Financial Statement Analysis

Essay: Financial Statement Analysis

Earl Steven Creech

June 15, 2015

Financial Statement Analysis

Financial statement analysis yields valuable evidence about financial trends and relationships, quality of the firm’s earnings, and the strengths and weaknesses of its financial position. The overall purpose of financial statement analysis is to examine past and present financial data, so that a company's performance and financial position can be evaluated, and future risks and potential can be estimated (Woelfel, 1988). When analyzing financial statements, we examine each of the three primary financial statement documents: the balance sheet, the cash flow statement, and the income statement.

The income statement is also known as the “profit and loss statement”, or a “statement of profit and loss” (Codejia, 2015). In the framework of financial reporting, the income statement summarizes a business entity’s revenue and expenses incurred during a specific accounting period, most commonly quarterly and annually for each fiscal year. The statement of profit and loss follows a general form. It begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The profit and loss statement (income statement), summarizes the profit or loss for specific period and its primary purpose is to analyze profitability of a company. Investors and creditors carefully observer a firm’s net income, since it indicates the firm’s ability to sell goods and services for more than the cost to produce and deliver. Investors purchase a company’s stock when they believe that future earnings will increase and lead to higher stock prices. Lenders may count on on future earnings to provide the resources needed to repay loans. In order to understand and analyze profitability the analyst must be familiar with the components of income as well as income statement items that require...