As observed in the preceding Chapter, a basic limitation of the traditional financial statements comprising the balance sheet and the profit and loss account is that they do not give all the information related to the financial operations of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners equity, and so on and the profit and account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about as firm from a careful examination of its financial statements as invaluable documents/ performance reports. The analysis of financial statements is, thus, an important aid to financial analysis.

The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluate the relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance. The first task of the financial analyst is to select  all information relevant to the decision under consideration from the total information contained the financial statements. The second step is to arrange the information in a way to highlight relationships. The final step is interpretation and drawing of inferences and conclusions. In the financial analysis is the process of selection relation and evaluations.

The present chapter is devoted to an in-depth analysis of financial statements and use for making by various parties interested in them. The focus of the Chapter is on ratio analysis the widely used technique of financial statement analysis (Section 1), Section 2 of the Chapter discussed common-size statements as method of analysis of financial statements. The importance of ratio analysis and its limitations are briefly outlined in Section 3. The major points are summarized in the last Section of the Chapter.

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