CHAPTER ONE
INTRODUCTION
A financial statement is defined by accounting standard committee (ASC) as a balance sheet, profit and loss accounts, and statement of source and application of unds, notes and other statements, which collectively are intended to give a true and fair view of the financial position and profit or loss. Several companies incorporate fixed assets valuations into their balance sheets, in which case the depreciation charge in profit and loss is based on revalued amount. Some companies draw up their financial statements on a current cost basis, but this is rare compared with the use of historical cost or modified historical cost. A financial statement is part of a company’s annual report, the purpose of which is to communicate information about the company to those who have the right to receive it for instance, the shareholders, in addition to investors, potential investors and other users of financial statements.
It provides an indication of company’s trading performance and gives a snapshot of aspects of its financial position at a particular date. At a minimum, a financial statement consist is of accounting policy, balance sheet, profit and loss portraying organizations and income and expenditure for non-trading organizations, notes to the account, directors report, sources and application of fund and value added statement. The analysis of financial statement or an account is therefore the interpretation, amplification and translation of facts and financial statements, the purpose is to draw relevant conclusions, therefore, making of inferences as to business operations, financial positions and future prospects. The procedure involves.
a. analysis of data contained in the financial statement into certain basic component parts. For instance, in carrying out a profit analysis, the net sales is a very important figure and other data in the account like cost of goods sold, gross profit and cost of production are compared with this cove of the income statements. Similarly, in balance sheet analysis, the cove components are net assets which are usually compared with ones capital, loan stock and working capital.
b. Translation of those data into cheer and simple form. The translation process may lead to extraction of ratios or percentages that establish relationships between comparable data or even the presentation of graphs and charts.
c. Drawing relevant conclusions and making inferences concerning the company’s financial position, stability, profitability and solvency.
d. Presentation of information do obtained to management for decision making.
The information is used in the forward process for future controls and policies. The application of this information will involve the isolation of the factors responsible for the state of affairs which are reveled by the analysis. The analysis could be horizontal or vertical internal or external horizontal analysis is a comparison of data in financial statements of two or more consecutive accounting periods to detect whether performance has improved or not. Example, the profit of 1994 of a company could be compared with that of 1995, 1996 with 1997 and after which a trend may arise from the analysis. This analysis is internal as it concerns financial data of one company alone. A vertical analysis as external s it concerns financial data of one company and another. That is, external when a comparative study of data between one company’s financial statement and that of another over a given time. It is wholly external and involves a comparative analysis of data in financial statements with in a single period. By reference to a common unit, data in the financial statements can be compared with one another to determine efficiency of current performance for the purpose of the analysis, certain figures in the accounts are expressed as a percentage of another relevant figure.