In this video, FactRight’s Chari Graham takes you through performing a financial statement analysis.
Do you have a complete set?
The very first thing you need to do when you are performing an analysis is to make sure you have a complete set of financial statements. This means you have the balance sheet, the statement of income, the statement of cash flows, and the statement of equity. Many people look at only one or two of the financial statements, but they are all integrated.
What is your perspective?
The next thing you need to do is to understand what your perspective is. What is your purpose for reviewing the financial statement? For example, if you want to understand the financial position of the company, you are going to focus on the balance sheet. If you want to understand the historical operations of the company, then you are likely going to be focusing on the profit and loss.
Completing a Trend Analysis
An important aspect of performing a financial statement analysis is completing a trend analysis. This is when you look at the components of the financial statement, both vertically and horizontally. Vertical analysis means that you compare financial statement items to other items within the same financial statement. Horizontal analysis means that you look at specific financial statement items over time, year over year.
Once you have completed the trend analysis, be sure that you have identified those items that are either the most significant, the largest, or have had the most unusual changes over time. Then you are going to need to obtain further information on those items.
And that is how you begin an analysis of a financial statement.