MAFundamentals defines the foundation of Management Accounting from cost concept, classification and analysis. It provides general discussion on COST, VOLUME, PROFIT, VARIANCE and other information necessary for performance measurement, decision making and pricing.

Financial Statement Analysis and Interpretation

What is Financial Statement (FS) Analysis?
Financial statements contains data that if carefully selected, an assessment and evaluation can be made on firm's past performance, its present condition and business potential in the future.

Its primary purpose is to check and forecast the firm's financial health, its strength and weaknesses and its:
  • profitability
  • ability to meet obligations
  • safety of investment in the bisuness
  • management effectiveness in running the firm.
FS Analysis' General Approach
The following are the general approachesin the analysis of financial statements.
  1. Evaluation of the industry an economy in the place of business
  2. Analysis of the firm's ability to meet short-term maturing obligations (solvency)
  3. Analysis of the firm's capital structure and long-term solvency
  4. Evaluation of management's efficiency in running the business
  5. Analysis on profitability

FS Analysis' Problems and Limitations
While FS is useful in different analysis and evaluation, it has a limitation in Comparison of financial data and if there is a need to look beyond ratios.
  1. Comparison of Financial Data
    • Differences between companies  - ration derived and made acceptable by one company may not be the same to another especially when other factors are considered.
    • Differences in accounting methods and estimates
    • Problem in valuation - with historical cost as the basis, it does not reflect the current value of the asset. The effect of price level changes must be considered.
    •  The timing of transactions and use of averages may affect the result obtained in using various techniques.
  2.  The need to look beyond ratios - other factors must be considered to support the sufficiency of financial ratios
    • industry trend
    • changes in technology
    • changes in the economy as a whole
    • changes in customer or consumer taste and wants
    • changes within the company itself
Steps in FS Analysis
Here the the general steps in the analysis of Financial Statements by answering the ff. questions:
  1. What is the objectives of the analysis to be conducted?
  2. What are the factors to be considered within the industry where the firm belogs?
  3. What is the firm's background and the quality of its management?
  4. Using the Evaluation Techniques available, how is the firm's financial statements?
  5. What is the summary of the study and evaluation conducted?
  6. What is/are the conclusions relevant to the objectives?