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Lesson 2 Basics Purpose and Information Needed For Financial Analysis

Financial analysis involves examining a company's financial statements to assess its performance and inform decision-making. Key components include the balance sheet, income statement, cash flow statement, and statement of owners equity, which help evaluate financial health, identify strengths and weaknesses, and support strategic planning. Horizontal analysis is one method used to compare financial data over time, highlighting trends and percentage changes for better comparative insights.

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5 views2 pages

Lesson 2 Basics Purpose and Information Needed For Financial Analysis

Financial analysis involves examining a company's financial statements to assess its performance and inform decision-making. Key components include the balance sheet, income statement, cash flow statement, and statement of owners equity, which help evaluate financial health, identify strengths and weaknesses, and support strategic planning. Horizontal analysis is one method used to compare financial data over time, highlighting trends and percentage changes for better comparative insights.

Uploaded by

Raffy Sillar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Analysis and Reporting

Lesson 2 - Basics, Purpose and Information needed for Financial Analysis

Financial Analysis - is the systematic examination of a company's financial statements, ratios, and other relevant
data to evaluate its financial performance, identify strengths and weaknesses, and make informed decisions
about investments, business operations, and financing activities.

4 Basic Needs for Financial Analysis


1. Balance Sheet
2. Income Statement
3. Cashflow Statement
4. Statement of Owners Equity

Purpose of Financial Analysis


- Financial analysis is an essential component of decision-making in business and finance. It involves evaluating
financial data to understand an organization's financial health, performance, and potential.

1. Understanding Financial Health


- One of the primary purposes of financial analysis is to assess the financial health of an organization. It
measure liquidity, assess solvency, evaluate profitability. Understanding these aspects enables stakeholders
to make informed decisions regarding investment, lending, or operational adjustments.

2. Supporting Decision-Making
- It provides quantitative and qualitative insights that guide decision-making. It helps identify areas where
costs can be reduced or efficiency can be improved. Decide whether to buy, hold, or sell stock based on the
company’s financial performance and market position. And evaluate the creditworthiness of a borrower.

3. Identifying Strengths and Weaknesses


- Revealing inefficiencies, such as high operating expenses or low asset turnover ratios. Assessing external
risks like market competition and macroeconomic conditions through comparative and ratio analysis,
ensuring long-term sustainability.

4. Benchmarking and Industry Comparison


- By comparing financial performance against industry standards or competitors the organization can
identify competitive advantages, Highlight areas where they lag behind peers, Set realistic performance
targets based on industry norms.

5. Forecasting and Strategic Planning


- Financial analysis serves as a critical tool for forecasting future performance and developing strategic
plans. Iike preparing for potential financial risks or economic downturns. And allocate resources more
effectively to achieve strategic objectives.

6. Evaluating Investment Opportunities


- Helps organizations determine the viability of projects or investments through methods that enables the
businesses to prioritize investments that align with their financial goals and deliver maximum value.

7. Enhancing Communication with Stakeholders


- Lastly, financial analysis facilitates clear and effective communication with internal and external
stakeholders. It provides a basis for discussions during board meeting and helps investors understand the
organization’s performance and future potential.

Types of Financial Analysis


A. Horizontal Analysis - is an approach used to analyze financial statements by comparing specific financial
information for a certain accounting period with information from other periods. Analysts use such an approach
to analyze historical trends.
Financial Analysis and Reporting

Horizontal analysis focuses on the dollar and percentage changes that occur in specific accounts from year
to year. Determining the percentage change is important because it links the degree of change to the actual amounts
involved. In this way, percentage changes are better for comparative purposes with other firms than are actual dollar
changes.

Example of Horizontal Analysis:

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