Procedure of Financial Statement Analysis
A common procedure is followed for financial statement analysis. Such procedure is briefly explained below.
1. Objective of Analysis: The objective of analysis is differing from one interested party to another. In other words, the user of financial statement analysis fixes or determines the objectives of analysis.
2. Decide the Extent of Analysis: The extent of analysis is also decided by the interested party. For example: Shareholder considers long term solvency of the business concern. The debenture holder considers short term solvency of the business concern.
3. Scope of Analysis: It means that an analyst should determine the depth of the analysis. This can be decided depending upon the nature of problem.
4. Going Through the Financial Statements: The analyst should go through every item of the financial statements. If not so, the hidden facts cannot be find out through analysis.
5. Pooling of Relevant Data: The analyst should collect relevant data from the financial statements. If not so, he/she can get relevant information from the published financial statements.
6. Rearrangement of Financial Data: The contents of the financial statements are rearranged before making actual analysis and interpretation. Under this step, approximation of figures, consolidation of items etc. is done.
7. Understanding: The analyst should go through financial documents and other documents for clearly understand the problem.
8. Classification: After understanding the problem, the collected relevant data are to be classified according to the needs of the problem to find out a correct solution.
9. Analysis: After making above preparation, actual analysis is done. Any one of the tools or techniques of financial statement analysis can be used.
10. Interpretation and Conclusion: The interpretation is made and the inferences are drawn only on the basis of analysis.
11. Report Form: All the inferences and interpretation should be presented in a report form to the management.