The document discusses financial analysis, which involves critically examining financial statements to understand a firm's financial position and performance. Financial analysis identifies strengths and weaknesses by establishing relationships between balance sheet and income statement items. It has several objectives, including providing reliable financial information to assess a firm's profitability, financial position, and ability to meet obligations. Financial analysis can be conducted internally or externally and has various types depending on the materials used, methodology, entities involved, and time horizon considered. Its limitations include potential to mislead users or make wrong judgments if not done properly.

1. FINANCIALANALYSIS
PRESENTED BY
NEETHU S JAYAN

2. MEANING
Analysis is the process of critically examining in detail
accounting information given in the financial statements.
Analyzing financial statements is a process of evaluating
relationship between component parts of financial statements to
obtain a better understanding of firm’s position and
performance.

3. Financial analysis is the process of identifying the financial
strengths and weaknesses of the firm by properly
establishing relationships between the item of the balance
sheet and profit & loss account.
It is also known as interpretation of financial statements or
financial data to achieve the desired result.

4. NEEDS AND OBJECTIVES
Provide reliable financial information.
Provide other needed information about changes in economic
resources and obligation.
Provide reliable information about changes in net resources.
Providing financial information that assess in estimating the
earnings of a business.
To disclose other information according to the needs of the
users.

5. Helpful in assessing the financial position and
profitability of a concern.
To asses the present and future earning capacity of the
concern.
To assess the operational efficiency of the concern as a
whole and of its various parts or departments.
To assess the short term and long term solvency of the
concern for the benefit of the debenture holders and
trade creditors.

6. To assess the comparative study in regard to one firm with
another firm or one department with another department.
To assess the possibility of developments in future by making
forecasts and preparing budgets.
To assess the financial stability of a business concern.
To assess the real meaning and significance of financial data.
To assess the long term liquidity of its funds.

7. USERS
Internal users: board of directors, Employees ,
managers, owners.
External users: Creditors, Government, Suppliers of
long term debt, investors, public, share holders.

8. TYPES OF
FINANCIAL
ANALYSIS
The financial analysis has been mainly
divided into 4 types.
i. On the basis of material used,
ii. On the basis of modus operandi,
iii. On the basis of Entities involved
iv. On the basis of time horizon.

9. ON THE BASIS OF
MATERIAL USED
According to this analysis can be of two types:
External analysis: It is done by outsiders who don’t have
access to the detailed internal accounting records of the firm.
These include investors, potential investors, creditor, potential
creditors, government agencies & the general public. They
entirely depend on published financial statements. Serves only
a limited purpose.

10. Internal Analysis: This is done by persons who have
access to the internal accounting records of a business
firm.
It can be performed by employees of the organization as
well as government agencies which have statutory
powers vested in them.

11. ON THE BASIS OF MODUS
OPERANDI
According to the method of operation followed, it is also be
of two types;
Horizontal analysis: It refers to comparison of financial data
of a company for several years. Also called Dynamic
Analysis.
The figures of the various years are compared with base year.
The figures for this analysis are presented horizontally over a
number of columns.
It makes it possible to focus attention on items that have
changed significantly.

12. Vertical Analysis: It refers to the study of relationship
of the various items in the financial statements of one
accounting period. Also called Static Analysis.
As it takes only the current years data it is not
considered .
It can be made use along with horizontal analysis.

13. ON THE BASIS OF ENTITIES
INVOLVED
On the basis of entities it is again divided into 2 types;
a. Cross Sectional or Inter-firm analysis: It involves
comparison of financial data of a firm with other
firms(competitors)or industry averages for the same
time period.
b. Time Series or Intra-firm analysis: Time series
analysis involves the study of performance of the
same firm over a period of time.

14. ON THE BASIS OF TIME
HORIZON
On the basis of time horizon, financial analysis can be
classified under 2 heads:
Short Term Analysis: It measures the liquidity of the firm i.e.
the short term paying capacity of a firm or the firm’s ability to
meet its current obligations.
Long Term analysis: It involves firms ability to meet the
interest costs and repayment schedules of its long term
obligations. The solvency, stability and profitability are
measured under this analysis.

15. LIMITATIONS
Mislead the user
Not useful for Planning
It does not provide qualitative aspects.
Comparison is not always possible.
Wrong judgement.
Subject to fraud.