How to Analyze Financial Statements Accurately? The Best Way Is Here

How to Analyze Financial Statements Accurately? The Best Way Is Here

27 Jun 2023 3023 7 minutes

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Many students face difficulties in analyzing the financial statements and search for online finance assignment help to complete it. Are you also one of them? If yes, then give this document a careful reading. Here we will share the best way of doing it in the form of a simple step- by- step process. Read the next section to know more.

Ultimate Steps to Do Accurate Financial Statement Analysis for Your Assignment

Financial statement analysis is a difficult task, especially for the students who are newbies to it. But, you need not worry as our experts will make it a child's play. Here we will share their step- by- step guide on how to do it. Go through it with a focused mind.

Step 1: Income Statement Analysis: Our experts begin the financial statement analysis by analyzing the income statement of the company under question. What is the first thing that comes to mind while thinking of a business concern? Well, it is the revenue that the business earns and its profitability is the topmost concern that the people have. And, the income statement analysis reveals just that. Now the question arises on how to analyze these statements? Well, the answer is also simple. There are two methods to evaluate it. Have a look at them one by one.

Vertical Income Statement Analysis: It is very easy to analyze the income statement using this method. All you need to do is look at it vertically to calculate the following metrics:

  • The cost of goods sold during the financial year as a percentage of the revenue.
  • Depreciation during the year as a percentage of the company’s revenue.
  • The company’s gross profit as a percentage of its total revenue.
  • The earnings before tax of the company as a percent of its revenue.
  • The company's net earnings as a percentage of its revenue.
  • The interest paid by the company during the year as a percentage of revenue.
  • The tax that the company has paid as a percentage of its revenue.

Horizontal Income Statement Analysis: Analyzing an income statement using the horizontal method is also a simple task. Here, you need to look at it horizontally in a year over year manner. Here is an example to make it clear. Suppose the company's revenue during 2018 was $ 5000 whereas in 2017 it was $6000. Then, to arrive at the change percentage, divide 2018's revenue by 2017's revenue and subtract 1 from the result. Thus, in our illustration, the change% will be ($5000/$6000)-1, that is, -16.66%. The negative percentage means that the profit of the company has been declined by 16.66%.

Step 2: The balance sheet and ratio analysis: After analyzing the income statement, our experts move on towards the balance sheet analysis. The purpose of evaluating the balance sheet is to determine the operational efficiency of the company. Here you need to calculate various ratios. We list them below along with the formulas of their calculation for your help.

Quick ratio: It is calculated as an aggregate of quick assets divided by quick or current liabilities. This ratio indicates the company’s liquidity. The ideal ratio is 1:1.

Current ratio: To calculate this ratio, divide the company’s current assets by the current liabilities. It reveals the organization’s capability to meet its short term obligations. The ideal current ratio is 2:1.

Debt to equity ratio: This ratio is a measure to determine the extent to which the company depends on the borrowed funds. It is calculated by dividing the debts by the equity. An ideal debt to equity ratio is 1:5.

Interest coverage ratio: This ratio reveals whether the company’s profits are enough to cover its interest payment obligations or not. It is calculated by dividing the earnings before interest and tax by the outstanding interest for the period. It is expressed as the number of times the company can pay the interest out of its profit and 2 is considered as an ideal ratio.

Inventory turnover ratio: This ratio is calculated to determine how effectively the company can manage its inventories. To compute it, divide the cost of goods sold by the average inventory for the period. The ratio in the range 4-6 is considered ideal.

Accounts receivable turnover ratio: This financial ratio is calculated to find out how effectively the company can collect its receivables from the debtors. It is computed by dividing the net credit sales by the aggregate accounts receivable.

Step 3: Cash flow statement analysis: The cash flow statement is analyzed to evaluate the cash inflows and outflows during the financial year. Here have a look at what information each of its sections reveals:

Cash flow from operating activities: This part of the statement brings light to the cash that the company has generated through its operations.

Cash flow from investing activities: This section shows the amount of cash that the company can generate through its investments in various bonds, securities, etc.

Cash flow from financing activities: This section reveals the cash outflow of the company in the form of interest and dividend payments. And, also shows the inflows in the form of debt and capital issuance.

You may also like : How to Analyse Quantitative Data Using SPSS? | Tips & Tricks Included

To conclude we can say that the above- mentioned steps of financial statement analysis will go a long way to help you analyze them easily for the finance assignment. But, we would advise that instead of jumping on the assignment's question directly, first practice implementing these steps. And, if you face any issues in their implementation, then feel free to contact our experts for assistance.

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