Types Of Financial Analysis
Financial Analysis can be classified into different categories depending upon
(i) The materials used and (ii) The modus operandi of analysis
ON THE BASIS OF MATERIAL USED: According to this basis financial analysis can be of two types.
(i) External Analysis: This analysis is done by those who are outsiders for the business. The term outsiders includes investors, credit agencies, government and other creditors who have no access to the internal records of the company.
(ii) Internal Analysis: This analysis is done by persons who have access to the books of account and other information related to the business.
On the basis of modus operandi. According to this, financial analysis can also be two types.
(i) Horizontal analysis: In case of this type of analysis, financial statements for a number of years are reviewed and analyzed. The current year’s figures are compared with the standard or base year. The analysis statement usually contains figures for two or more years and the changes are shown recording each item from the base year usually in the from of percentage. Such an analysis gives the management considerable insight into levels and areas of strength and weakness. Since this type of analysis is based on the data from year to year rather than on the date, it is also termed as Dynamic Analysis.
(ii) Vertical analysis: In case of this type of analysis a study is made of the quantitative relationship of the various terms in the financial statements on a particular date. For example, the ratios of different items of costs for a particular period may be calculated with the sales for that period such an analysis is useful in comparing the performance of several companies in the same group, or divisions or departments in the same company.
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