Financial Analysis and Management Reporting

Steps in Financial Analysis

• Financial Analysis includes the following three steps:

1. 1. Establish the facts about the organization
   2. Compare the facts of the organization over time with facts of similar organizations
   3. Use perspective and judgment to make decisions regarding the comparisons

• Financial decisions by management can occur at any level—departmental, divisional, or institutional—within the organization
• Comparison of one organization with another includes ratio analysis, horizontal analysis and vertical analysis
  • Ratio analysis evaluates the organization’s performance by computing the relationships of important line items in the financial statements
  • Horizontal analysis evaluates the trend in the line items by focusing on the percentage change over time
  • Vertical analysis evaluates the internal structure of the organization by focusing on a base number and then showing percentages of important line items in relation to the base number
• There are four types of financial statements:

1. 1. The Balance Sheet
   2. The Income Statement
   3. The Statement of Owner’s Equity
   4. The Statement of Cash Flows

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