The Financial statements of a company or individual are the documents that reflect the historic financial information of the entity. This includes a detailed and accurate record of the assets and liabilities as well as the income and expenses and also the cash flow of the entity.
The Financial Statements
Financial statement as communications medium provides a valuable summary of the entities economic history. It is useful to establish the performance as well as the future potential of the entity. The financial statements that will be discussed in this article are:
The Balance sheet - this is a record of the assets and liabilities on a given date. The Income statement - this is a record of the income and expenses for the reporting period. The Cash Flow statement - this is a record of the sources and application of funds that includes operating, investment, and financing activities and how they impacted on the cash position during the reporting period. The Purpose of Financial Statements
The primary purpose of the accountant is to provide appropriate information in a standardized format for the taking of financially based decisions. For this purpose the financial statements generally follows a standardized structure. The financial statements are a record of the activities but do not provide an evaluation of the data. Despite the important role of the financial statements they do not provide an evaluation of the accounting results. In order to be able to use the information contained in the various financial statements for financial decision-making, a number of measurements and evaluations needs to be made to the numbers. Only then will the information be useful as a tool for decision-making.
The Purpose of Measurement and Evaluation
The purpose of the conducting measurements and making evaluation is to provide answers to the following questions:
Why there are no excess funds available? Are the reporting entity financially sound? Would it be possible to make further loans? Will available cash generating be sufficient to provide in the anticipated demand? The format and type of information obtained during this process will depend on the intended users of the information.
Interpreting the Numbers
The conducting measurements and the making of evaluation process basically consists of the rearranging of the information in order to obtain information in a format that can be used to appraise the performance, activities, financial health, stability and growth potential.
In order to conduct a proper evaluation and interpretation of financial statements the following important steps needs to be followed.
Conduct a superficial analysis of the financial statements in order to obtain an initial feeling for the areas that needs special attention. Conduct an evaluation of the flow of funds in order to establish the ability of the entity to generate cash as well as the needs for funds. Conduct a ratio analysis in relation to Rentability also sometimes called profitability,Risk and Growth Analysis of non-financial information Conclusion
From the above introduction to financial statements it is clear that not all the information necessary to make sound financial decisions is readily available form these statements. A number of ratios need to be calculated and compared with others to enable the decision maker to draw the correct conclusions. It should be remembered that the financial statements reflect the historic activities and that decisions are taken about the future. This can only be done by drawing conclusions about trends of the different ratios rather than the actual historic numbers.