The primary objective of accounting is to provide information useful for decision making. To provide information that supports this objective, the types of decisions different users make with financial statement must be considered. Presentation of financial statements is an important part in accounting process and aims to provide meaningful information to enable the owners, investors, creditors or users of financial statements in evaluating the financial standing and efficiency of a business during the particular period. In order to make the purposeful decisions about the profitability and financial soundness of the business it is essential to consider analysis and interpretation of financial statements.
Financial statement analysis and interpretation refer to the process of establishing meaningful relationship between the items of the two financial statements with the objective of identifying the financial and operational strengths and weaknesses.
Financial statement analysis focuses primarily on isolating information useful for making a particular decision. The information required usually involves comparisons, such as comparing changes in the same item for the same company over a number of years, comparing key relationships within the same year, or comparing the operations of several different companies in the same industry. There are three categories of analysis methods: horizontal, vertical, and ratio.
Horizontal analysis, also called trend analysis, refers to studying the behavior of individual financial statement items over several accounting periods. These periods may be several quarters within the same fiscal year or several different years. The analysis of a given item may focus on trends in the absolute dollar amount of the item or trends in percentages. The absolute amounts of particular financial statement items have many uses. Financial statement users with expertise in particular industries might evaluate amounts reported for...