Financial Statements Analyses and Their Implications to Management

Analyses of financial statements

Set to answer a wide range of questions of users.

Profitability

• The firm's ability to yield a sufficient return on company sales assets and invested capital.

• The firm's capacity to generate earnings vis-à-vis relevant costs incurred during a specific period of time.

Liquidity and Stability

Working capital position or short-term financial position. The firm can meet or pay its current or short term maturing obligations.

Asset Utilization or Activity

• Pertains to how efficient the company is in managing its resources.

• The firm's speed or pace in turning over accounting receivable, inventory, and long-term assets. This reveals the frequency of the firm in selling its products or in collecting its receivables.

• As fixed or long-term assets are concerned, it shows how the company uses its fixed assets to yield revenue.

Debt-utilization or Leverage

• The overall debt status of the company

• It measures the degree to which the firm is financed.

• The debt is evaluated using other variables like assets, equity, and earning power.

Examine the present and past SFP and the results of operations (IS) to determine the best suitable estimate and predict the company's future state and performance.

Primary purpose of financial statement analysis

Conclusive, refutable

Interpretations of financial ratios are not ultimately conclusive. Results from the analysis are refutable.

Its failure to consider changes in the purchasing power, inconsistencies, and dissimilarities in the accounting principles, policies, and procedures used by the firms in the industry.

Limitation #1 of Financial Statements

Its failure to consider changes in the purchasing power of occurrence.

Limitation #2 of Financial Statements

The age of financial statements is a limitation.

Limitation #3 of Financial Statements

Failure to read and understand the Notes to the Financial Statements' information may be obscure for managers in evaluating the degree of risk.

Limitation #4 of Financial Statements

Financial statements that have not undergone external auditing procedures may or may not conform with the Generally Accepted Accounting Principles (GAAP) and standards; thus, using these statements may lead to erroneous analysis and ultimately erroneous decisions.

Limitation #5 of Financial Statements

Financial statements that have not undergone external auditing procedures may prove to be inaccurate or, worse, fraudulent; hence, they do not fairly present the company's financial condition.

Limitation #6 of Financial Statements

Audited statements do not guarantee accuracy.

Limitation #7 of Financial Statements

Generally Accepted Accounting Principles

In the field of accounting, it has been a requirement by the Generally Accepted Accounting Principles to present comparative financial statements for the current year and the previous year, facilitating a comparison of the company’s financial position and results of operation.

Horizontal Analysis

The balance of the accounts in the financial statements of the previous year is subtracted from the current year, resulting in a change, either a growth or a reduction

Vertical Analysis

• Uses percentages/ratios that present the relationship of the different accounts or items in the financial statements

• Presents the relative size of an account or item in proportion to the whole (which is the base).

Common-size statements

• Sometimes called component percentage or 100 percent statements

• The outcome for the percentages is presented

• Management can have a better understanding of the changes to the total assets or net sales/net operating revenue that are transpired from one period to the next