Q. What are the needs for financial statement analysis?
The financial statements are to be studies for the following purposes.
a) To make comparisons between two sets of financial statements-
Management as well as other stakeholders, like potential investors in the share of your company would like to compare the performance of your company with the performance of another similar company or with the performance of past year. Management requires such comparison for improving itself, for finding the areas of weakness or strength.
b) To find out how funds or cash have come into and gone out of the organization-
Cash flows help you in deciding your future investments and financing decisions. They also indicate your weakness in cash management. For example, you may be inefficient In collecting money due from your customers in your hotel business.
c) To find out the liquidity position of firm-
As we have seen earlier, liquidity is very important indicator of financial health. Financial statement analysis helps you in finding out liquidity position of your firm.
d) To find out the solvency of the company-
Solvency means your company is able to pay its liabilities even in the long run. It indicates that your company may not be lead to financial distress. Finding out the degree of solvency is very important for you as well as for lenders to your firm and future investors in your firm.
e) To find out level of efficiency of the company in utilization of resources-
Management should know whether they are utilizing the resources like material, labour and of course, assets of the company in an efficient manner. It is possible that your competitor with only two aircrafts is doing more business per aircraft than you in spite of having ten aircrafts.