Financial statement analysis in Finance

This
contains summarized information on a firm financial affairs organized systematically.
They are the means of presenting the financial report of the company to the
owners, creditors, employees, government and the general public.

Objectives
of financial statement

i.
It assist in managements decision making

ii.
It provides reliable financial information about economic resources and
obligation of a big enterprise

iii.
It provides reliable information that assist in estimating the earning
potential of enterprises

iv.
It provides information about exchange in the resources of an enterprise

v.
It provides information on how efficiently resources of the company were
employed in generating profits

vi.
It provides other needed information about the enterprise

Types
of financial statement

i.
Balance sheet: the balance sheet provides a snap shot at this financial
position of a firm at the close of the firm accounting period. Most specifically,
it shows information about the resources of a firm i.e. what the business owns
and the obligations of the firms to both creditors and owners i.e. what the
business owes. Resources are shown as assets while obligations are shown as
liabilities, conventionally total assets must be equal to total obligations

ii.
Assets: this represents viable possession owned by the firm they may be
classified into

a.
Intangible assets

b.
Fixed assets

c.
Current assets

iii.
Intangible assets: these are assets with no physical existence but which
are valuable to the firm e.g. goodwill, patent right, copy right. These assets
are reported in the balance sheet only when they are purchased

iv.
Fixed assets: these are long term assets or properties held for period
longer than the accounting year. They are held for use in the firm and not for
resale e.g. land, buildings plants and machinery, vehicles, furniture’s and
fittings etc

v.
Current assets: these are resources of the firm held in form of cash or
expected to be converted into cash within the accounting period, e.g. cash,
bank balances, debtors, stocks, pre-paid expenses etc

vi.
Obligations: these are debts payable in future by the firm to its
creditors; they can be classified into current liabilities, long term
liabilities and owner’s fund

vii.
Current liabilities: these are debts or short term obligations of a firm
payable within an accounting period e.g. creditors, bank overdraft, taxation
payable, accrued expenses, income received in advance etc

viii.
Long term liabilities: these are debts payable in a period of time,
longer than the accounting period e.g. long term loans. Debentures mortgage
loans, agricultural loans etc

ix.
Owner’s funds (equity): these are financial interest of the owners or
promoters of the company. They include ordinary share; share premium, retained earnings
and reserves

Format
of the balance sheet

Balance sheet as at December 1997

Owners fund Ordinary share xx Share premium xx Retained earnings xx Reserve xx Xx Long Term Liabilities Mortgage loans xx Agric loans xx Debentures xx xx Current liabilities Creditors xx Accrued expenses xx Taxation xx Dividend xx Xx Total obligation xxx	Intangible Assets Goodwill xx Patent right xx Xx Fixed Assets Building (less deps) xx P & M (less dep) xx Motor vehicle (less depr) xx F & F (less depr) xx Xx Current Assets Stocks xx Debt xx Bank overdraft xx Cash xx Xx Total Asset xxx

These show how the assets of the company were used
in generating sales and profit. It shows how efficiently management was able to
generate, control cost and achieved optimal profitability. It is divided into
two segments:

1.
The trading segment

2.
The profit and loss segment

Format of trading profit & loss account

Less: