Question

Explain how Financial Statements Evolved, including at least two reasons that they are so useful. (minimum 500 words)

If you can't write answer in 500 word limit then please don't answer it because I can't pay for same question twice.

Answer 1

Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.

Globally, publicly listed companies are required by law to file their financial statements with the relevant authorities. For example, publicly listed firms in America are required to submit their financial statements to the Securities and Exchange Commission (SEC). Firms are also required to provide their financial statements in the annual report that they share with their stakeholders.

The main purpose of financial statement is to do the analysis about the past performance of the company in order to predict how it will perform in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and resolve those.

USERS OF FINANCIAL STATEMENT ANALYSIS

There are many users of financial statements. These can be identified as internal and external. Internal users refer to management of the company who analysis financial statements for making decisions for operations of the company. External users refers to Financial institutions, creditors, investors, government etc who analysis financial statement to make decision for lending money, investing money in shares of company.

KEY FINANCIAL STATEMENT AND ITS ANALYSIS

The main types of financial statements are the balance sheet, the income statement and the statement of cash flows. These accounting reports are analyzed in order to aid economic decision-making of a firm and also to predict profitability and cash flows.

I. BALANCE SHEET

The Balance sheet shows the current financial position of the firm as on date. It is also called statement of financial position. The structure of the balance sheet is laid out such that on one side assets of the firm are listed, while on the other side liabilities and shareholders’ equity is shown. The two sides of the balance sheet must balance as follows:

Assets = Liabilities + Shareholders’ Equity

II. THE INCOME STATEMENT

The purpose of an income statement is to report income earned and expenses incurred of a firm and profit or loss generated by an entity over a period of time.

The user of the financial statement calculates various ratios like Debt-equity, Current ratio, quick ratio Debtors turnover ratio, free cash flow etc to assess the health of company.

Besides this user also analysis of profit & Loss ratio like, trend analysis, gross profit margin, EBIDTA ratio, sales to fixed assets ratio etc to assess how much sales are generated by company on every unit of investment in fixed assets also what kind of Gross margin it generates on sales etc.

III. CASH FLOW

The purpose of a cash flow statement is to report cash earned from various resources and application of those resources. Also this also shows various means of finance.

ADVANTAGE OF FINANCIAL STATEMENT

1) Financial statement analysis helps to know whether the business is making profits or losses. It also helps to know whether the profits/losses of the firm are increasing or decreasing. It also helps to know the business organisation's ability to pay interest on loans taken and its ability to pay dividend to its shareholders.

2)         Financial statement analysis helps to understand the overall financial strength of the business. It also helps to take decisions regarding funds available for purchase of assets, payment of liabilities, etc. It also helps to know whether company's internal sources of funds are sufficient or a loan would be required