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Analysis of Financial Statements — Part 1: Meaning, Objectives, Tools, Limitations and Comparative Statements

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Lesson

Analysis of Financial Statements

Part 1 — what analysis is, who needs it, its tools and limits, and the comparative statement.

In this lesson you will

Explain the meaning, significance and objectives of financial statement analysis
Name the tools of analysis and state the limitations of analysis
Prepare a comparative statement of profit and loss with absolute and percentage changes
Prepare and read a comparative balance sheet

Part 1 at a glance

Concept

Significance: who analyses, and why

Table of users of financial analysis and what each wants to judge: management, investors, suppliers, lenders, employees and government
Who analyses	What they want to judge
Management	Where costs are rising, how efficiently resources are used, what to plan next
Investors (present and future shareholders)	Profitability, growth and the safety of their money
Trade payables (suppliers)	Ability to pay within the credit period: short-term solvency
Lenders and debenture holders	Ability to pay interest and repay over years: long-term solvency
Employees and unions	Capacity to pay wages and bonus; job security
Government and researchers	Tax, regulation, industry trends