Printable template for balance sheet and income statement word example, Financial statements are all appropriate documents of the fiscal activities of a company, individual, or other entity. It provides a summary of a company or person’s financial requirement in both brief and long term. It is a tool used to convey financial information about an entity to those who would like to make determination and informed judgments concerning the entity’s financial position, results of operation and cash flows. There are four financial statements Balance Sheet, Income Statement, Statement of Cash Flows and Statement of changes in owner’s equity. All these four financial statements have special purpose but they are interrelated.
The function of a financial statement is to reflect the financial strength or weakness of a small business. Internally, it’s used by a company to make fiscal decisions like hiring new employees or even layoffs. When businesses are financially struggling they look to lower cost and the quickest way to cut costs is to eliminate workers. Now in a struggling market, employees are considered as costly liabilities, and companies and authorities are attempting to reduce those obligations as much as possible.
Managers will also be widely worried about the financial ratios. The ratios provide hints of how well the business and its business units are doing. Some of these ratios would ordinarily be used in a balanced scorecard strategy. The specific ratios selected are based on the provider’s strategy. For example a company that wants to emphasize responsiveness to clients may closely monitor the inventory turnover ratio. Since supervisors must report to shareholders and might want to raise funds from outside sources, supervisors must look closely at their financial ratios used by outside stocks to rate the organization’s investment possible and creditworthiness.
Though financial statement analysis is an extremely useful tool, it has two limitations. These two constraints demand the comparability of financial information between businesses and the need to check past ratios. Comparison of a single company with the other can provide invaluable clues about the financial health of a company. Unfortunately, differences in accounting methods between businesses sometime makes it tough to compare with the firms’ financial data. By way of instance if one firm values its inventories from the LIFO method and another company by average cost method, subsequently direct comparisons of financial data such as stock valuations are and price of products sold between both businesses could be misleading. Some instances enough information are introduced in foot notes to the financial statements to restate information to a similar basis. Otherwise, the analyst must remember the lack of comparability of this data before drawing any definite conclusion. But in spite of this restriction in mind, comparisons of important ratios with other businesses and with business averages frequently indicate avenues for further investigation.
Few figures appearing financial statements have much importance standing by themselves. It is the relationship of one figure to another and the quantity and direction of change over time that are important in financial statement analysis. How does the analyst key in on important relationship? How can the analyst dig the essential trends and changes at a business? Three analytical techniques are commonly utilized; dollar and percent changes on announcements, common-size statements, and financial ratios formulas.
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