Chap 1(1) Introduction
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Transcript of Chap 1(1) Introduction
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Defining Financial Analysis
Financial analysis is the process of evaluatingfinancial and other information for decision-making.
According to Business Dictionary, Financial Analysis is use and transformation of
financial data into a form that can be used tomonitor and evaluate the firm's financial position,
to plan future financing, and to designate the sizeof the firm and its rate of growth. Financialanalysis includes the use of financial statementanalysis and funds-flow-adequacy ratio.
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Assessment of the effectiveness with which funds
(investment and debt) are employed in a firm,
efficiency and profitability of its operations, andvalue and safety of debtors' claims against the firms
assets.
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Significance of Financial Analysis
i. To make comparison of a firmsperformance withinthe firm or with that of other firms in the same line ofbusiness.
ii. To reveal its current strengths and weakness.iii. To show whether the firms performance is either
improved or deteriorated.
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iv. To suggest actions that the firm might enact to take
advantage of the strengths and correct the weakness
in the future.
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Types of Financial Analysis
i. Fundamentals: This type deals with the forecast ofany company, commodity, currency.
ii. Technical: This type uses charts and past behavior.
iii. Cycle: This type looks at the stage of the investment,is it in its growth stage or in its top.
iv. Inter Market: This type looks at the effect if one thingon other investments.
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Objectives of Financial
Analysis
From the view po ints of Shareho lders,i) To judge the financial stability of an enterprise.
ii) To measure the enterprise's short-term andlong-term solvency.
iii) To measure the enterprise's operatingefficiency and profitability.
iv) To compare intra-firm position, inter-firm
position and pattern position within industry.v) To assess the future prospects of the
enterprise.
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Objectives cont.
From the view po int of Lender,
i) To assess managerial Performance
ii) To assess the cash flow pattern
iii) To assess the economic performance
From the view point of Government ,
i) To assess the contribution to society
ii) To ascertain business and productsbackgrounds
iii) T evaluate the inflation effects
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Six-step Process
Identify purpose of financial analysis
Corporate overview
Financial analysis techniques Detailed accounting analysis
Comprehensive analysis
Decision or recommendation
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Tools & Techniques of Financial Analysis
i. BEP or C-V-P analysis
ii. Capital budgeting technique
iii. Cash flow analysisiv. Ratio analysis
v. Variance analysis
vi. Leverage analysis
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vii. Risk analysis & control
technique.
vii. Earned value analysis.viii. Sensitivity analysis.
ix. Simulation analysis.
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Limitations of Analysis of F.S.:
I. Limitations of Financial Statements: FinancialStatements are the basis f financial analysis. Hence,the limitations of financial statements, such asinfluence of accounting concepts and conventions,personal judger disclosure of only monetary events,
etc., are also the limitations of analysis and financialstatements.
II. Ignores the Price-Level, Changes: Financialanalysis fails to disclose current worth of theenterprise, since it is based on .financial statements,
which are merely a record of historical cost.
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Not. Free from Bias:In many situations, the accountant hasto make a choice out of various alternatives available,e.g., choice in the method of depreciation choice in themethod of inventory valuation. Since, the subjectivity isinterest in personal judgment, the financial statements
are therefore not free from bias. As a result, financialanalysis also cannot be said to be free from bias.
Window Dressing: The term window dressing meanspresentation of account that conceals vital facts andshowing better position than what it actually is. Onaccount of such a situation, financial analysis may not bea definite indicator of good or bad management
Continuing
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