Analysis of Financial Statement Essay

Daniel Benitez Goris.

12-0428.

Analysis of Financial Statement.

Essay.

First, is indispensable to establish the importance of this subject, and how to apply into real life.  Analysis of financial statement studies the performance of a business through the use of indicators and ratios. Is something like when you go to the doctor for a problem you have, but do not know it, the doctor makes analysis, and later on gives you the results which tells you where the problem lies, and therefore how to fix it.  In financial terms instead of the doctor, is an analyst, who after seeing annual financial reports, this person determines, whether the business has financial trouble from some area, whether it spent this or that much on advertising, or that much in human capital. After all, is analyzing the business financial situation, interpreting the information, understanding how it behaves, and making recommendation for the improvement of it.

Companies publish their financial data using financial statements, a picture of changes the company have incurred over a period of time. This field of financial analysis assists anyone concerning the given data about understanding how to establish the best estimates and possible predictions for future results.  In my opinion, the real importance of this subject is that it facilitates decision making for investors or others who are interested in the economic and financial situation of a business.  Financial statements in other words, reflect the financial position of the company, its strengths and areas for improvement; they are four financial statements: the balance sheet, the income statement, the statement of cash flows, and the statement of stockholder’s’ equity. Starting with the balance sheet statement, this report indicates the result of the assets, liabilities, and equity of a firm at a point in time. The income statement, gives the summary of operating performance over a period of time. The statement of cash flows shows the summary of a firm’s cash flows from day to day operations. Finally, the statement of stockholder’s equity shows the summary of the changes in the equity accounts.

The interpretation of this financial statements is extremely important for each of the activities carried out within the company through executives for creating different outsourcing policies and may also focus on solving specific problems that affect the company such as accounts receivable or accounts payable prepared. Also the credit policies is key to customers depending on their investment, could be an important point for determining inefficiency, through the interpretation of the data presented in the financial statements of managers, customers, employees and suppliers. An analyst may account for the performance, which shows how good, or bad the company is in the market.

The quality of financial Information, shareholders and creditors depend on he financial statements of companies that are prepared according to generally accepted accounting standards (GAAP), companies must follow this rules, if they don’t strictly write down their annual reports within the bounds of stated method, is possible they get into legal problems.  The different methods of accounting that a company’s management may choose within GAAP) creates opportunities to manage earnings, making the financial analyst job a bit more challenging.  An interesting fact learned form the book was that analyst need to examine the sources of a company’s revenues and earnings, stating an example: a company that earns a large portion of its revenues from nonoperation sources or business segment that are not the primary lines of business may indicate potential problems in future earnings. An additional consideration for the financial analyst is the auditor’s report. The independent accounting firm that audits company financial statements and reviews the management’s reports, the check if they are prepared according to (GAAP) and whether these reports are sufficient

There are a number of indicators and ratios that allow a complete and thorough analysis of a company.  Many of these indicators are most useful applied individually or in isolation, so it is necessary to use several of them in order to make a comprehensive study covering all aspects and elements of the financial reality of every business. This help to know if the company results are good or bad. For example, one of these reasons is liquidity, in which the relationship that exists between current assets and current liabilities is measured, the result is an index by which one can know the risk that the company regarding immediate obligations, whether these will need to be settled with assets from the fast movement. if the index is very low indicates that the company may not honor their debts to the current level of sales.

Without the financial analysis can not make a diagnosis of the current company, and without it there will be no rate portal to indicate a course to follow in the future.

Many business problems can be anticipated interpreting accounting information, as this reflects every negative or positive sign showing that the company goes to the extent that economic events are happening.  Another example could be activity ratios, this is a measure of how well assets are used, let’s say I create a real estate company and I buy 300 apartments, this ratio tells me how efficiently am I using this 300 apartments to recover investment and gain profit. At the end, most of the ratios help us explain the trends and changes in trends that the financial ratios may reveal.

Taking a closer look at fundamental factors of earnings, which is often stated in terms of a return. There is a possibility that reported financial information might be managed by the judicious choice of accounting methods and timing. In particular, earning can be managed using a number of devices, including the selection of inventory method like FIFO AND LIFO, and the likelihood of manipulation. Earnings are used in valuation of stock because of the close relation that has been observed between earnings and stock prices. There are many definitions of earnings, with the appropriate definition being dependent on the particular use of earnings in the analysis.

One measure of earnings is net income, but the experience of the recent past in terms of financial reporting has taught us to be cautious of interpreting this measure.  The relation between earnings and stock prices is often summarized using the price to earnings ratio.  In my opinion it’s essential to know about this ratios because many investors are interested in how earnings are valued by the market, investors are forward looking in their valuation. Moving on to dividends, payments made by a corporation to its owners. Cash dividends are paid to both preferred and common shareholders; most of the focus of the attention is on the dividends paid to the residual owners of the corporation, the common shareholders. Dividend paid to common and preferred shareholders are not legal obligations of a corporation, and some corporation do not pay cash dividend, there’s no requirement that says a company has to pay cash dividends.