Q.Explain the meaning of Analysis of Financial Statements. State any four objectives of such analysis, and name the parties who are interested in it.

Financial statements by themselves are just a list of figures — analysis is what turns them into usable information about a firm's health.

Meaning: Analysis of Financial Statements is the systematic process of examining, breaking down, comparing across periods, and establishing meaningful relationships (through statements and ratios) between the figures reported in a firm's Trading and Profit & Loss Account and its Balance Sheet, so as to judge its profitability, liquidity, solvency, and operating efficiency — turning raw published figures into information a reader can actually act on.

Four objectives (of several):

1. To assess the earning capacity/profitability of the business, in relation to sales and to capital invested.
2. To judge the short-term financial position (liquidity) — whether current liabilities can be met as they fall due.
3. To judge the long-term financial soundness (solvency) of the business.
4. To measure the operating and managerial efficiency with which resources are used.

Parties interested:

• Owners/Partners/Shareholders — to judge the safety and return on their investment.
• Management — to plan, control, and take corrective decisions.
• Banks and financial institutions — to decide on lending and its terms.
• Creditors/suppliers — to judge whether bills will be paid on time.
• Prospective investors — to decide whether to invest fresh capital.
• Employees/trade unions — to assess job security and for wage negotiation.
• Government/tax authorities — for taxation and regulatory purposes.

Students often list only 'knowing the profit' as the sole objective, missing that liquidity, solvency and managerial efficiency are equally central objectives — and often forget that employees and government are also genuine interested parties, not just owners and banks.