Objectives Of Financial Statement Analysis
The major objectives of financial statement analysis are as follows
1.Assessment Of Past Performance
Past
performance is a good indicator of future performance. Investors or
creditors are interested in the trend of past sales, cost of good sold,
operating expenses, net income, cash flows and return on investment.
These trends offer a means for judging management's past performance and
are possible indicators of future performance.
2.Assessment of current position
Financial
statement analysis shows the current position of the firm in terms of
the types of assets owned by a business firm and the different
liabilities due against the enterprise.
3.Prediction of profitability and growth prospects
Financial
statement analysis helps in assessing and predicting the earning
prospects and growth rates in earning which are used by investors while
comparing investment alternatives and other users in judging earning
potential of business enterprise.
4.Prediction of bankruptcy and failure
Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure.
5. Assessment of the operational efficiency
Financial
statement analysis helps to assess the operational efficiency of the
management of a company. The actual performance of the firm which are
revealed in the financial statements can be compared with some standards
set earlier and the deviation of any between standards and actual
performance can be used as the indicator of efficiency of the
management.
