Explaining Accounting Analysis
Accounting analysis, also referred as financial analysis or financial statement analysis, can be explained as an assessment of the stability, viability, and profitability of a business, sub-business, or project. A financial analysis is carried out by professionals who prepare reports through the use of info obtained from financial statements and other reports. Besides, one key area of financial analysis is the extrapolation of company’s past performance into an estimate of its future performance.
As explained by Investopedia, accounting analysis is one of the most common techniques for accounting analysis is calculating ratios from the data to compare with those of other companies or with the past performance of the company. For instance, retur on assets is a common ratio which is used for determining the efficiency of a company at utilization of its assets as well as a measure of its profitability.
Methods of Accounting Analysis
The main methods adopted for accounting analysis include:
- Past performance
The accounting analysis uses past statistics across historical time periods for a single company, for example, the last 5 years.
- Future performance
The accounting analysis is performed by utilizing historical figures and certain statistical and mathematical techniques, counting present and future values. This extrapolation method acts as the main source of errors in accounting analysis for past statistics can play poor predictors for future prospects.
- Comparative performance
The accounting analysis is also done through comparison between similar business companies.
Objectives of accounting analysis
Carrying out accounting analysis is helpful in solving the following purposes:
Accounting analysis is helpful in assessing the ability of a company to repay its obligations to creditors and similar third parties in the long run.
Accounting analysis facilitates the ability of a company to earn income in addition to sustaining short term as well as long term growth. A company’s profitability level is based on the income statement, which provides reports on the company’s operation results.
Accounting analysis aims at assessing a company’s ability to maintain positive cash flow in addition to satisfying immediate debts.
Accounting analysis aims at assessing the company’s ability of sustaining itself in the long run, without the existence of significant losses in the business conduct.