Basics of Financial Statement Analysis

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Evaluating the performance of a business can be challenging, and requires a systematic collection and review of financial information. Financial statements provide this summary of collected data. The three primary statements include income, balance sheet and statement of cash flows. Public companies also have a statement of equity. To understand financial statements it is vital to understand the components of these statements because it helps identify the procedures involved in creating these reports. Whether a company is a publicly traded large corporation or a small one-person business, the procedures are basically identical. The operations and financial complexity of larger businesses may disguise these procedures from non-accountants. However, the same rules apply to financial statement preparation, regardless of company size or industry. Business owners can use 2 types of financial statement analysis: quantitative and qualitative. Quantitative analysis uses formulas or ratios to break down the company’s financial statements into indicators. These indicators provide business owners with benchmarks to compare the company’s information against the industry standard. Qualitative analysis involves business owners using personal judgment or inferences when reviewing financial statement information. Business owners use both quantitative and qualitative analysis to make decisions regarding business operations. Businesses conduct qualitative analysis by comparing several financial statements at one time. This financial statement review process commonly is called a horizontal or trend analysis. Business owners can prepare a single document containing the current month’s financial statement and that of several previous months. Reviewing individual accounts or line items can help business owners discover trends in company operations relating to sales, cost of goods sold

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