Printable business problem statement template excel example, All financial statements are essentially historically historic documents. They tell what has happened during a specific time period. However most consumers of financial statements are somewhat worried about what will happen in the future. Stockholders are concerned with future earnings and benefits. Creditors are worried about the firm’s future ability to repay its debts. Managers are worried about the corporation’s ability to fund future expansion. Despite how financial statements are historic documents, they can still provide useful information bearing on every one these concerns.
The use of a financial statement is to reflect the financial weakness or strength of a company. Internally, it is used by a business to make financial decisions such as hiring new employees or layoffs. When businesses are financially fighting they look to cut cost and the quickest way to reduce costs is to eliminate employees. Today in a struggling economy, employees are regarded as expensive liabilities, and businesses and governments are trying to decrease those liabilities as much as they can.
Managers will also be widely concerned with the fiscal ratios. First the ratios offer hints of how well the company and its business units are doing. A few of these ratios could ordinarily be utilized in a balanced scorecard approach. The particular ratios chosen are based on the organization’s strategy. For instance a business which wishes to highlight responsiveness to customers may closely track the stock turnover ratio. Since managers need to report to shareholders and might wish to increase funds from outside sources, supervisors must focus on their financial ratios used by outside inventories to rate the firm’s investment possible and creditworthiness.
Though financial statement analysis is an extremely useful tool, it has two limits. These two limitations involve the comparability of financial information between businesses and the need to check beyond ratios. Comparison of one company with the other can offer valuable clues about the financial health of a company. Unfortunately, differences in accounting procedures between businesses sometime makes it tough to compare with the firms’ financial information. For instance if one company values its inventories from the LIFO method and the other company by average cost method, then direct obligations of financial data such as inventory valuations are and cost of goods sold between the two businesses may be deceptive. Some instances enough data are presented in foot notes to the financial statements to restate information to a comparable basis. The analyst must keep in mind the lack of comparability of this information before drawing any certain conclusion. But despite this restriction in mind, comparisons of key ratios with different companies and with industry averages often suggest avenues for additional investigation.
Few characters emerging on financial statements have considerably importance standing by themselves. It is the relationship of a single figure to the quantity and direction of change over the years which are important in financial statement analysis. How can the analyst crucial in on important relationship? How does the analyst dig the important trends and changes in a business? Three analytical methods are commonly used; dollar and percentage changes on statements, common-size statements, and financial markers formulations.
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