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What is Financial Statement Analysis?

Keith Koons
Keith Koons

Financial statement analysis is a process that is used to determine the economic stability of a company. This task is normally performed by an accountant who would look at items like gross sales, company assets, and liabilities to determine how much a business is actually worth. Once each financial aspect of the company is reviewed, a detailed report can then be generated to provide information to any interested party. A financial statement analysis is completed for several different reasons as well, and it can be used to obtain an overall summary of a business or a very specific aspect of it.

The basic purpose of a financial statement analysis is to determine what accountants refer to as "cash flow." This is the amount of money that a business takes in over a certain period, minus its overall debts and other expenses. Although this task may appear to be somewhat basic, there could be hundreds of factors involved that would change how the business is viewed financially. For example, if a company were to spend a large amount of money for purchasing new equipment, the business itself would appear to take a heavy loss during that actual month or year. That very transaction may have increased the business's overall worth by allowing it to create new products or services, however, which is why a financial statement analysis is necessary.

Man climbing a rope
Man climbing a rope

In other situations, a financial statement analysis is prepared to give a broad overview of a company. Besides showing the actual cash flow, there are several areas that are studied so that investors will have a clearer picture of the business's overall stability. This report would also examine items like total assets, long term debt, or the change in overall sales from one period to the next. Taking any one of those items into consideration by itself could easily mislead an individual into thinking that a business is stronger or weaker than it really is. By presenting a more complete picture through a financial statement analysis, these issues can largely be avoided.

Sometimes a financial statement analysis is for much more specific reasons. If there are investors that hold stock in a company, for example, this process would determine the base price of what each share would be worth. Most governments also perform a financial statement analysis when they suspect that a business has not properly paid all of the tax revenue owed. Someone looking to purchase a business may have a financial statement analysis completed to determine a fair market value. Each of these tasks would require a different set of computations to find the proper answer.

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