25-01-2013, 10:34 AM
TYPES OF FINANACIAL ANALYSIS
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Financial Analysis can be classified into different categories depending upon
• the material used
• the modus operandi of analysis
On the Basis of Material used
According to this basis, financial analysis can be of two types:
External Analysis: This analysis is done by those who are outsiders for the business. The term outsiders includes investors, credit agencies, government agencies and other creditors who have no access to the internal records of the company .These persons mainly depend upon the published financial statements. Their analysis serves only a limited purpose .The position of these analysts has improved in recent and governmental regulations requiring more detailed disclosure of information by the companies in their financial statements.
Internal Analysis: This analysis is done by persons who have access to the books of account and other information related to the business. Such an analysis can, therefore, be done by executives and employees of the organisation or by officers appointed for this purpose by the Government or the Court under powers vested in them. The analysis is done depending upon the objective to be achieved through this analysis.
On the Basis of modus operandi
According to this, financial analysis can also be of two types:
Horizontal Analysis: In case of this type of analysis, financial statements for a number of years are reviewed and analysed. 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 regarding each item from the base year usually in the form 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 one date, it is also termed as ‘Dynamic Analysis’.
Vertical Analysis: In case of this type of analysis a study is made of the quantitative relationship of the various items in the financial Statements on a particular date. Since this analysis depends on the data for one period, this is not very conductive to a proper analysis of the company’s financial position. It is also called ‘Static Analysis’.