Analyzing Financial Statements

April 30, 2012 — 1,358 views  
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Financial statements analysis is the process of identifying financial weakness and strengths in a business. It allows a firm to understand the relationships between profit and loss and other items on the financial statements. These statements, or accounting reports, are used to make financial decisions as well as meet reporting obligations externally.

When analyzing financial statements, it's important to look at a company's liabilities, assets and equity to find out what kind of financial condition the business is in. According to the U.S. Securities and Exchange Commission, the balance sheet shows what a company owns and what it owes. The income statement and cash flow statement are also considered during financial statements analysis.

The income sheet shows what a company has earned and spent during a period of time, whereas the cash flow statement shows the exchange of cash outside the company, explains the source. Finally, the statement of shareholders equity is examined, which illustrates the interests of shareholders in the business.

Analyzing financial statements is a complex topic that's often taught in a full semester course at business schools. Yet, it is essential to the livelihood of any business, so a company should have professionals who are able to properly head the quarterly or annual financial statements analysis.