39+ Sample Financial Statement Analysis

What is a Financial Statement Analysis?

A financial statement analysis is a process of developing an all-inclusive analysis of a business firm or an organization’s financial statements to help business executives, managers, investors, and internal and external stakeholders to understand the overall condition of an organization and to evaluate the business value and financial performance. As a crucial accounting tool, it is used by internal constituents to closely manage and monitor the finances of the business or organization. Small business firms, mid-sized companies, and large corporate firms are required to create and maintain basic financial statements such as the balance sheet, the cash flow statement, and the income statement to create the foundation for financial statement analysis.

A 2022 statistical report revealed the percentage of companies reporting the major benefits of financial analysis such as improved forecasting and budgeting (75%), increased efficiency and productivity (62%), improved decision-making and risk management (58%), better visibility into financial performance (51%), improved regulatory compliance and governance (42%), and increased business revenue and profitability (36%). Thus, gaining clear insights from financial statement analysis helps businesses concentrate on specific metrics, creates more accurate budgets and forecasts, identifies and manages risks, recognizes investment opportunities, evaluates their potential returns, and allows business firms to present complex data using data visualization tools.

Types of Financial Statements

The U.S. Securities and Exchange Commission (SEC) described financial statements as documents that “show you where a company or an organization’s money came from, where it went, and where it is now.” There are many financial statements used by many businesses and institutions that vary from each other. 

Cash Flow Statement: It measures the ability of the company in generating cash to pay its debts and funding its operating expenses and investments. This type of financial statement helps investors to check whether or not the business firm is in solid financial strength and to evaluate where its money comes from and how it is being used. A cash flow statement is used to align the income statement with the balance sheet. This document addresses sources and uses of cash from managing the business and selling its products or services including any changes made in cash accounts receivable, accounts payable, depreciation, and inventory. It also includes the sources and uses of cash from long-term investments such as asset purchase or sale, loans made to vendors or obtained from customers, and any payments related to a merger or acquisition. Plus, it displays the net cash flows used to fund the company such as equity and dividends. Income Statement: It demonstrates how much a business, or an organization made and spent over a certain period of time. It shows the expenses, revenues, profits/losses, net income, and earnings per share or the company’s operating results. This document conveys detailed information on the profitability and the financial outcomes of business activities. It can be beneficial in analyzing whether the revenue of the company or organization is increasing. Business investors depend on income statements so that they know how the management efficiently controls the expenses which can help in increasing profits. An income statement shows different forms and revenues and expenses such as operating revenue, non-operating revenue, income from long-term assets, primary expenses, and typical expenses. Balance Sheet: It provides details about the liquidity and capitalization of an organization including its assets, liabilities, and equity as of the reporting date. A balance sheet consists of liquid assets (cash and cash equivalents like certificates of deposit), accounts receivable, inventory (the finished products, works in progress, or on-hand raw materials), prepaid expenses, capital assets (company-owned equipment, plant, and property), investments, intangible assets (trademarks, goodwill, and patents), accounts payable, wages payable, notes payable, dividends payable, long-term debt, etc. Statement of Retained Earnings: Also referred to as a statement of owner’s equity, this financial statement showcases changes in equity which include the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses among all the shareholders. It is commonly added to the audited financial statement package of the company or organization.

Types of Financial Analysis

Business firms and corporate firms have different types of financial analysis. Here are some of the most common types of financial analysis:

Horizontal Analysis: This type of financial analysis makes an in-depth interpretation of the change in financial statements over two or more accounting periods based on historical data. It creates a comparison of the figures for a certain period with the other period. It helps in analyzing the growth of the company or organization from quarter to quarter or year on year with the increase in business operations. Vertical Analysis: It is used in measuring the line items of the balance sheet or income statement. Financial analysts take any line item of the financial statement as a base and disclose the same in percentage form. This type of financial analysis helps in making comparisons of business entities of varying sizes while displaying the financial statements in final form. Trend Analysis: It is a type of financial analysis that focuses on analyzing the trend of the company. Financial analysts compare its financial statements to assess the market trend or future analysis according to past performance results. So, it is used to determine patterns from multiple periods and to plot those in a graphic representational format to deduce a conclusion on actionable details. Liquidity Analysis: It is used to analyze the ease of the conversion of assets or securities into cash. It evaluates the short-term capability of the business or organization for daily payments of short-term borrowings, trade creditors, and more. It is important when it comes to verifying that the proper liquidity is maintained carefully for the given period and that all liabilities are fulfilled without default. A liquidity analysis is implemented with the use of a ratio analysis technique that involves using different ratios such as the current ratio, liquidity ratio, and many others. Profitability Analysis: If you want to understand how your business generates revenue, create a profitability analysis. Measure the rate of return in a specific period to help the investor in having the assurance of the safekeeping of funds. Financial analysts use these tools when they carry out a profitability analysis: profit margin calculation, operating profit margin calculation, and earnings before taxes calculation. Scenario and Sensitivity Analysis: Conduct a scenario/sensitivity analysis to analyze various changes that continue to take place in banking rates, tax structures, and many others. It is useful to measure the effects of those changes on the business or organization’s financials. When using this approach, use these tools: data table using Excel, one variable data table using Excel, and two-variable data tables using Excel. Variance Analysis: This is the process of determining and evaluating the difference between the standard numbers that a company or an organization anticipates to fulfill and the actual numbers that they reach. Variance analysis is a crucial financial analytical tool to see the variance between the budget and assessments with the actual one to prevent any loopholes in the process and help the business to perform corrective actions.

How to Develop a Financial Statement Analysis

Are you having a hard time developing an accurate, logical, and well-detailed financial statement analysis. Consider following the basic steps in this section to help you easily create a comprehensive and effective financial statement analysis.

Step 1: Define the Industry is Economic Attributes and Business Strategies

Create a value chain analysis for the industry or the chain of activities involved in the creation, manufacturing, and distribution of the company’s products and services. Analyze the economic attributes by using Porter’s Five Forces. Then, determine the nature of the products and services that the company is offering. Take a look at the originality and uniqueness of the product, level of profit margins, creation of brand loyalty, and cost control. Consider other factors such as geographic diversification, industry diversification, and supply chain integration.

Step 2: Assess the Financial Statements of the Business Firm

Examine the main financial statements such as the balance sheet, income sheet, and cash flow statement based on the relevant accounting standards. When you analyze the balance sheet financial accounts, evaluate issues like classification, recognition, and valuation. Check if the balance sheet is the overall representation of the business firm’s economic position. Assess the income statement as you evaluate the quality of earnings and view it as an overall representation of the business firm’s economic performance. Review the cash flow statement to understand the impact of the liquidity position of the business firm on its financial activities over the period.

Step 3: Examine Current Profitability and Risk

Use major financial statement ratios connected to asset management, liquidity, debt management, profitability, and risk or market valuation. Reflect on how profitable the business operations are linked to its assets and how it is profitable from the viewpoint of the equity shareholders. Make a comparative analysis of the current ratios on any financial statement ratios in connection to those from earlier accounting periods.

Step 4: Finalize the Financial Statement Analysis

Make logical and realistic assumptions about the future of the business firm and its industry. Prepare forecasted financial statements and demonstrate how your assumptions will affect the cash flows and funding. Lastly, review and finalize your financial statement analysis.

FAQs

What are some examples of financial statement analysis?

Some examples of financial statement analysis are financial problem statement analysis, college financial statement analysis, banking institute financial statement analysis, enterprise financial statement analysis, school financial statement analysis, financial management statement analysis, business valuation financial statement analysis, international financial statement analysis, industry financial statement analysis, financial statement analysis for non-profits, and financial statement research analysis.

What are the types of financial statements?

The types of financial statements are cash flow statements, income statements, balance sheets, statements of retained earnings, personal financial statements, and non-profit financial statements.

What are the types of financial analysis?

The common methods used in financial statement analysis are horizontal analysis, ratio analysis, trend analysis, vertical analysis, liquidity analysis, solvency analysis, profitability analysis, scenario & sensitivity analysis, variance analysis, and valuation analysis.

Why financial analysis is important for businesses and organizations?

Financial analysis is important because this comprehensive analysis helps the business or organization clearly understand its overall financial health. This tool is beneficial if you need to learn essential techniques to generate wealth, creditworthiness, and profitability. Also, financial statement analysis is integral when it comes to sharing investments and holding, making decisions, developing plans, organizing the management, offering capital credit, and deciding on investments.

A 2023 financial analytics statistical report stated that 72% of business firms and organizations that use financial analysis had increased profitability and 70% of them had improved decision-making. Conducting a financial statement analysis is fundamental to delving through businesses, budgets, projects, and other finance-related transactions to measure their financial health and performance level. Easily access and download from our diverse collection of sample financial statement analysis templates like a financial feasibility analysis and many other analysis templates including a network vulnerability analysis.