A solid foundation in financial analysis is important for aspiring accountants and business leaders. It provides the baseline knowledge to interpret key figures and functions of economic health. The online Bachelor of Science (B.S.) in Accountancy program from Southern Illinois University Edwardsville (SIUE) offers courses like Financial Management and Decision Making, Mathematical Methods for Business Analytics, and Fundamentals of Financial Accounting to prepare students with the skills and tools to succeed in this field.
Understanding the components of financial statement analysis helps students make informed decisions, identify potential risks and maximize opportunities. This type of information is valuable when pursuing various roles in this field.
Common Types of Financial Analysis
Financial analysis can be categorized into several types, each focusing on a specific part of a company’s financial health. These three are the most common:
- Ratio analysis: Ratio analysis examines the connections between various financial figures within a single report. It helps experts understand a company’s overall well-being and operational effectiveness.
- Vertical analysis: Vertical analysis examines a company’s financial records by studying a single column within a financial report to understand the relationships between various figures during a specific timeframe.
- Horizontal analysis: Horizontal analysis, often referred to as trend analysis, contrasts a company’s financial records with those of previous periods to assess changes over time. It identifies whether figures have risen or fallen and explores the reasons behind the fluctuations.
Financial statement analysis is a comprehensive process examining a company’s financial statements to understand its financial performance and health. By analyzing these financial statements, analysts can identify trends, potential risks and opportunities for growth. The basic components of this analysis include:
- Income statement: This statement discloses a company’s income, costs, profit or loss during a particular timeframe.
- Balance sheet: This statement captures a company’s financial standing at a particular point in time, outlining its assets, liabilities and equity.
- Cash flow statement: This statement illustrates the movement of cash into and out of a company during a particular timeframe.
Benefits of Comprehensive Financial Statement Analysis
Conducting a comprehensive financial statement analysis is necessary for long-term strategies. The process offers various benefits:
- Improved decision-making: By understanding a company’s financial health, analysts can make more precise decisions that impact long-term goals.
- Risk assessment: Identifying potential risks helps companies initiate proactive countermeasures.
- Performance evaluation. Tracking performance over time allows leaders to evaluate the effectiveness of current strategies.
- Investor relations: Strong financial analysis boosts investor confidence and attracts more investment capital.
- Strategic planning: Analysts develop effective long-term strategies by investigating a company’s financial position.
While financial statements provide an important foundation for analysis, additional information is often needed to get a more well-rounded understanding of a company’s financial health. This type of information can include:
- Industry analysis: Researching industry trends, competition and regulatory environment can provide more granular information on current conditions.
- Economic indicators: Economic factors such as GDP growth, interest rates and inflation can affect a company’s performance.
- Qualitative factors: Non-financial factors — such as management quality and brand reputation — can influence a company’s prospects.
Accounting professionals have a variety of methods for generating this information. SIUE’s online B.S. in Accountancy program introduces foundational concepts regarding this process, including:
- PESTLE Framework: This method studies outside factors that influence a business, such as technological, political, legal, social, economic and environmental conditions. It also considers current trends.
- Porter’s Five Forces: This practice analyzes five factors that shape every industry. By considering these forces, companies can prioritize areas of improvement.
- SWOT analysis: This type of analysis helps a company identify threats, weaknesses, opportunities and strengths. It is vital for managing change as well as charting new strategic directions.
- Value chain analysis: This protocol examines the overall value of a service or product to discover opportunities to streamline practices, lower costs and maximize efficiency.
By effectively combining financial statement analysis with additional information, analysts can develop a more accurate understanding of a company’s financial health and future opportunities. This essential foundation opens the door for graduates of Southern Illinois University Edwardsville’s online B.S. in Accountancy.
Learn more about SIUE’s online Bachelor of Science in Accountancy program.
