Question

State and explain any 'four objectives' of financial statement analysis from the business point of view.

Answer 1

Financial statement analysis is a process by which financial statements, i.e. Balance Sheet and Income Statement, are analysed to study the business results and the efficiency of the business operations.

The following are the objectives of preparing financial statements from the business point of view.

1. To measure the profitability: Financial statements are prepared to ascertain profit earned or loss incurred by a business during an accounting period. This is estimated by preparing Trading and Profit and Loss Account.

2. To ascertain the true financial position: Balance Sheet is prepared to ascertain the true financial position of the business. It is a financial statement prepared to ascertain the value of assets and liabilities of a business on a particular date. Financial statement analysis also provides the information related to various provisions and reserves to meet unforeseen future conditions and to toughen the financial position of the business.

3. For effective management: It also assists management in the decision-making process, drafting various plans and also in establishing an effective control system. This analysis also helps in judging the efficiency of the decisions that are taken by the management.

4. To know the financial growth of the business: Financial statement analysis also helps in measuring the financial growth of the business as it helps in comparing the current year’s performance with that of the previous year’s, i.e., intra-firm comparisons. It also facilitates comparison of own performance with other firms in the same industry, i.e., inter-firm comparisons.