MBA NOTES:TYPES OF FINANCIAL ANALYSIS

TYPES OF FINANCIAL ANALYSIS

Following are the various types of financial analysis.

A. On the basis of material used.

1. External Analysis
Analysis of financial statements may be carried out on the basis of published information. i.e.., information made available in the annual report of the enterprise. such analysis are usually carried out by those who do not have access to the detailed accounting records of the Co. i.e., Banks, Creditors etc.

2. Internal Analysis
Analysis may also be based on detailed information available within the Co. which is not available to the outsiders. such analysis is called internal analysis. this type of analysis id of a detailed one and is carried out on behalf of the management for the purpose of providing necessary information for decision making, such analysis emphasizes on the performance appraisal and assessing the profitability of different activities.

B. According to objectives of analysis

1. Short Term Analysis
Short term analysis is mainly concerned with the working capital analysis.in the short run, a Co. must have ample funds readily available to meet its current needs and sufficient borrowing capacity to meet the contingencies. in short term analysis the current assets and current liabilities are analysed and liquidity is determined.

2. Long Term Analysis
In the long term a Co. must earn a minimum amount sufficient to maintain a reasonable rate of return on the investment to provide for the necessary growth and development of the Co., and to meet the cost of capital.
financial planning is also desirable for the continued success of a Co. Thus in the long term analysis the stability and the earning potentiality of the C. is analysed  i.e., fixed assets, long term debt structure and the ownership interest is analysed.

C. According to the Modus Operandi of analysis

1. Horizontal Analysis
Analysis of financial statements involves making comparisons and establishing relationship among related items. such comparison or establishing of relationship may be based on financial statements of a Co.for a number of years and the financial statements of different Co's for the same year. such analysis is called horizontal analysis. it may take the following two forms.
a. comparative financial statement analysis
b. trend analysis.

2. vertical Analysis.
Analysis of financial data based on relationship among items in a single period of financial statement is called vertical analysis. from a single balance sheet or P&L A/C relationships of various items may be established.
e.g. various assets can be expressed as percentage of total assets. statements containing such analysis are also called as common size statements. The common size P&L A/C is more useful in analysing the operating results and costs during the year. It shows each element of cost as a percentage of sales. Similarly common size balance sheet show fixed assets as a percentage to total assets.

SYNOPSIS OF FINANCIAL ANALYSIS
FINANCIAL STATEMENTS / FINANCIAL REPORTS
USERS OF FINANCIAL STATEMENTS
TYPES OF FINANCIAL ANALYSIS
TOOLS OF FINANCIAL ANALYSIS (METHODS)
RATIO ANALYSIS
CLASSIFICATION OF RATIOS
LIQUIDITY RATIOS
PROFITABILITY RATIOS
LEVERAGE RATIO
EFFICIENCY RATIO




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