financial statement analysis | trading profit

capital rationing, financial management, financial statement analysis, scope of management accounting, how npv is calculated

 

Trading profit is closely related to operating profit and EBIT. The definition of trading profit can vary. It is usually excludes certain items, in order to give a better view of the underlying results. The excluded items typically include:

• one-off items such as restructuring charges and profits on the sale of businesses
• impairments and other non-cash items
• changes in the fair value of financial securities
• profits from associates and joint ventures.

trading profit

Financial Statement Analysis:

Learning Objectives:

1. Prepare and interpret financial statements in comparative and common-size form.
2. Compute and interpret financial ratios that would be most useful to a common stock holder.
3. Compute and interpret financial ratios that would be most useful to a short-term creditor
4. Compute and interpret financial ratios that would be most useful to  long -term creditors.

Definition and Explanation of Financial Statement Analysis:

Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

Tools and Techniques of Financial Statement Analysis:

Following are the most important tools and techniques of financial statement analysis:

1. Horizontal and Vertical Analysis
2. Ratios Analysis

1. Horizontal and Vertical Analysis:

Horizontal Analysis or Trend Analysis:

Comparison of two or more year’s financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form. Click here to read full article.

Trend Percentage:

Horizontal analysis of  financial statements can also be carried out by computing trend percentages. Trend percentage states several years’ financial data in terms of a base year. The base year equals 100%, with all other years stated in some percentage of this base.Click here to read full article.

Vertical Analysis:

Vertical analysis is the procedure of preparing and presenting common size statements.Common size statement is one that shows the items appearing on it in percentage form as well as in dollar form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by the use of common size statements. Click here to read full article.

2. Ratios Analysis:

Accounting Ratios Definition, Advantages, Classification and Limitations:

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply means one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another. Click here to read full article.