The role of the financial manager in the company is connected with the capital budgeting decisions. He/she deals with accounting principles and different financial processes. One of the most important and responsible work they do is making a financial statement analysis. The result of this process helps to see an exhibit summary of all company’s activities. However, like many other similar financial operations, financial statement analysis has its advantages and disadvantages. Moreover, it can help or mislead the financial manager to make decisions.
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John N. Myer said that financial statement analysis is largely a study of relationships among the various financial factors in a business, as disclosed by a single set of statements, and study of these factors as shown in a series of statements (Bhattacharyya D., 2011, p. 6). Financial statements and financial statement analysis are two parts of a continuous process. “Financial statements are compilation of financial data, arranged and organized in a systematic and summarized manner according to the accounting principles, to assess financial position of an enterprise as regards to its profitability, operational efficiency, long- and short-term solvency, and growth potential.” (Bhattacharyya D., 2011, p. 10). An analysis which critically examines the relationship between various components of financial statements with a view to obtain necessary and effective information from these is called financial statement analysis.
While doing financial statement analysis (FSA), the financial manager faces with different objectives, approaches and features, which have their own advantages and disadvantages. According to different techniques of FSA, manager can easily analyze and understand core areas of the functioning of the business of an enterprise. However, the manager can’t use only one technique for interpreting the overall performance of the enterprise and for decision making as well. That is why he/she would better use a combination of a few techniques for effective interpretation and analysis, which takes much time to prepare it (Bhattacharyya D., 2011).
According to the types of analyses, which are drawn as per GAAP (Generally Accepted Accounting Principles), the scope of differences among interpretations made by various analysis will be more or less. Moreover, each type needs different number of people that are involved in preparing and analyzing statements (Sinha G., 2009).
Limitation of the current ratio is one more reason that helps manager to make correct decision. To overcome limitations of current ratio (e.g. accounts receivable) and for getting more transparent picture about the financial position of firms, managers began to use different indicators (Sinha G., 2009).
FSA can be classified in various ways. According to the view of corporate information users there are two groups: corporate financial analysis (the main aim is to collect information on the factors influencing the affairs of the enterprise); and portfolio/security analysis (the main aim is to help in evaluating alternative investment opportunities). The disadvantage for managers is that pursuant to each group, measuring the qualitative aspects remains within its domain (Sinha G., 2009).
Financial statement analysis is a process of scanning financial statements for evaluating the relationship between the items as disclosed in these. It tells the financial strengths and weaknesses of the firm. However, when financial manager works on such analysis he/she faces with different points that are either helpful or interfering while manager tries to judge operational ability, profitability, solvency, managerial efficiency and overall performance of the enterprise more clearly.