Use of Financial Statements for Predicting the Corporate Success or Failure

By

ACKNOWLEDGEMENT

I would like to thank my supervisor for supporting me throughout my project and giving his valuable suggestions. Finally thanks to all my friends and family for their utmost support and inspiration.

DECLARATION

I, (Your name), would like to declare that all contents included in this dissertation stand for my individual work without any aid, & this dissertation has not been submitted for any examination at academic as well as professional level previously. It also represents my own views & not essentially the ones associated with university.

Signed __________________ Date _________________

ABSTRACT

The research study highlights the use of the financial statements in predicting the future success or failure of the corporations. The review of the financial statement makes it possible to expose the resources from where the corporations obtain them, how these resources are used and to what extent, these resources are actively used. The financial statements are largely used to evaluate the lending and investing decisions of the corporations. The financial statements are used at all the levels of the management in order to make the financial investment fruitful. The most effective way of determining the competitiveness and effectiveness of the corporations are the cash flows that compare the corporations from other firms in the market. The cash flow is an important element of the financial statement that is used by the financial analysts to compare the market performance and the effectiveness of the corporations. The financial analysis is largely depended on the profitability ratios of the financial statements. The profitability measures that include the return on assets and the net sales to income have long been determined as the part of the financial analysis. The Z-score methodology has been used in the research study in order to analyse the soundness of this method. The Z score methodology is based on certain financial ratios on the basis of which the future performance of the corporations is measured. This method was invented by Edward Altman who was a finance professor in the New York University. The method is used to measure the performance of the corporation by analyzing the probability of its bankruptcy. It also analyse the financial health of the corporations. This method include certain financial ratios that include the retained earnings, total assets, EBIT, Market value of equity, net sales working capital and total liabilities of the corporations. There were chosen 10 firms that are based in the United Kingdom. Among these firms, five firms were bankrupt while other five were the non bankrupt firms.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

CHAPTER 1: INTRODUCTION1

Background of the research study1

Problem Statement3

Aims and objectives of the Research study3

Significance of the research study3

Rationale of the research study5

Structure of the thesis6

CHAPTER 2: LITERATURE REVIEW9

Theoretical Framework9

Financial Statement10

Structure of the Financial Statement12

Advantages of the Financial Statement14

Significance of financial statement15

Discuss how a business manager may benefit from an understanding of this statement.17

Income statement and its application for predicting the current or future position17

Role of Financial Statements for predicting corporate success or failure17

Financial Ratios19

Leverage Ratios24

Prediction of ...