Organization obtains input from the environment, processes (value addition) it and then produces out some output back in environment. At each level some persons are interested about the organizations performance; they need to know about the organization and primary source for them is the financial statements produced by the organization.
Extracting the particular information from financial statements requires the skills thus the knowledge of “Financial Statement Analysis” comes into play. In my opinion every person should have basic ideas of interpreting financial statements since everyone is in interaction with organizations either in the form of shareholder, lender of money to companies or (in the most obvious form of) being an employee.
Users of Financial Statements
Diagram shows the key persons interacting with an organization at different levels (described in detail on coming pages).
The coming pages describe in detail about
- Particular Information each user (employees, shareholders, lenders etc) of financial statements is interested in and how to extract that information from financial statements.
- Financial Statement Analysis Techniques
- Horizontal Analysis
- Vertical Analysis
- Ratio Analysis (the most commonly used analysis technique)
- Limitations / Weaknesses of Financial Statement Analysis
Step by step approach has been used so that even a person having very limited knowledge of financial accounting can understand and use this guidance in his real life.