Financial Statement Analysis

Step 1: Define. Analysis = breaking complex financial data into meaningful parts.
Step 2: Purpose. - To know earning capacity. - To judge liquidity, solvency and stability. - To provide useful information to management and investors.
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Step 1: Standard methods of financial analysis.
The major tools used are: - Ratio Analysis (liquidity, profitability, solvency ratios)
- Comparative Analysis (comparison over years)
- Trend Analysis (study of changes with base year)
- Common-size statements
Step 2: Capitalisation method.
Capitalisation method is not a tool for analysing financial statements. Instead, it is used for valuation of goodwill in partnership accounts.
Step 3: Conclude.
Hence, Capitalisation Method is not a method of financial statement analysis.
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