XBRL in Financial Statement Analysis

XBRL in Financial Statement Analysis

Table of Contents

Section 1: Literature Review1

Section 2: Analysis of Financial Statements5

Current Ratio5

Net Profit Margin5

Debt to Equity Ratio6

Usefulness of XBRL in my Experience6

Conclusion8

References9

XBRL in Financial Statement Analysis

Section 1: Literature Review

XBRL (eXtensible Business Reporting Language) is a tool used by investors for gathering information, which is required by them in an explicit computer readable representation. This affords investors the best opportunity to understand, compare and analyze, while enabling them to leverage readily accessible tools without the burdens of costly, error-prone report translation and data rekeying. However, these benefits can only be realized if the reports created using XBRL are constructed with sufficient quality and consistency (Gomaa et al. 2012: pp. 19-25).

Companies that led the way to data-interactive financial reporting are now facing their first exposure to full liability for the content of their filings--and exposed they are, with no audit to backstop litigation or regulatory action (Kugel 2012: pp. 38).

XBRL has the potential to provide companies with an automated method for generally accepted accounting principles (GAAP) financial reporting. Financial statements, tax filings, and Securities and Exchange Commission (SEC) reports are examples of the financial reports that can be filed in XBRL format. This information can quickly and easily be uploaded into a variety of analyst software (Haseqawa et al. 2004: pp. 46-51).

Despite the claimed benefits of using XBRL and the software that has been developed for this technology, it has taken more than five years for the filing of financial statements in XBRL to become mandatory in the United States. On February 3, 2005, the SEC announced a voluntary program for registrants to submit filings (beginning with 2004) using XBRL. This rule was initially proposed in October 2004. Microsoft was the first company to submit a quarterly report for this period in XBRL format. On December 17, 2008, the SEC announced that all public companies will be required to submit their SEC reports in XBRL, making it much easier to collect, manage, and share financial data. This recent mandate for mandatory reporting in XBRL increases the urgency for research on the potential impact of using XBRL for financial analysis.

Currently, XBRL is much hyped but little used. There is little evidence that XBRL technology can, in reality, change or improve decision-making. Yet, evidence suggests that technologies (e.g., decision support systems) can improve information search processes and decision outcomes.

The largest public calendar-year companies that submitted their third-quarter financial statements through the still-evolving XBRL system are at risk. That is because the Securities and Exchange Commission no longer considers these companies to be simply "furnishing" their financial statements. Now, they are "filing" them through XBRL. It is a legal distinction that provides cover during a transition period, as companies get used to the new system. There is no change to the rules they have to follow, but it means that an XBRL exhibit has the same liability as the HTML financials (Cunningham 2005: pp. 125-135).

The SEC required the largest domestic public companies--those with a public float ...