TA 1-1

​Introduction to Financial Statement Analysis

Go through the annual report of any publicly listed company or ACNC registered charity and you will eventually find the financial statements. The financial statements, comprising mainly of the income statement, balance sheet and cash flow statement, are the report card of an organisation.

Whether you are an investor deciding which company’s shares to buy, a small business owner trying to understand your businesses financial position and performance or a philanthropist deciding on which charity to donate to, the ability to read financial statements is an invaluable skill to have.

The skill of financial statement analysis is at the heart of accounting. This module serves as a guide for it, with Part One being a basic overview, and Parts Two and Three going through Balance Sheet Analysis and Income Statement Analysis, respectively.

Business Analysis and Financial Statements
Financial statements provide a rich and reliable source of information for business analysis.
The statements reveal:

  1. how a company obtains its resources (financing)
  2. where and how those resources are deployed (investing) and
  3. how effectively those resources are deployed (operating profitability).
Uses of Financial Statements
Many individuals and organisations use financial statements to improve decisions through business analysis. The stakeholders include:
Investors and creditors use them to assess company prospects for investing and lending decisions.
Boards of directors, as investor representatives, use them to monitor managers’ decisions and actions.
Employees and unions use financial statements in labour negotiations.
Suppliers use financial statements in setting credit terms.
Investment advisors and information intermediaries use financial statements in making buy-sell recommendations and in credit rating.

Four Key Financial Statements

The financial analyst must possess an understanding of the four key financial statements and how they describe the business activities of a company.

  1. The Balance Sheet (Statement of Financial Position)
  2. The Income Statement (Statement of Financial Performance)
  3. The Statement of Cash Flows
  4. The Statement of Shareholders’ Equity