Question
State any two objectives of analysis of financial statements.
✓
Answer
- To Measure the Earning Capacity or Profitability: According to Robert Anthony, "The overall objective of a business is to earn a satisfactory return on the
funds invested in it, consistent with maintaining a sound financial position." Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business. It is also disclosed by analysis of financial statements whether these profits are increasing or decreasing over the years. For this purpose, the financial statements of a few years are taken into account to compute the change in profits over the years. Such analysis helps in ascertaining the future profit ability or earning capacity of the business. - To Measure the Solvency: It can be ascertained from financial analysis whether the business is in a position to pay its short-term and long-term liabilities in time. For example, the liquidity ratios ( current ratio and quick ratio) are calculated to ascertain whether the business enterprise has sufficient liquid funds to meet its short term liabilities and Debt Equity. Ratio is calculated ascertain wether the business enterprise has got the ability repay the long term liabillties.
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