Analysis of Financial Statements

Analysis of Financial Statements

Introduction

In simple words, financial statements mean the statements showing the financial affairs of a person, an enterprise , an organization, or an accounting unit. But what does the term finance' mean? The word has various shades of meaning. One of the meanings is “money resources of state, company, or person”. Another use of the word is “science of the revenue". Still another use is “management of money”. But money and finance do not convey the same idea. What is common among all the meanings stated above is the idea that finance is a fund containing something measurable in the quantity of money.

Financial management refers to the management of collecting and investing such funds. Hence, a financial statement refers to that statement which reflects collection of fund from various sources, cost of using such funds, investment of such funds in various assets, return accrued from such resources and similar bits of information. All commercial companies produce annual financial statements (also known as the annual report, the annual accounts). Generally, these have to be filed with the government, either centrally or in regional offices, and they have to be sent to shareholders.

In many countries, the government file is available to public, so that financial statements are in effect public and available to competitors or customers or suppliers and are regularly consulted by these. Equally there are credit information companies, which collect financial information and sell it to interested parties.

Many small companies do not like this exposure, but in large companies generally welcome it and indeed publish the data widely, including on their website. Large companies are well aware that this is the only independently confirmed information on the company which is widely available and is a major tool in engendering confidence in those with whom the company wishes to do business.

The annual accounts typically consist of the elements such as income statement that reports on sales, cost and profits of the company for the year and consequently are the main performance indicator as far as profitability is concerned.The balance sheet gives a picture at a given moment, the last day of the financial year; of how the company has been financed and how that money has been invested in productive capacity (plant, buildings, computers, stocks etc.).

The notes to the account can be anything from two or three pages to forty or fifty; the notes provide detailed analysis of some of the figures in the balance sheet and income statement, such as the dates when the loans fall due for repayment, or the different constituents of the total stock. Importantly, the notes also contain a statement of the different accounting policies followed by the company. They are increasingly a means of conveying nonaccounting information, such as commitments to honor futures contracts, to interested outsiders.

The notes are subject to audit.The cash flow statement is an analysis of the main cash movements through the company in the previous twelve months; cash created by the company through ...