Q.What is meant by Financial Statement Analysis? State any four of its objectives.

Financial statements are only useful once their figures are examined critically, in relation to each other and over time, rather than read in isolation.

Financial Statement Analysis is the process of critically examining the relationships between various items of a company's Balance Sheet and Statement of Profit and Loss to assess its profitability, financial position, and operating efficiency. Four of its objectives are: assessing profitability, judging short-term and long-term financial position, measuring operating efficiency, and enabling inter-period or inter-firm comparison.

Financial Statement Analysis is the process of critically examining the relationship between various items presented in a company's financial statements — the Balance Sheet and the Statement of Profit and Loss — in order to draw meaningful conclusions about the firm's profitability, financial position, and operating efficiency. Rather than reading each figure in isolation, this analysis breaks down composite totals into comparable elements and studies how they relate to one another and change over time.

Four of its principal objectives are:

1. To assess profitability — how efficiently the business is generating profit from its operations, and whether that profitability is improving or declining.
2. To judge the financial position — both the short-term liquidity (ability to meet immediate obligations) and the long-term solvency (ability to meet long-term debts) of the firm.
3. To measure operating efficiency — how effectively the firm is using its resources, such as inventory and receivables, to generate sales and profit.
4. To enable comparison — of the firm's own performance across different years (inter-period comparison), or against other firms in the same industry (inter-firm comparison), highlighting relative strengths and weaknesses.

(Other valid objectives include assisting forecasting and budgeting, and helping various users — management, investors, creditors, employees, and government — make informed decisions about the business.)

Students sometimes confuse Financial Statement Analysis with the preparation of financial statements itself. Remember: preparing the Balance Sheet/P&L is a separate, earlier step; ANALYSIS begins only after the statements already exist, and involves interpreting and comparing the figures they already contain.