What are the objectives of financial statement analysis? OR,
Why is financial statement analysis important?
Financial statement is the art and science of detailed examination of different items. In the financial statements mainly balance sheet and income statements. The main objectives of financial statement analysis are to have an in-depth understanding of the financial information presented in different financial statements for decision making.
Owners and shareholders
Owners and shareholders of the company would like to see that EPS (Earnings per share) of that company is maximized. EPS is the final result of operation which comes from quantity and quality of revenues, expenses, assets, liabilities and operational efficiency. Financial statement analysis assists the shareholders to understand and identify whether the company is being run efficiently and whether they need to take steps to improve performance.
The creditors or lenders would like to see the company’s ability to repay the loan timely. They would also like to analyze whether the company is over-indebted and whether assets of the company are adequate to repay its loan with interest. Analyses of different ratios and other indicators in the financial statements help to understand this.
The objectives of the managers is to maximize profit by taking steps to increase revenue and decrease cost. As agents of the shareholders managers often have to take decisions that are conflicting with interests of different stakeholders. Financial statement analysis assists the managers to take the right steps in these situations.
Government agencies like income tax department would like to see accuracy of the revenue, expenses assets and liabilities and whether profit of the company is not understated. The government agencies increasingly use financial statements for company’s true assessment.
Auditors verify and certify whether transactions of the company were recorded and financial statements were prepared according to acceptable accounting principles. They can not do this without analyzing the financial statements.
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