Question

The complexity of the current business environment and regulatory environment has increased the demand for individuals in all fields of business who have the ability to analyze business transactions and interpret their efforts on the financial statements. Please discuss why you think this ability to analyze business transactions and financial statements is important to the decision makers of any given organization.

Answer 1

The ability to analyse business transactions and financial statements play a very crucial role for the decision makers of any given organization. Business transactions include transactions of sale, purchase, investment, loans, mortgage etc. There are mainly three types of Financial Statements- Balance sheet, Income statement and cash flow statement.

Analysis of business transactions includes understanding the transaction, how the organization is involved in the transaction, what documents are there in support of the transaction, whether the transaction is legal and done in good Faith, what type of transaction is this, whether it is operating, investing or financial. Whether the transaction is recorded timely and properly.

Financial Statement means financial data prepared in a required format. Financial Statement analysis is performed in several ways such as ratio analysis, horizontal analysis, vertical analysis etc. Analyzing financial statements helps in knowing the profitability position, liquidity, changes in assets and liabilities etc.

The analysis of business transactions and financial statements is important to the decision makers of any given organization due to the following reasons -

1. It provides an idea to the decision makers regarding the actual financial health of the organization. They are able to evaluate that whether the financial position is achieved as budgeted and expected.

2. It provides an insight regarding the current and prospective risks, weaknesses and strengths of the organization.

3. It provides the detailed data for all the products, debtors, creditors and investors. It helps to identify the product with lower or higher profitability.

4. It examines the rate of return for investors, the factors which can lead to increase in return.

5. It helps in identifying weak areas and developing a powerful marketing strategy.

6. It helps in making decision regarding the assets, liabilities and investments. It helps to identify the assets which are less or non operative.

7. It helps in making tax planning.