The amount of information one requires making an informed judgment about a firm’s overall financial performance is usually enormous. This information often spans a company’s internal operations and how the said information compares with the outside world. Organizing the said information in a coherent and understandable manner allows for it to be useful. This is done through financial analysis which makes it possible for the current as well past financial statements of a firm to be diagnosed. The main focus of financial analysis is usually financial statements since these are the primary documents through which business entities disclose their financial performance (Siddiqui, 2014). There are various tools that can be used to analyze the financial statements. They include comparative financial statements, trend analysis, ratio analysis, common size statements and statement of changes in working capital.
Comparative financial statements is a tool that is used to provide a comparison between two specific finance periods of a firm. In addition to that, the tool can be used to compare the performance of two or more businesses for one or more financial periods ( Siddiqui, 2014). Comparative financial statements are applicable to the balance sheet and income statements. Trend analysis is used to analyze financial statements by taking into consideration the trends of series of information. It is used to determine the direction of change in financial performance over a specified period. Ratio analysis is another common tool for analyzing the financial performance of businesses. It allows for establishing of meaningful relationships between the different items or group of items that appear on the financial statements (Siddiqui, 2014). In common size statements, the figures in the financial statements are expressed in form of percentages. The total balance sheet is taken as 100 after which the individual's items are taken as the ratio of every other asset to total assets while the ratio of each liability expressed in relation to total liabilities (Siddiqui, 2014). I do not favor one over another given their relative weaknesses and strengthens. Using all the tools when analyzing the financial performance of an entity as opposed to sticking to only one or two makes it possible for the tools to cover up for each other’s weaknesses.
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References
Siddiqui, F. (2014). Financial Analysis: A short note on tools and techniques of Financial Analysis . Retrieved from https://www.linkedin.com/pulse/20140806181716-59817714-financial-analysis-a-short-note-on-tools-and-techniques-of-financial-analysis
