Financial reporting is the way companies show their performance to outside world. The objective behind financial statement analysis is to use the company’s financial statements & other relevant information to make economic decisions. Such an analysis is used to evaluate a company’s past performance & current financial position and project company’s ability to earn profits and future cash flows so that economic decisions like whether to invest in the company's securities or whether to extend bank credit to the company can be taken.
Financial statements are the different formats which have been prescribed by the law (accountancy) to be used for the purpose of financial reporting. Each format communicates a separate aspect of the business. Different Financial Statements are:
1. Statement of Financial Position (Balance Sheet)
2. Statement of Earnings (Income Statement)
3. Statement of Cash Flows
4. Statement of change in Shareholders’ Equity
Users of Financial Information
Direct vs. Indirect Users – Direct users are individuals who are directly affected by the results of a company. This includes investors and potential investors, employees, management, suppliers and creditors. These are individuals who stand to lose money financially if there are financial problems with the company.
Indirect users are basically those people or groups who represent direct users. They include financial analysts and advisors, stock markets and regulatory bodies.
Internal vs. External – This distinction is rather obvious in that internal users make decisions within the firm and external users make decisions from outside of the firm about whether or not to continue, start or change their relationship to the firm in question.
Because there are so many people using the financial information and they are using it for so many diverse purposes, there are a lot of different reasons that people need this information, such as to:
Make investment decisions,
1) Extend credit or not,
2) Assess areas of strength and weakness within the company,
3) Evaluate performance of management, or
4) Determine if the company is in compliance with regulatory requirements.
Financial statements are the different formats which have been prescribed by the law (accountancy) to be used for the purpose of financial reporting. Each format communicates a separate aspect of the business. Different Financial Statements are:
1. Statement of Financial Position (Balance Sheet)
2. Statement of Earnings (Income Statement)
3. Statement of Cash Flows
4. Statement of change in Shareholders’ Equity
Users of Financial Information
Direct vs. Indirect Users – Direct users are individuals who are directly affected by the results of a company. This includes investors and potential investors, employees, management, suppliers and creditors. These are individuals who stand to lose money financially if there are financial problems with the company.
Indirect users are basically those people or groups who represent direct users. They include financial analysts and advisors, stock markets and regulatory bodies.
Internal vs. External – This distinction is rather obvious in that internal users make decisions within the firm and external users make decisions from outside of the firm about whether or not to continue, start or change their relationship to the firm in question.
Because there are so many people using the financial information and they are using it for so many diverse purposes, there are a lot of different reasons that people need this information, such as to:
Make investment decisions,
1) Extend credit or not,
2) Assess areas of strength and weakness within the company,
3) Evaluate performance of management, or
4) Determine if the company is in compliance with regulatory requirements.
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