the strengths or profitability of the concern if there are numerous frauds and defalcations in the accounts.