Accounting can be defined as the process of identifying, measuring and communicating economic information to permit informed and decision by the users of information. In this document author will be analysing the financial statements of the "Indian Hotel Companies Limited".
As manager of the hotel it is very important to know how well the department is doing financially. It is the goal of every business venture or organization to make profit and to establish its level in the market. In the growing competition today it is very necessary for a manger to see to that the budgets are made and met with. As competition is growing day by day, thus the manager should be able to read and analyse the financial statements of his firm and if required the necessary actions should be taken. By these actions he will be able to know how well his organization or establishment is doing and also he will be able to verify how his competitors are doing.
Financial statements are records that provide an indication of an individual's, organizations, or business' financial status. There are four basic types of financial statements: balance sheets, income statements, cash-flow statements, and statements of retained earnings. Typically, financial statements are used in relation to business endeavours.
Though not every business's financial division operates alike, there are seven major types of financial statements that are common in most types of businesses:
Income Statement
It reflects a specific time period. So, an income statement for the quarter ending March 31, shows revenue and expenses for January, February and March; if the income statement is for the calendar year ending December 31, it would contain all your information from January 1 to December 31.
Balance Sheet
Accounting is based upon a double entry system - for every entry into the books there has to be an opposite and equal entry. The net effect of the entries is zero, which results your books being balanced. The proof of this balancing act is shown in the balance sheet when Assets = Liabilities + Equity.
Statement of Cash Flows
If a person could only choose one of the above given three financial statements to evaluate the ability of the company to pay dividends and meet obligations (indicating a healthy business) I would pick the statement of cash flow.
FINANCIAL ANALYSIS
The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet and the other cash flow statement. (Investopedia ULC, 2011)
The Financial Statement Analysis is Important for Different Reasons:
Holding Of Share
Shareholders are the owners of the company. Time and again, they may have to take decisions whether they have to continue with the holdings of the company's share or sell them out. The financial statement analysis is important as it provides meaningful information to the shareholders in taking such decisions.
Decisions and Plans
The management of the company is responsible for taking decisions and formulating plans and policies for the future. They, therefore, always need to evaluate its performance and effectiveness of their action to realise the company's goal in the past. For that purpose, financial statement analysis is important to the company's management.
3. Extension of Credit
The creditors are the providers of loan capital to the company. Therefore they may have to take decisions as to whether they have to extend their loans to the company and demand for higher interest rates. The financial statement analysis provides important information to them for their purpose.
4. Investment Decision
The prospective investors are those who have surplus capital to invest in some profitable opportunities. Therefore, they often have to decide whether to invest their capital in the company's share. The financial statement analysis is important to them because they can obtain useful information for their investment decision making purpose.
TYPES OF FINANCIAL ANALYSIS
Financial statements are analysed by different parties for different purposed. The analysis
Is done from different angles. Accordingly, we can classify financial statement analysis into different categories as follows:
On the basis of concerned parties
According to different parties concerned with the operation of the company, the financial statement analysis can be of two types:
EXTERNAL ANALYSIS
INTERNAL ANALYSIS
External Analysis
When the analysis is undertaken by outside parties namely existing and prospective investors, suppliers, lenders, government agencies, customer etc., it is external financial statement analysis. These external parties do not have any access to the internal records of the company; nor do they have any scope to know the hidden accounting policy, if any, of the management. So, they have to depend almost entirely on the published financial statements and other additional information supplied by the management.
Internal Analysis
This analysis is undertaken by the management of the company to monitor its financial and operating performance. As the analysis is done by the party who has access to the internal records and policies, it is expected to be more effective and reliable.
On the basis of time period of the study
Based on the time period covered for the study, the financial statement analysis can be grouped into:
HORIZONTAL ANALYSIS
VERTICAL ANALYSIS
Horizontal analysis
This analysis refers to the study of the past consecutive balance sheets, income statements or statements of cash flow at a time. The analysis can be made between two periods or over a series of periods.
Vertical analysis
When the analysis is restricted to the financial statement of one particular period only, it is known as vertical analysis of financial statements.
