Question

A friend asks you to describe financial analysis and its purpose. What do you tell her?

Answer 1

Financial analysis is a process in which financial statements of a business are analysed in order to gain an insight into the financial status of the business. Financial Analysis is a systematic process of identifying the financial strengths and weaknesses of the business by establishing relationship between the items of the Balance Sheet and Income statement. Financial analysis is done to achieve some pre-determined purposes mentioned below:

Objectives of Financial Analysis are:

1. Measure the short-term solvency of the enterprise.
2. Measure the long-term solvency of the enterprise.
3. Measure the operating efficiency and profitability of the enterprise. 4.
4. Compare intra-firm position, inter-firm position and pattern position within the industry

Hence, financial analysis if of very much use as it provides vital information on the basis of which important decisions can be taken.