Introduction:
In the previous modules, you have been introduced to financial statements, namely the statement of financial position, the statement of profit or loss, the statement of comprehensive income, the statement of changes in equity and the statement of cash This module will introduce you to some analytical methods to be applied using financial statements to assess the health of an entity. A fundamental purpose of preparing these statements is to provide useful information to assist users in their decision making. Financial analysis refers to the assessment of an entity’s financial position and profitability. A reported number or ratio on its own is of limited usefulness because it needs to be compared across time and with other industry leaders. This module will cover the analytical methods of horizontal analysis, trend analysis, vertical analysis and ratio analysis. Within ratio analysis, you will learn about profitability in this module. These analytical methods are designed to add a comparative dimension to the number or ratio. Profitability refers to an entity’s performance during the reporting period or over a number of reporting periods. Profitability is not identical to profit. Whether you are a manager or an analyst, these techniques will help to assess an entity’s financial health.