Financial Accounting: Analysis And Interpretation Of Financial Statement

The process of systematic recording of the business transaction in the various books of account maintained by the entity with ultimate purpose of preparing financial statement there from is called Financial Accounting. Financial accounting summarizes the transaction taking place during a period with the objective of preparing the financial statements
Balance sheet indicates the state of affair of the organization or entity at a given point of time in terms of its assets and liabilities while Profit/loss statement shows the result of operation carried out by the organization during the given period of time. To ascertain the profit or loss and indicate the financial position of an organization is the main purpose of the financial accounting.

The financial statement becomes a tool for future planning and forecasting. The analysis of these statements involves their division according to similar groups and arranged in desired form. The interpretation involves the explanation of financial facts in a simplifier way
Objective of Analysis and Interpretation
The user of the financial statement has definite objectives to analysis and interpretation. Objective of the interpretation is varied by various class of the person. There are certain specific and common objectives which are listed below
• To measure managerial efficiency of the firm or entity
• To measure the short-term and long-term solvency of the entity
• To determine the future position of the

In fact, analysis of liquidity needs the preparation of cash budgets. It also establishing relationship between cash and other current asset to current liabilities provide a quick measure of liquidity
Activity Ratio or Turnover Ratio
Activity ratio refers to highlights the activity and efficiency of the business entity. It measures relationship between the sales and assets. It is useful in the evaluation of the efficiency with which firm manages and utilize its assets.
Profitability Ratio
It reflects the final result of the business operations. Profit earning is considered vital for the business. It is like blood in human body. Profitability ratio indicate the relationship between profit and sales
Earnings Ratio
Income of shareholders through the investment of the share is called earning. It is useful to the investors for the value of the shares that they have been holding
Comparative Balance Sheet
To evaluate the financial position of the entity over a period of years, comparative balance sheet is useful. It is used to study the trends of same or group of items in two or more balance sheet of the same organization on different