How to analyze financial statements in a simple way
rancakmedia.com – For those of you who don't know how to analyze financial statements, you can find out in the article we provide below. The word “financial statements” is well known to business professionals and must have a lot to do with accounting.
It is highly recommended to understand this because it is directly related to the financial reports and thus has an impact on the survival and growth of your company. The following is a review of financial statement analysis.
Definition of Financial Statement Analysis
In analysis, identification, handling, evaluation, research and even comparisons can be interpreted. Analyzing financial statements is the process by which financial statements are identified, assessed and compared. This comparison is a comparison of all types of financial statements for the current year and previous years.
The benefit of examining financial statements for companies is to find out various aspects related to the company's financial health. The quality of the accounting information presented in the financial statements can also be determined by examining the financial statements. Usually the financial statements examined include balance sheets, profit and loss, changes in capital, cash flow and many other reports.
Purpose of Financial Statement Analysis
Analysis of company financial statements tries to:
- To detect changes in the company's financial condition within a certain time.
- To evaluate management performance in the current year.
- To find out the strengths and weaknesses of the company.
- To study any necessary corrections, which naturally relate to the company's financial situation and performance.
- Help management make important choices.
- As an investment factor for investors in the company.
- Know the errors in the financial statements.
How to Analyze Financial Statements
There are many ways to analyze financial statements, one of which is:
Horizontal and Vertical
Horizontal analysis is a comparison between last year's or current year's financial data and the previous year's financial data. This kind of analysis is also known as trend analysis and is often represented in terms of money or currency percentages.
A comparison of currency amounts can provide information about factors that contribute significantly to a company's financial situation.
Meanwhile, vertical analysis is an analysis carried out by comparing in one financial report the relationship between each component and all accounts. This analysis is performed by showing Standard Headers as a proportion of a company's entire annual turnover for the income statement.
The purpose of vertical analysis is to facilitate the acquisition of information when there are disparities in the distribution of benefits, costs and expenses. In addition, this analysis is useful for comparing predictions and identifying certain patterns in the coming years.
Common Size
Common measures technique is an analytical approach to reporting financial statements. Where the presentation is usually related to something significant and substantial, for the balance sheet reports of assets or sales in return.
Comparative
This methodology is compared by comparing the figures in the current year's financial statements with the figures in the previous year's financial statements. This approach allows companies to compare each of the relevant financial statement items. This technique is also called the ratio analysis method of financial statements.
Ratio analysis financial statements can be compared between 2 amounts. With respect to other numbers, ratios always represent one number. Ratios that are often used in financial statement analysis include:
- Liquidity ratio, meaning the company's ability to meet its short-term commitments.
- The solvency ratio is basically a company's ability to meet all short-term and long-term commitments.
- The payback ratio is a company's capacity to generate profits within a certain period of time.
- The activity ratio is the company's capacity to use its resources.
Index Time Series
The time series index technique is a method in which financial reports are indexed and selected as the base year. The selected or assigned base year usually has an index of 100.
Financial Statement Analysis
The following is an analysis of financial statements that you need to know, namely:
Background Understanding of the Company
The first step in evaluating a company's financial statements is to understand the background of the company. You need to understand the company's strategy, products sold, distribution system, bookkeeping, etc.
The goal is to understand the company's operations, cash flow and so on, so that the analysis will become simpler to calculate and find results.
Beware of Influential Factors
The next financial report evaluation method is to know the variables that affect the company's financial condition. Consider inflation, taxes, interest rates, management rework and so on, for example.
Industrial and technical development is also covered, because today's business world cannot be separated from these two elements.
Review of Financial Statements
You should also check financial reports. Financial statements can be reviewed in various ways, for example whether the financial statements are prepared in accordance with Financial Accounting Standards (SAK), the numbers in the financial statements are accurate, or how the accountant produces financial reports. .
Naturally, the error rate due to human error is greater if financial reports are prepared manually compared to accounting software such as Harmony.
Another thing we need to know is whether the financial reports are made by (in-house) internal workers or company consultants (out source). If you are a busy businessman and don't have time to make financial reports, then you can use other business services, such as Harmony Accounting Service, to produce financial reports.
Financial Report Ratio Analysis
The next stage is the analysis of financial ratios. As stated above, you can use analytical procedures or approaches.
Making Conclusions
The final stage is analysis to make conclusions. Of course, you will get results after calculating and evaluating financial ratios. Therefore, draw conclusions based on calculations and analysis results.
FAQs
Below we have summarized some frequently asked questions about financial statements, as follows:
What are the analytical tools in financial analysis?
There are 4 measurement tools that can be used in the analysis of financial ratios, such as liquidity ratios, solvency ratios, profitability ratios, and also activity ratios.
Conclusion
Analyze Financial statements is the process by which financial reports are identified, assessed and compared. There are many techniques for analyzing financial statements, namely horizontal and vertical analysis. A comparison of currency amounts can provide information about factors that contribute significantly to a company's financial situation.
This is an article on how to analyze financial statements in a simple way, I hope the article above can be useful and helpful for all of you.