Analyzing and interpreting financial statements

Analyzing and interpreting financial statements

Introduction

In modern era, world has observed incredible strategy restructuring and suggestion being provided to overcome and manage the way through which organization used to comply their financial work. This constant reformation is only because of increasing frauds in financial framework that have forced the regulating bodies to introduce such policies and framework through which they can affectively monitor the accounting policies of the modern organization.

The perception of tempering with financial figures is not new as history is filled with various companies like “Enron and others” that have collapsed because of improper activities (Ball, 2006). Organization primary objective is to enhance the market value of its current and probable investors and this sometimes prompt these companies to alter their financial statements so that they can attract more investors as they are the major sources of overcoming their financial shortage. The most recent example of financial scandals that have shock the nation is of “Shell” the world largest producer and seller of oil across the globe. The company was charge of exaggerate oil assets to catch the attention of investors and the top management has ultimately confessed of indulging in wrong activities (Beck et al, 2006). Thus, in light of these frauds, it became important to secure the data present in financial statements as interest of various important personals was at stake and thus, financial authorities of USA introduced GAAP (Generally accepted accounting principles) to review the financial strategies used by companies and endow them with standard format of producing financial statements.

Similarly, several other countries have instructed their business communities to implement accounting rules and regulation developed using the principles of IFRS (International financial reporting standards) as it would enable the companies to eradicate incongruity in financial statements, enhancing investment choices for investors, and publishing every aspect of financial information to the general public.

Discussion

Use of financial statements in market place

Financial statement of companies describe its financial position in the market and enables them to fulfill the desires of several important elements including (shareholders and stakeholders) by providing these people with comprehensive annual reports that contain detail information of company financial position and it also act as a medium of communication.

Moreover, growth and triumph of any organization is entirely depended on the ability of its management to make quality decisions (Chen et al, 2011). The top management of the company can only make crucial decision if they have the ability of appropriately using important financial information and presenting this crucial information in accordance with the standards prescribed by GAAP and IFRS.

Moreover, (De Franco et al, 2011) has explained financial statements as a proper documentation of companies financial activities which enable shareholders, stakeholders, and other individual to compare and analyze the company performance from preceding years and based on that in-depth evaluation they are able to take investment decision. () has agreed with above facts but has further explained that every company whether small or large contains four basic types of financial ...