Method of Doing Financial Analysis

Introduction

Financial analysis is the communication of information for making investment, creditor, and other for decision making. The users of this financial analysis are include a company's managers, stockholders, bondholders, security analysis, suppliers, lending institutions, employees, labor unions, regulatory authorities, and the general public. Each of the users have a different need and used of analysis to evaluate the business performance and position, plus condition of the business firm whether it is reliable, relevant, timely, and understandable to make decision or not.

Financial analysis principle

There are way of doing financial analysis and its usefulness of each method. The principal financial statements of a corporation are the balance sheet, income statement, and statement of cash flow.

A balance sheet shows the financial condition of an accounting entity as of a particular date. The balance sheet can be described in the equation of Asset equal to the sum amount of Liabilities plus Equities. As assets is the resource of the firm, liabilities is the debts of the firm, and stockholders' equity the owners' interest in the firm.

Firms are requiring to present reconciliations of the beginning and ending balance of their stockholders' equity accounts. This is done by presenting a statement of stockholders' equity, where retain earning is also include in one of account in stockholders' equity too. Retain earning link the balance sheet to the income statement. Retained earnings are increase by net income and decrease by net loses and dividend paid to stockholders.

The income statement summarizes revenues and expenses and gain and loses, ending with net income. It summarizes the operation of the firm for the particular period of time. Net income is including in retained earnings in the stockholders' equity section of the balance sheet. A multiple-step income statement usually presents separately the gross profit, operating income, income before income taxes, and net income. But some firms also use a single-step income statement, which total revenues and gains from sale and other income and then deducts total expense and loses from cost of goods sold, operating expenses, and other expenses.

The statement of cash flow itself is details the inflows and outflows of cash during a specified period of time, the same period that is used for income statement. The statement of cash flow consists of three sections: cash flow from operating activities, cash flow from investing activities, cash flow from financing activities.

Method of doing financial analysis

The analysis of financial data employs various techniques to emphasize the comparative and relative importance of the data presented and evaluates the position of the firm. These techniques include ratio analysis, common-size analysis, study of different in component of financial statement among industries, review of descriptive material, and comparisons of results with other type of data.

Financial ratio is usually express or as times per period. A ratio is a mathematical relation between one quantity and another. A financial ratio is a comparison between of bit of financial information and another. Ratios can be classified according to the way they are constructed and their general characteristics.

As in common-size analysis expresses comparisons in percentages. The use of common-size analysis makes comparisons of firms of different sizes much more meaningful. Vertical analyses compare each amount with a base selected from the same year, where horizontal analysis compares each amount with a base amount for a selected base year.

Company Operation Performance measurement

When we assess a company's operating performance, we want to know if it is applying its assets in an efficient and profitable manner. When we assess a company's financial