Introduction to Financial Statement Analysis (PDF)
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Added on 2021-05-31
Introduction to Financial Statement Analysis (PDF)
Added on 2021-05-31
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Financial statements are the most important documents of the company. It is a formal record of the financial activities and position of the business[ CITATION Itt09 \l 1033 ]. It includes income statement, balance sheet, statement of cash flows and statement of changes in shareholders’ equity. Financial position reveals about the company’s assets, liabilities and equity at a given point of time and income statement reveals about revenue and expenses, profits and losses occurred to the business during a given period of time. The purpose of financial statements is to provide information about the result of operations, financial position and cash flow of an organization. The information provided by financial statements is used by a variety of users to take decisions related to allocation of resources.Financial statements should only contain information related to business that has occurred or existed rather than reports and thoughts of the issuers about the future. It should only record transactions which are related to operations of business and has already occurred. Future events or transactions which may or may not occur in future should not be included in financial statements as statements are not prepared on accrual basis[ CITATION OHa16 \l 1033 ]. Everything that is included in financial statements should be supported by documents which are considered as an evidence of proof. Anything that has not occurred but document is prepared should not be included in financial statements as it will be misleading. Anything that is fictions and or does nothappen should not be included in financial statements. In preparing financial statements only those formulas should be used which consider events already occurred. It should not take into consideration events on accrual basis which may or may not happen as it is related to future which is uncertain. It should consider reporting entity different and separate from all other entities with which it is associated. It should treat business and businessman as separate entities in order to have a clear picture[ CITATION Aji17 \l 1033 ]. It should not incorporate false assumptions as it will lead to misleading statements. Assumptions can be correct or incorrect as per consequences so it should not be included. Statements are prepared for the users and it should emphasize their needs rather than some other parties. It should be prepared in a manner that it is useful to users and if there is a conflict user’s interest should be considered first rather than other relevant parties. It should also obey all the rules of arithmetic[ CITATION Rak12 \l 1033 ].Financial statements should be prepared on cash basis which means when revenue is actually received and payment is actually made. Nothing about future should be taken into consideration in order to determine the results and to compare it with past events so as to know the progress of the business. Only current events that actually occurred should be considered to know the exact position and it should be compared with past reports soas to ascertain the differences and reasonsfor the same so that immediate steps can be taken to correct it. If differences are positive then it should be further implemented[ CITATION Erd17 \l 1033 ].Only those assets should be included in financial statements which are actually assets. Assets which have been discarded or depreciated to its full value should not be included in financial statements[ CITATION Wey04 \l 1033 ]. Sometimes to give a fair picture of financial statements losses are also shown as assets which makes the statements misleading. Assets less
depreciation should be shown in balance sheet to give the real picture of the financial statements which can be useful for various interested parties. Assets include both current and fixed assets which are included in balance sheet in the preparation of financial statements[ CITATION Gib12 \l 1033 ].The equity of the entity is a helpful concept which exists only in the minds of users. It means equity capital actually does not provide a helping hand as interest is paid to investors for providing the money and if profit is there then it is also distributed on per share basis. When entity is started capital is required which is provided by investors in the form of equity capital which is considered a great help but it exist only in minds as payment is made for that money given by investors in the form of equity capital.Costs are not assets. Cost refers to monetary value of expenditurefor raw material, equipment, supplies, services, labor and products etc. It is recorded as an expense in book- keeping. It is the amounts which are spent on the purchase of an asset along with amount spend on its installation and making it ready to use. Cost is not assets it is the amount which is spent on purchase of it. Asset is recorded on asset side of balance sheet and cost is recorded as an expense in income statement. Cost refers to amount spend on daily operations of business.Financial reports should not be prepared just to follow the ritual. It should provide a clear picture about the company’s financial and profit position as it is on the basis of these reports many decisions are taken. If reports are faulty it can be harmful to business as well as investors as they will not be able to take decisions correctly. All rules related to preparation of financial statements should be followed to avoid confusion and to ascertain true value of business.It should be able to provide clear and meaningful information to various interested parties so that decisions are taken correctly.Users of financial statements include investors, public, banks, government, customers, suppliers, managers and owners. Users of financial statements take decisions on the basis of these statements and if the statements are faulty they should not accept it. They should not be forced to tolerate the incorrect reports[ CITATION Ann183 \l 1033 ]. As these re the basis of decisions and if they provide false or incorrect information then decisions may prove wrong and can hinder the interest of parties involved. So if they are not providing correct information then itshould not be accepted by the parties involved and corrective measures should be imitated.Financial reporters should not do anything for which they are not authorized. They should only perform task for which they are authorized. They should not be forced to prepare financial statements in a manner that it gives positive reports which actually is not. They should disclose everything that is important for business and interested parties whether it is positive or negative. They should not conceal any information which can have negative impact on business but is important to be known to various parties. Thus financial reporter should provide fair and true value of business by preparing statement the way it should be prepared.
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