Printable college personal statement template, A Financial statement is a business’s resume reflecting the fiscal activity of the business. There are four important elements which are part of a financial statement. These elements would be the balance sheet, income statement, statement of retained earnings, and a record of cash flow. A balance sheet reports a company’ net equity, liability and assets. An income statement states a business’ expenses, profits and earnings over a particular period of time. A statement of retained earnings documents the changes in a business’ retained earnings within a period of time. The statement of cash flow states a business’ operating, investment, and financial income flow. All these elements of a financial statement are utilised to gauge the financial profitability and action of a small business. A negative or positive fiscal statement can determine if a business is in a strong or weak financial situation.
Financial statement analysis entails careful choice of information from financial statements to its main purpose of forecasting the financial health of the corporation. This is accomplished by analyzing trends in key financial information, comparing financial data across businesses, and assessing key financial ratios.
Knowing financial statements help managers and owners make better choices monitoring the business and plan for future expansion. Financial statements provide a crystal clear understanding of the business’ strengths and weaknesses. They are vital for business owners that wish to succeed and expand their business.
Although financial statement analysis is a highly practical instrument, it has two limits. Both of these limitations involve the comparability of financial data between businesses and also the need to look past ratios. Comparison of a single firm with the other can offer valuable clues about the financial health of a company. Unfortunately, differences in accounting procedures involving companies sometime makes it hard to compare with the companies’ financial data. For instance if a single company values its inventories by the LIFO method and a different firm by average cost method, then direct comparisons of financial information like inventory valuations are and price of products sold between both firms may be deceptive. Some times enough data are introduced in foot notes to the financial statements to restate information to a similar basis. The analyst must keep in mind the absence of comparability of the information before drawing any definite conclusion. Nevertheless, in spite of this restriction in mind, comparisons of important ratios with different companies and with business averages often suggest avenues for further investigation.
Few figures emerging on financial statements have much importance standing by themselves. It’s the relationship of a single figure to another and the quantity and direction of change over time which are important in financial statement analysis. How does the analyst crucial in on important relationship? How does the analyst dig the important trends and changes at a business? Three analytical techniques are commonly utilized; dollar and percentage changes on statements, common-size statements, and financial ratios formulations.
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