FINANCIAL STATEMENTS

Advantages and Disadvantages of Financial Statements

Advantages and Disadvantages of Financial Statements

Introduction

A financial statement of financial report is a record of the financial activities of a business. All the relevant information regarding a business is reported in a structured manner in financial statements that is easy to understand for all the stakeholders. The investors review and analyze the information contained in these statements before taking decision whether to invest or not. These statements serve a starting point for analysts who are interested in analyzing the company as a whole or its stock. It reflects the earnings and spending of a company within a given time frame. The set of financial statements most commonly includes four financial statements, footnotes to financial statements and a management discussion and analysis. These statements include balance sheet, income statement, cash flow statement and statement of changes in equity. Footnotes include the assumptions by management in preparing these statements and explain each item in these statements in detail and management discussion and analysis discusses the management view on the affairs of business.

A financial statement is also used by management to identify company's assets and give an indication of future finances. But in the recent past many companies have manipulated their financial statements for personal interests and have misled many stakeholders. Financial statements in themselves have provisions that allow management to use those tools within their legal right. The paper analyzes the usefulness of these statements and at the same time explores the factors that limit the usefulness of these statements.

Discussion

Financial statements should be understandable, reliable and comparable among companies (Riedl 2010, pp. 3). The assets, expenses and equity reported on the financial statements are an indicator of the company's financial position and strength. Different users use these statements for different purposes. Managers of the company may use the information in these statements as an input for further analysis to identify the problem areas. Potential investors use the information in the financial statements to evaluate the feasibility of the investment and making informed decisions. Many organizations usually present these statements quarterly, semi annually or annually in their respective annual reports.

Balance sheet

Balance sheet is a listing of organization's assets, liabilities and owner's equity at a point in time (Fridson 2011, pp. 29). It shows the financial position of a company at a single point in time and also known as statement of financial position. It provides a summary of the company's resources; obligations and commitments and owner claims on these resources.

Assets and liabilities are classified as current and long term. Current assets are those resources that can be easily converted into cash such as account receivable, marketable securities, prepaid assets etc where as current liabilities are those obligations that are expected to mature within one year such as notes payable, account payable, current portion of long term debt, taxes payable etc. Liabilities represent the assets that are owed to creditors which are the primary owners of an organization ...