Financial Analysis Report: Roles of Directors and Financial Statements

This financial analysis report delves into the critical roles of the board of directors and the significance of financial statements in corporate governance and financial performance. The report begins by examining the responsibilities of the board of directors, including their role in representing shareholders, making key decisions, ensuring ethical conduct, and complying with government regulations. It highlights how a credible board of directors enhances a company's reputation, reduces the cost of finance, and aids in profit generation. The second part of the report focuses on financial statements, emphasizing their importance in conveying a company's financial performance to stakeholders. It discusses the limitations of individual financial statements and the importance of considering all statements collectively. Furthermore, the report addresses accounting concepts, such as prudence, and how errors in financial reporting, including the misstatement of assets and the impact of historical costs, can affect the accuracy of financial statements. Overall, the report provides a comprehensive overview of the key elements of financial analysis.

Running head: FINANCIAL ANALYSIS
Financial Analysis
Name of the Student
Name of the University
Author Note

1FINANCIAL ANALYSIS
Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................3
References....................................................................................................................................4

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Answer to Question 1
The owners of any company are its shareholders. They take part in the decision making
of the entity. However, the shareholders are extremely large in number and it is not possible for
all of them to run the daily activities of the entity together at once. Hence, there is a need for
their representatives who will run the organization on a daily basis and make important decisions
on behalf of the shareholders. As the company is an artificial person and it cannot enter into
agreements by itself, there is a necessity for a representative who would enter into agreements on
behalf of the company. The board of directors also performs this role (Yosifon, 2013). Not all the
shareholders may be competent in understanding the functioning of a corporate entity; the
directors are useful in communicating the decisions made by the entity in the annual meetings.
Every company has a vision and mission in place. These are helpful in guiding it in situations
where important decisions need to be taken. The Board of Directors play the role of a supervisor
and always ensure that the activities undertaken by the company are ethical and do not deviate
from its guiding principles (Volonté, 2015). The government regulations governing a corporate
entity are very high in number. The board of directors are usually aware of the law and ensure
that the entity complies with it. Apart from this, the directors are independent from the entity and
its performance. This means that they do not have any conflicting interests within the
organization and are always required to act by keeping the best interests of the entity in mind. If
they are faced with any adverse circumstances, they are free to make a firm choice, which they
think is best for the entity. Having a credible board of directors is beneficial to the entity as they
provide a balanced view on all the issues being faced by the company. Outsiders, financial
institutions and potential investors also view it as a favorable aspect. The cost of obtaining

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finance is reduced due to the presence of a credible set of board of directors. Hence, it helps the
entity in earning more profits.

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Answer to Question 2
The financial statements of an entity cover its financial performance in an exhaustive
manner. They contain all the information relevant to the stakeholders. It is to be kept in mind that
the financial statements are a summary of a particular aspect of the financial performance of an
entity. A single financial statement is not the end and means of an organization. All of them used
together are more beneficial than using an individual financial statement to make conclusions
about an entity (Robinson et al., 2015). Hence, if the gross margin of the entity is more, it should
not be concluded that the entity is highly profitable. It may so happen that the administrative
expenses are high and the overall profitability of the organization is low. It may also happen that
if the net income of an entity is high, then investments in new avenues is low. Each financial
statement suggests a different kind of information. The purpose of a firm is not solely limited to
the generation of profits. It also has to make sure that it creates sufficient value for the
stakeholders. Aspects like debt-equity ratio, cash flows generated by an entity and its current
ratio should all be taken into consideration. They not only provide information about the present
condition of the firm but also give an idea of its future prospects that are useful for potential
investors. Accounting concepts like prudence are also responsible for the understatement and
overstatement of losses and incomes (Christensen & Nikolaev, 2013). Due to the errors in
financial reporting, there occur situations in which a certain item of the financial statements is
wrongly stated. This also leads to errors in all the items related to the financial statements. Other
reasons that cause wrong profits in the financial statements are the delay in the recognition of
impaired assets including inventory and fluctuations in the market values of marketable
securities. Due to the habit of entities of recording most of their assets at historical costs, the

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present value of these assets is not known and this leads to the wrong statement of profits and
losses incurred by an organization in a particular year.

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References
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets
pass the market test? Review of Accounting Studies, 18(3), 734-775.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Volonté, C. (2015). Boards: Independent and committed directors? International review of law
and economics, 41, 25-37.
Yosifon, D. G. (2013). The law of corporate purpose. Berkeley Bus. LJ, 10, 181.