Finance is studied to gain an understanding of the financial performance of a company or an industry.
The data is basically provided by accountants, which is interpreted in financial terms by the finance men. Data provided by the accounts department is in the form of balance sheets, income statements, cash flow statements and some ratios derived from the above reports.
A balance sheet is the reflection of the financial position of a business at a point in time i.e. a snapshot, while the income statement depicts the financial condition of a business over a period of time which can be a month, a quarter or a year.
The statement of cash flows shows and emphasizes the cash inflows and cash out flows i.e. operating, investing and financing; besides there are ratios which are calculated from the figures shown in these statements. These ratios are used by the financial analysts for analyzing various aspects of a company’s activities. These activities include the liquidity position of a company, estimation of credit risk, profitability etc. Among some basic ratios are debt equity ratio, current ratio i.e. ratio of current assets to current liabilities, price earnings ratio.
If the credit rating of a company is good as determined by financial analysis the company can borrow money on lower interest rates. When a company is not a good financial risk, few shareholders will be interested to invest in buying more shares of the company.
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