TYPES OF FINANCIAL STATEMENT ANALYSIS

Analysis of Financial Statement is also necessary to understand the financial positions during
a particular period. According to Myres, “Financial statement analysis is largely a study of
the relationship among the various financial factors in a business as disclosed by a single set
of statements and a study of the trend of these factors as shown in a series of statements”.
Analysis of financial statement may be broadly classified into two important types on
the basis of material used and methods of operations.

Based on the material used, financial statement analysis may be classified into two
major types such as External analysis and internal analysis.
A. External Analysis
Outsiders of the business concern do normally external analyses but they
are indirectly involved in the business concern such as investors, creditors,
government organizations and other credit agencies. External analysis is
very much useful to understand the financial and operational position of
the business concern. External analysis mainly depends on the published
financial statement of the concern. This analysis provides only limited
information about the business concern.
B. Internal Analysis
The company itself does disclose some of the valuable informations to the
business concern in this type of analysis. This analysis is used to understand
the operational performances of each and every department and unit of the
business concern. Internal analysis helps to take decisions regarding achieving
the goals of the business concern.

Based on the methods of operation, financial statement analysis may be classified
into two major types such as horizontal analysis and vertical analysis.
A. Horizontal Analysis
Under the horizontal analysis, financial statements are compared with several
years and based on that, a firm may take decisions. Normally, the current
year’s figures are compared with the base year (base year is consider as 100)
and how the financial information are changed from one year to another.
This analysis is also called as dynamic analysis.
B. Vertical Analysis
Under the vertical analysis, financial statements measure the quantities
relationship of the various items in the financial statement on a particular period.
It is also called as static analysis, because, this analysis helps to determine the
relationship with various items appeared in the financial statement. For example,
a sale is assumed as 100 and other items are converted into sales figures.

Sources of finance mean the ways for mobilizing various terms of finance to the industrial
concern. Sources of finance state that, how the companies are mobilizing finance for their
requirements. The companies belong to the existing or the new which need sum amount
of finance to meet the long-term and short-term requirements such as purchasing of fixed
assets, construction of office building, purchase of raw materials and day-to-day expenses.
Sources of finance may be classified under various categories according to the
following important heads:

Sources of Finance may be classified under various categories based on the period.
Long-term sources: Finance may be mobilized by long-term or short-term. When
the finance mobilized with large amount and the repayable over the period will
be more than five years, it may be considered as long-term sources. Share capital,
issue of debenture, long-term loans from financial institutions and commercial
banks come under this kind of source of finance. Long-term source of finance
needs to meet the capital expenditure of the firms such as purchase of fixed assets,
land and buildings, etc.
Long-term sources of finance include:
● Equity Shares
● Preference Shares
● Debenture
● Long-term Loans
● Fixed Deposits
Short-term sources: Apart from the long-term source of finance, firms can
generate finance with the help of short-term sources like loans and advances from
commercial banks, moneylenders, etc. Short-term source of finance needs to meet
the operational expenditure of the business concern.
Short-term source of finance include:
● Bank Credit
● Customer Advances
● Trade Credit
● Factoring
● Public Deposits
● Money Market Instruments

Sources of Finance may be classified under various categories based on the period:
An ownership source of finance include
● Shares capital, earnings
● Retained earnings
● Surplus and Profits
Borrowed capital include
● Debenture
● Bonds
● Public deposits
● Loans from Bank and Financial Institutions.

Sources of Finance may be classified into various categories based on the period.
Internal source of finance includes
● Retained earnings
● Depreciation funds
● Surplus
External sources of finance may be include
● Share capital
● Debenture
● Public deposits
● Loans from Banks and Financial institutions

Security finance may be include
● Shares capital
● Debenture
Retained earnings may include
● Retained earnings
● Depreciation funds
Loan finance may include
● Long-term loans from Financial Institutions
● Short-term loans from Commercial banks.

The above classifications are based on the nature and how the finance is mobilized
from various sources. But the above sources of finance can be divided into three major
classifications:
● Security Finance
● Internal Finance
● Loans Finance

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