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Answer -
Financial analysis is of great importance for the various users of accounting information. Financial statements such as Balance Sheets, Income sheets and other sources of financial data provide ample information on the various expenses and sources of profit, loss and income which is helpful in determining the financial status of a business. Financial data is not making any meaningful contribution until it is analysed. There are various methods which help in analysing financial statement and make it useful for various accounting users.
Following reasons are essential for performing financial analysis:
1. It is very helpful in determining the financial viability and profit earning capacity of the firm.
2. It is helpful in evaluating the solvency of the business in the long term
3. It is useful in comparing the financial status of a firm in comparison to other competitor firms
4. It helps management in decision making, drafting plan and also in establishing a robust and effective control mechanism