Definitions
Financial Data
Financial data is a set of data that defines, specifies, and establishes a business’s current financial position. Such data is defined by reporting periods and is used by organizations to determine financial indicators that reflect their investments, assets, and cash flows. It is recorded in the financial statements, which are then analyzed.
Financial Report
A financial report is an official document that presents an organization’s financial position. There are several basic types of reports, each used for the organization’s needs: to predict future financial activities, to optimize costs, to evaluate the current financial state, to analyze investments, and for other tasks.
Reports Using Financial Data
Balance Sheet
There are different types of reports, and all of them are used to analyze financial data. For example, a balance sheet is a report that contains financial data such as assets and equity. The report is prepared based on the company’s existing economic state, accumulated during its activities at a particular point in time. A particular part of this report is the company’s liabilities.
Income Statement
An income statement reconciles a company’s income and expenses over an accounting period. It reflects the process of changing the income into net profit after recalculating the organization’s expenses. It contains financial data such as gross revenues, organizational expenses, advertising, and maintenance.
Statement of Changes in Equity
Statement of changes in equity is a report that documents changes in equity, available reserves, and profit for the reporting period. An essential point in preparing the report and its analysis is the movement of retained earnings from one period to another. The financial data recorded in such a statement are profit/loss, availability of other income, dividends, shares, and reserves.
Cash Flow Statement
Finally, a cash flow statement is the most dynamic report, necessary for the organization to assess its solvency and ability to cover the minimum cost, that is, its liquidity. It reflects the company’s liquidity and flexibility, providing information on the possibility of trading and whether capital is available. Mandatory data for the report are transactions (payments to personnel, purchases of goods), investments (sales of assets), and finances (dividend payments, repurchase of shares).
Report Analysis
Overview
All reports prepared by the organization are analyzed based on various methods. The most used are horizontal and vertical analysis, ratio, and trend analysis. They differ in that they specialize in different data from the financial statements and are either dynamic or static (Jackson, 2021).
Each analysis has a specific purpose, so efforts are underway to optimize the process. The use of machine learning could facilitate data analysis and place it within the spectrum of tasks performed by artificial intelligence (Chakri et al., 2023). Such technologies will likely allow companies to reduce the time spent on urgent financial data analysis and to spend more time on this process.
Horizontal Analysis
Horizontal data analysis applies most often to balance sheets and statements of changes in equity. In this type of analysis, managers’ tasks are to determine the profit flow and equity loss. Each component in a balance sheet for one period is compared with the same component in another, and the net result is determined to see whether there is a capital gain or loss. The balance sheet is the most helpful report for a horizontal analysis because it reflects a specific point in time. It enables managers to track the flow of finances over time and identify general business trends.
The statement of changes in equity is also a valuable report for this type of analysis, as it compares investment levels and their impact on the organization’s overall sales. Thus, horizontal analysis can reveal the relative dynamics of finances, but it does not specify them.
Vertical Analysis
Vertical analysis establishes the relationship between the various components in a single statement. The most commonly used Income statement for vertical analysis: the total amount of income serves as the base number, from which all other income is expressed as a percentage (Jackson, 2021). The essence of vertical analysis is to determine the correlations between the fundamental indicators (income, expenses, and net income) and their components and mandatory elements. For example, in the balance sheet, equity serves as the base because it represents the sum of assets and liabilities; the percentage ratios for liabilities are then calculated and can be compared dynamically (transition to horizontal analysis).
Ratio Analysis
Dynamic types of analysis are ratio and trend analysis. Ratio analysis establishes correlations between specific financial indicators to forecast the company’s future financial condition and market behavior. This type of analysis serves as the basis for financial performance analysis, enabling the specification of an organization’s liquidity and operating efficiency based on information available in its financial statements (Chakri et al., 2023). If the reporting is weak or incomplete, this analysis will be of limited value because many key components will not be considered. Based on this, the balance sheet and income statement should contain as much information as possible to facilitate the calculation of ratios.
Trend Analysis
Trend analysis is an extension of other types of analysis because it uses not one but at least three reporting periods. This enables verification of financial statements, identification of cost-optimization weaknesses, and establishment of subsequent dynamics.
References
Chakri, P., Pratap, S., Lakshay, & Gouda, S. K. (2023). An exploratory data analysis approach for analyzing financial accounting data using machine learning. Decision Analytics Journal, 7.
Jackson, A. B. (2021). Financial statement analysis: A review and current issues. China Finance Review International.
Qadri, S. U., Ma, Z., Raza, M., Li, M., Qadri, S., Ye, C., & Xie, H. (2023). COVID-19 and financial performance: Pre and post effect of COVID-19 on organization performance; A study based on South Asian economy. Frontiers in Public Health, 10.