Question

Explain the difference between the financial statement approach and the valuation approach. Which approach is superior for making short-term financial decisions? Why?

Answer 1

Answer:- 1. Financial statement approach is the process of analysing a company's Financial statement for decision making process.

2. Three main Financial statements are :- I. Income statement

II Balance sheet

III Cash flow statement

3. This is used to manage the operations of their business and also to provide reporting transparency to their stakeholders

4. All three Statement are interconnected and create different vies of the company activities and performance.

** Valuation approach

1. It is the methodology used to determine the Fair market value of the business.

2. The most common valuation approach are :- income valuation , Market valuation and Asset based approach.

3. Income valuation identifies the net present value of future benefits associated with ownership of the equity interest or Asset .

4. Market valuation :- determine the Fair market value by reviewing actual transaction of comparable companies and Assets.

5.Asset based approach :- it uses the current value of a company's tangible net Assets as the key determinent of the Fair market value.

The superior approach for making short term Financial decision is valuation approach because it more appropriate than others and also helps in to determine the Fair market value of a business and helps is making the Financial decisions very accurate.