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Tools of Financial Analysis

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Tools of Financial Analysis

The financial statement analysis is performed in a good number of ways by making use of different tools and techniques. The financial statement analysis is used by various groups of users. There may be people who might be interested in some tools and uninterested in some others.

Here are some of the various tools and techniques:

  1. Comparative statements

The comparative statements are made into use if a comparison needs to be made between the different items of the profit and loss account and the balance sheets of two or more periods. The comparative statements for the profit and loss account are prepared separately as comparative income statements and for the balance sheets. According to the different norms, any financial statement can be reformed into the comparative statements. This can be either, comparative balance sheet, comparative profit and loss account, the comparative cost of production statements, comparative statement of working capital and many others. 

  1. Comparative income statement

The comparative income statement gives information about the three important and crucial aspects. These are gross profit, operating profit, and the net profit. Any sort of changes or alterations or the advancements that need to be done in the profitability of the business organization over a specific period of time. if the changes worked well, then it is good. On the other hand, if the improvements are not satisfactory, then the management can work and find out reasons for the failure and some actions to correct the decisions. 

  1. Comparative balance sheet

The comparative balance sheet is helpful in knowing the financial condition of the business organization. the different elements of the two different time periods are used for such comparison. For the purpose of comparison, the assets are categorized as current assets and fixed assets. Similarly, the liabilities are also classified as the current liabilities, long term liabilities, and shareholder’s net worth. The shareholders net worth includes the equity share capital, preference share capital, reserves and surplus.

  1. Trend analysis

In this specific analysis, the different items for various time periods are identified and then a comparison is made between them. The analysis of the ratios over some specific time period, informs if the business is trending upwards or downwards. This analysis is also known by the Pyramid Method.

  1. Average analysis

At the time of calculation of the trend ratios of a business, the comparison is done on the basis of the industry average. Both of these trends can be depicted on a graph by using a paper. Not only graphs but also the curves can be formed. Suh representation in the form of the graphs and curves can make the analysis more comprehensive and imposing.

  1. Fund flow analysis

Fund flow analysis deals with the brief sources and the uses of funds of the business organization for that particular time period. This shows from where the funds are coming and how are they being used during that period of time. this tells about the changes that have been done in the financial structure of the company.

  1. Cash flow analysis

The cash flow analysis is conducted on the basis of the movement of the cash and the bank accounts. Therefore, instead of the movement of working capital, the movement of cash is considered in the cash flow analysis. Actual cash flows and the notional cash flows are the two types of cash flows.

  1. Cost volume profit analysis

This type of analysis reveals the prevalent relationships among the sales, cost, and profits. Further, the cost is also divided into two segments – fixed cost and variable cost. The relationship between sales and variable cost is unceasing. The cost analysis helps the management of the organization for better and improved profit planning. 

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