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Financial statement analysis

Financial Statements

The concept of financial statements is called a set of financial statements that reflect the organization’s activity during a specific financial period, which are issued by the company’s management, and through these lists, a set of financial information is disclosed to many parties within the company, and some external parties benefit from data Financial statements such as: creditors, shareholders and investors, and these lists are: the income statement, the statement of financial position, the balance sheet, the statement of cash flows, the statement of shareholders' equity. Financial analysis of the financial statements.
Financial statement analysis
Financial statement analysis

Financial statement analysis

The financial analysis of the financial statements aims to clarify the contents of the financial statements and the use of the numbers that are disclosed in the financial statements in order to make some decisions by the beneficiaries of these statements internally or externally. The financial analysis of the financial statements is done through horizontal analysis of the financial statements, and the vertical analysis of the financial statements Financial analysis using the so-called financial ratios, and this can be clarified through the following:

horizontal analysis

This type of financial analysis is called, and through the horizontal analysis of the financial statements, a comparison is made between the financial information contained in the financial statements over a period of more than one financial year, and through this comparison, the rise and fall in the values ​​of these statements is noted. These financial statements may be classified as The form of charts or graphs to facilitate the process of comparing the values ​​of items contained in the financial statements. Among the most famous financial statements in which horizontal analysis is used are: sales, cost of goods sold, and various expenses such as salary expenses and rent expenses. The financial analyst benefits from horizontal analysis as much as possible when This analysis is simultaneous for more than one item, as the effects of the rise and fall in the values ​​of items included in the financial statements on various accounts appear, which increases the ability of the financial analyst to give reasonable explanations.

vertical analysis

This type of financial analysis is called, and through vertical analysis, the financial statements are placed in tables within percentages, and this type of financial analysis is commonly used because It well-knownshows the relative proportion of economic account balances in comparison to every different withinside the equal time period. Vertical analysis in the income statement is that its items are mentioned as a percentage of total sales, while in the balance sheet its items are mentioned as a percentage of total assets, and one of the most important benefits of vertical analysis is that it gives explanations for expenses that are not of relative importance and that management can overlook.

Financial ratios in financial ratios

Some accounts in the financial statements items are compared to each other by the relative method through the numerator and denominator, so that these ratios give indications of the company’s performance in view of the items contained in these financial ratios, so that the values ​​of these ratios are then compared with similar ratios of other competing companies within The same sector, and there are many types of financial ratios by which the performance of the company is evaluated, the most prominent of which are the following:
  • Performance ratios: In the performance ratios, the data contained in the income statement is compared, as it gives indications of the company's ability to achieve profits, the most important of which are the following: Gross margin ratio = gross margin/sales. Operating Income Ratio = Operating Income/Sales.
  • Net Profit Ratio = Net Profit/Sales. Liquidity ratios: Through the liquidity ratios, the company's ability to meet obligations becomes clear through the presence of cash liquidity. The most prominent liquidity ratios are the following: Trading ratio = current assets / current liabilities.
  • Quick ratio = (current assets - inventory) / current liabilities. Cash flow ratios: through which accounting misrepresentation is detected according to the accrual basis. These ratios also reveal the company's ability to generate cash through commercial activity. The most prominent of these ratios are the following: Return on assets = (net profit + non-cash expenses) / Total cash assets from operating operations = cash flow from operating operations / net income. Cash reinvestment ratio = (increase in the value of fixed assets ± change in working capital) / (net income + non-cash expenses).
  • Return on investment ratios: through which the return obtained by the investors in the company is revealed, the most prominent of these ratios are the following: Return on shareholders’ equity = net income / shareholders’ equity. Return on assets = internet income / overall assets.

Variance analysis

Variance analysis is one of the helping factors in financial analysis as it reveals the difference between the actual amounts that resulted in the financial statements and the amounts that were planned in advance, and this type of analysis is widely used in tracking manufacturing costs by studying the standard costs of raw materials that Its processing results in the manufacture of products, in addition to studying the actual costs of raw materials for manufactured products. Therefore, the analysis of variance has a major role in revealing excess costs in order to search for their causes, and indicate the cost of manufacturing one unit of raw materials.
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