A Study on Financial Statement Analysis

Financial statements are prepared primarily for decision-making. They play a dominant role in setting the frame-work of managerial decisions. The term financial analyses refers to the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship between the item of balance sheet, profit and loss account and other operative data. Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making. Globally, publicly listed companies are required by law to file their financial statements with the relevant authorities. For example, publicly listed firms in America are required to submit their financial statements to the Securities and Exchange Commission (SEC). Firms are also obligated to provide their financial statements in the annual report that they share with their stakeholders. As financial statements are prepared in order to meet requirements, the second step in the process is to analyze them effectively so that future profitability and cash flows can be forecasted.