Analysis of accounting statements

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The analysis of accounting statements is a detailed study and objective assessment of the financial documentation of the organization. It can be conducted by in-house specialists at the request of managers or independent auditors who have passed special accreditation and training.

Regulatory authorities may require to provide the results of the analysis of accounting statements. In this case, only independent specialists should study the papers. However, management may also need objective views about the company’s activities, its financial performance, profitability and profitability. Without this, it is impossible to make effective management decisions and draw up a working development strategy.

If the request for analysis of financial documents comes from the management of the organization itself, it is also better to entrust the examination to independent auditors. As disinterested persons, they will certainly provide accurate and objective data, so systematic errors in documentation management or larger problems will not hide from the examination.

The main source of information about the financial situation of the company is the balance sheet and profit and loss statement. But before considering these types of documents in detail, let’s answer the frequently asked questions.

The most common questions

What are accounting statements?

This is a system of recording and storing information describing the economic activity of the enterprise and the results of its work for a certain period. Accounting documents are compiled on the basis of financial accounting, they reflect the state of property and capital. The largest amount of up-to-date information about the state of affairs of the company is contained in the balance sheet, so it is analyzed to assess how effectively the organization has placed its assets.

What are the main objectives of the analysis of the accounting statements of the company?

The key tasks include the assessment of the property status of the entire organization and the liquidity of individual assets, as well as the study of the sources of asset formation and the security of obligations under them. In addition, the expertise allows you to track the relationship between individual assets and liabilities, assess the possibilities of preserving and increasing capital, and the ability of an enterprise to generate funds.

What are the main sources of information for the analysis of accounting statements?

The profit and loss report is used for the examination – it allows you to evaluate not only the economic efficiency of the organization, but also its financial trends, the effectiveness of management decisions. However, experts also evaluate more than two hundred groups of indicators in financial analysis, for each of which a special coefficient is provided.

What is balance sheet liquidity?

This question arises because the liquidity of the balance sheet is also analyzed during the examination. This concept reflects the ability of an enterprise to sell its own assets in order to pay off its obligations. To determine liquidity, organizations compare different groups of assets with groups of liabilities: the most urgent liabilities are compared with the most liquid assets, fast assets are compared with short–term sources of funds. Also, current assets that cannot be realized quickly are compared. They are compared with the long-term obligations of the organization. And non-current assets are compared with the capital of the enterprise.

What is profit and loss analysis, and why is it needed?

This type of examination is designed to determine how the organization made a profit and loss, as well as to indicate the dynamics of profit or loss growth. It is important to understand that such an analysis reflects the results of the company’s activities only in a clearly defined period: quarter, half-year or year. However, it is this type of expertise that allows you to determine the degree of influence of various internal and external factors on profit, evaluate profitability indicators and identify reserves for increasing profits.

Who needs an analysis of accounting financial statements and when?

Periodically, expertise is necessary for every enterprise, regardless of its size, number of assets and market position. Because the analysis gives an objective idea of the financial situation, allows you to form effective management decisions and develop the company. Timely examination helps to reduce risks and prevent possible losses. In addition, reports on the financial situation help to evaluate potential partners and employers. Be prepared for the fact that before concluding a major transaction, the second party will ask you to submit up-to-date reports on the company’s affairs.

What are the requirements for the reliability of reporting?

The main requirements are set out in the order of the Ministry of Finance of the Russian Federation “On the forms of accounting statements of organizations”. When working with financial documentation, you should focus on the appendix to this order. If you answer the question briefly, then the papers should contain all the information necessary to form an exhaustive picture of the financial situation of the organization. The lack of data can be considered a violation of the letter of the law. If the company is large and has branches, the papers should contain up-to-date information about each of the branches. Each important indicator is described separately in the documentation.

What are the methods of accounting analysis?

First, the absolute indicators are determined. Then they are compared and proceed to the analysis of relative indicators, that is, financial coefficients. Which methods the expert will use in this case depends on the goals that you set for him. Each examination implies at least a preliminary assessment of the state of affairs and a detailed analysis. A detailed study of the company’s affairs involves the creation of a net balance sheet, vertical and horizontal analysis of the balance sheet, as well as an assessment of shifts in property issues over the period.

What are the stages of the analysis of accounting indicators?

They begin with an examination of the dynamics and structure of the enterprise, then proceed to the study of financial stability, liquidity of the balance sheet and solvency of the organization. Analyze the state of assets and business transactions. The assessment of the financial condition of the business completes the procedure. Specialists study all forms of accounting documents, including explanatory notes.

Results of the analysis of accounting statements: groups of indicators

Experts are studying about two hundred indicators. Therefore, we will list only some of them that are of key importance.

The analysts’ conclusion is influenced by liquidity indicators – they show how reliable the company is in the short term. Another important indicator is current assets that allow you to repay short-term liabilities. The examination takes into account the indicators of rapid and absolute liquidity.

Another important group of indicators reflects the financial stability of the organization. These indicators allow us to talk about how reliable the company is in the slightly longer term. This category includes, for example, the coefficient of collateral for current assets, as well as the indicator of financial autonomy.

Finally, experts work with such a group as profitability indicators. The goal of any commercial enterprise is profitability, because this is an extremely important group of data. The competence of management is best assessed precisely by the return on assets and capital. The same criteria can be used to understand how effectively an organization works, whether it has serious internal or external problems.

To understand how much a company’s assets can make a profit, they evaluate such an indicator as the return on assets. It is calculated by comparing the net profit and the average annual amount of assets. However, during the examination, the responsible specialist will compare the performance of your company with competitors, as this also helps to assess the quality of management and the efficiency of the use of reserves.

A group of profitability indicators allows you to identify problem points and prevent risks. However, financial analysis is interested in another group of indicators: business activity. They clearly reflect how well the work of the organization itself is going.

It is desirable that experts also evaluate the relative indicators of property status, since they can give a hint on how to form a long-term investment and financial management policy. Indicators of relative growth of assets, liabilities and financial results are no less important. Based on this information, it is possible to understand how stable the organization is, whether it is developing or, conversely, is in regression.

Analysis of the dynamics and structure of the balance

Such a stage of expertise as the study of the dynamics and structure of the balance deserves special mention. We are talking about the growth rates of the most important balance groups. They are compared with the growth rate of revenue. At the same time, experts conduct a so-called vertical balance analysis aimed at an objective assessment of the specific weight and dynamics of some balance groups. Both assets and liabilities of the enterprise are being studied.

In this case, the vertical balance makes it possible to establish how things are with the property, income and expenses of the enterprise, what obligations it faces. It is this part of the examination that will provide you with comprehensive information about the share of fixed assets and intangible assets, answer the question of what stocks are available to the business, what types of property and what accounts receivable.

A qualified specialist will not only determine the share of each indicator, but also compare it with the results of competitors so that you can understand your own position in the market. In addition, it is the vertical analysis that allows us to judge the net profit and the structure of income-expenses. However, it alone is not enough to get a complete picture of the financial affairs of the enterprise.

Analysis of the financial stability of the organization

This is one of the important stages of the examination, which allows you to calculate the absolute values of the financial stability of the business:

  • net assets, i.e. actual equity;
  • own working capital;
  • net working capital.

Also, in the course of the analysis, relative indicators of sustainability are studied – the financial structure of capital. Specialists analyze the liquidity and solvency of the enterprise. Senior management should invite independent experts at least once a year, so as not to miss the moment when financial problems or shortcomings appear at the enterprise, which in the future may damage profitability.

Experts use different methods to assess the liquidity of the balance sheet. Among other things, they calculate the coefficients that we mentioned above. At the same time, the ability of each group of assets to turn into net assets during the commercial cycle is necessarily taken into account.

Asset condition analysis

One of the stages of checking the documentation of the enterprise involves studying the composition, structure and effectiveness of assets. Specialists study both current and non-current assets, applying the criteria of turnover and profitability to them. This is a multi-stage part of the examination, which implies the study and evaluation of business activity, as well as the determination of the financial position of the organization.

Most often, experts assess the possibilities of restoring the solvency of an organization, but they also resort to mathematical calculations of the probability of bankruptcy. Even if it seems to the representatives of the company’s top management that business is going great, the examination can show that the probability of bankruptcy is not zero. This is another reason why it is critically important not to forget about the timely analysis of accounting documents.

Based on the results of the analysis, you will receive a profit and loss statement. It will show the balance sheet and net profit, factors affecting it and reserves for increasing profits. In addition, the expert will assess the profitability of the enterprise in the report.

Horizontal analysis of accounting statements

We have already mentioned vertical analytics, but after it they necessarily move on to the horizontal study of documentation, that is, comparing the financial indicators of the same enterprise for different periods. What does such an examination give? It allows you to see the change in the main financial indicators over a certain period of time. At the same time, specialists can study the same time intervals, for example, compare the results of reporting quarters. But at the same time, experts compare reporting by year.

To get an objective picture, it is important to study at least three periods. However, experts can compare the indicators for a longer period of time – it all depends on what tasks you set for them. Horizontal analysis involves comparing absolute and relative values. In the first case, we are talking directly about money, in the second – about interest.

Vertical analysis of accounting statements

We have already mentioned this stage of the examination, but let’s focus on it in more detail. Vertical analysis is the direct opposite of horizontal analytics. That is, it compares different indicators, but within a single period. At the same time, a balance that meets such requirements is considered satisfactory:

  • no uncovered losses;
  • increase in the balance currency at the end of the period;
  • the growth rate is higher than the inflation rate, but does not exceed revenue growth;
  • current assets grow faster than non-current assets;
  • indicators of long-term sources of funds exceed similar indicators of non-current assets;
  • part of equity in the balance sheet – at least half;
  • accounts payable and accounts receivable are increasing at approximately the same rate.

Vertical analysis is indispensable if you need to get an objective picture of the structure of income and expenses. However, it is carried out only within one period, whereas full financial analytics gives management objective information about the state of affairs of the company and allows you to build short-term tactics and long-term business development strategy.