Financial Management for RBI Grade-B and Bank of India (BOI)

Financial Statement or Analysis

A financial statement is an official document of the firm, which explores the entire financial information of the firm. The main aim of the financial statement is to provide information and understand the financial aspects of the firm. Hence, preparation of the financial statement is important as much as the financial decisions.

Meaning and Definition

The financial statement is an organised collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of financial aspects of a business firm. It may show a position at a moment of time as in the case of a balance-sheet or may reveal a service of activities over a given period of time, as in the case of an income statement.

Financial statements generally consist of two important statements:

(i) The income statement or profit and loss account.

(ii) Balance sheet or the position statement.

Apart from that, the business concern also prepares some of the other parts of statements, which are very useful to the internal purpose such as:

(i) Statement of changes in owner’s equity.

(ii) Statement of changes in financial position.

Income Statement

The income statement is also called as profit and loss account, which reflects the operational position of the firm during a particular period. Normally it consists of one accounting year. It determines the entire operational performance of the concern like total revenue generated and expenses incurred for earning that revenue. Income statement helps to ascertain the gross profit and net profit of the concern. Gross profit is determined by preparation of trading or manufacturing a/c and net profit is determined by preparation of profit and loss account.

Position Statement

The position statement is also called as balance sheet, which reflects the financial position of the firm at the end of the financial year. Position statement helps to ascertain and understand the total assets, liabilities and capital of the firm. One can understand the strength and weakness of the concern with the help of the position statement.

Statement of Changes in Owner’s Equity

It is also called as the statement of retained earnings. This statement provides information about the changes or position of owner’s equity in the company. How the retained earnings are employed in the business concern. Nowadays, preparation of this statement is not popular and nobody is going to prepare the separate statement of changes in owner’s equity.

Statement of Changes in Financial Position

Income statement and position statement shows only about the position of the finance, hence it can’t measure the actual position of the financial statement. Statement of changes in financial position helps to understand the changes in financial position from one period to another period. Statement of changes in financial position involves two important areas such as fund flow statement which involves the changes in working capital position and cash flow statement which involves the changes in cash position.

Types of Financial Statement or Analysis

Analysis of Financial Statement is also necessary to understand the financial positions during a particular period (Example 01st April 2016- 31st March 2017).

Analysis of financial statement may be broadly classified into two important types on the basis of material used and methods of operations. 

A. External Analysis

Outsiders of the business concern do normally external analyses but they are indirectly involved in the business concern such as investors, creditors, government organisations and other credit agencies. The external analysis is very much useful to understand the financial and operational position of the business concern. External analysis mainly depends on the published financial statement of the concern. This analysis provides only limited information about the business concern.

B. Internal Analysis

The company itself does disclose some of the valuable information to the business concern in this type of analysis. This analysis is used to understand the operational performances of each and every department and unit of the business concern. Internal analysis helps to take decisions regarding achieving the goals of the business concern.

Based on Method of Operation

Based on the methods of operation, financial statement analysis may be classified into two major types such as horizontal analysis and vertical analysis.

A. Horizontal Analysis

Under the horizontal analysis, financial statements are compared with several years and based on that, a firm may take decisions. Normally, the current year’s figures are compared with the base year (base year is considered as 100) and how the financial information are changed from one year to another. This analysis is also called as dynamic analysis.

B. Vertical Analysis

Under the vertical analysis, financial statements measure the quantities relationship of the various items in the financial statement for a particular period. It is also called as static analysis, because, this analysis helps to determine the relationship with various items appeared in the financial statement. For example, a sale is assumed as 100 and other items are converted into sales figures.