Financial statement analysis is the process of reviewing and analyzing a company’s financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. 


Analysis of financial statements helps the finance manager in: Assessing the operational efficiency and managerial effectiveness of the company. Analyzing the financial strengths and weaknesses and creditworthiness of the company.

Frequently Asked Questions

What is an analysis of a financial statement?

Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value.

What is financial statement analysis and its types?

The most common types of financial analysis are vertical analysis, horizontal analysis, leverage analysis, growth rates, profitability analysis, liquidity analysis, efficiency analysis, cash flow, rates of return, valuation analysis, scenario and sensitivity analysis, and variance analysis.

What is Analysis of Financial Statements answer in one sentence?

Analysis of financial statement means critical evaluation of financial statement to measure the profitablity, solvency and growth of organisation.

What is analysis of financial statements and its objectives?

The primary objective of financial statement analysis is to understand and diagnose the information contained in financial statement with a view to judge the profitability and financial soundness of the firm, and to make forecast about future prospects of the firm.

How important is analyzing financial statements?

It provides internal and external stakeholders with the opportunity to make informed decisions regarding investing. Financial statement analysis also provides lending institutions with an unbiased view of a business’s financial health, which is helpful for making lending decisions.

What is financial statement analysis class 12?

1. Financial Statement Analysis It is the systematic numerical representation of the relationship of one financial fact with the other to measure the profitability, operational efficiency, solvency and the growth potential of the business.

Which is the main technique of analysis of financial statement?

Horizontal analysis, vertical analysis, ratio, Cost Volume Profit Analysis and trend analysis are the five most often used techniques of financial statement analysis.

What are the two methods of financial analysis?

The three most commonly practised methods of financial analysis are – horizontal analysis, vertical analysis, and ratio and trend analysis.

What is the importance of financial statement analysis class 12?

(i) Financial statements analysis helps the management to judge the overall as well as segmentwise operational efficiency of the business. (ii) Financial statements analysis measures the short-term and long-term financial position of the business.

Who uses financial statement analysis?

The company’s management is the first and foremost user of the financial statements. Although they are the ones who prepare the financial statements, the board and the management need to refer to them while considering the progress and growth of the company.

What are the 3 basic tools for financial statement analysis?

Three common analysis tools are used for decision-making; horizontal analysis, vertical analysis, and financial ratios.

What are the methods of financial analysis?

The three most commonly practised methods of financial analysis are – horizontal analysis, vertical analysis, and ratio and trend analysis.

Which is not a method of financial analysis?

Explanation: Among the four options given in question statement, profit or loss statement is not a tool, it is basically a financial statement also known as the income statement. It basically lists the costs and revenues that have been incurred in a fixed period of time.

What is horizontal and vertical analysis?

Horizontal analysis is performed horizontally across time periods, while vertical analysis is performed vertically inside of a column. Horizontal analysis represents changes over years or periods, while vertical analysis represents amounts as percentages of a base figure.

What is a financial analysis example?

An example of Financial analysis is analyzing a company’s performance and trend by calculating financial ratios like profitability ratios, including net profit ratio, which is calculated by net profit divided by sales.

Which of the following is a method of analyzing financial statements?

The techniques, tools or methods of analysis and interpretation of financial statements are ratio analysis, average analysis and trend analysis.