FINANCIAL ACCOUNTING

Purpose of Financial Accounting

Purpose of Financial Accounting

Financial Statements is one most important thing necessary for the analysis of company's performance and it's working. Financial statement analysis is comprehensively conducted, in order to evaluate the past and current performance of the company. It also helps analyst analyze the kinds of risks the company would be facing in the future. Development of financial statements is necessary according to the requirements of the body regulating company. This helps the stakeholders of the company to retrieve information about the company. Financial Statement analysis is of such importance that it is used by many stakeholders including investors, creditors, banks, managers, security analyst, taxing authorities, regulatory agencies, customers and parties who require data for the company and economic analysis.

Financial Statement analysis requires data provided in the external reports of the company and the supplementary information provided by management. The analysis identifies different trends, relationship and turning points. Investors and creditors make the most use out of these financial statements. The objective of the use of financial statements vary from party to party, they also use different tools to judge the financial health of the company, but is often related to each other (Acton, D. 2009, pp. 79-82).

Past Performance and Current Position

Past behavior often gives a clue about the future performance of the company. Creditor or investors can look at past trends and performances that may look at the analysis of past sales, Net Income, cash flow and return on investment. This often gives a great insight about the future performance of the company. Analysis of current performance will help analyst understand what assets, the business own and what the liabilities it has to face are. It gives the analyst a great idea about how a company would perform in the future. These financial statements are of great help for public limited company, which are not normally listen on the stock exchange and do not have to follow the same regulations, as a public listed company has to follow.

Future Potential and Related Risk Past information is only important when it could be used to predict the performance of the company in the future. The investor predicts the performance of the company, so if the company is performing well the market price of the company may increase in the future, and the company would be able to pay dividends in the future. A creditor can judge the debt repaying ability of the company by analyzing the financial statements of the company. It could be done by either checking the debt ratio of the company, its cash flows and the interest expense of the company. This will determine the whether a credit must extend credit to the company or not. The investor and creditor can significantly predict and analyze the company by the analysis of company's profitability and liquidity respectively. The risk aspect of the company could also be considered by the analysis and decisions could be made ...