Explain the importance of assessing a firm’s historical financial statements. Wh
ID: 2758508 • Letter: E
Question
Explain the importance of assessing a firm’s historical financial statements. What type of ramifications can occur if the statements are not taken into consideration?
Explain the importance of assessing a firm’s historical financial statements. What type of ramifications can occur if the statements are not taken into consideration?
Explain the importance of assessing a firm’s historical financial statements. What type of ramifications can occur if the statements are not taken into consideration?
Explanation / Answer
A firm's financial statements represent a firm's financial position at a point of time. Various expenses and incomes are reported in the income statement to arrive at the profitability of the company. Similarly, assets and liabilities are reported in the balance sheet. Cash flow statement is prepared to determine the actual cash balance available with the company. It is a must for any organization irrespective of its size and organization to report its business transactions in its books of accounts. These financial statements are used for performing ratio analysis on the basis of which the financial performance of a company can be evaluated over a period of time.
While investing in a company, it is essential for an investor to assess a firm's historical financial statements. Use of techniques like ratio analysis, vertical and horizontal analysis can provide valuable information on the growth of the company and its ability to survive in the near future within the industry. It is on the basis of these historical financial statements, that the projection for future operations of the company are based. Additionally, a company wishing to borrow money from banks/financial institutions or through public issue is required to provide financial statements for previous years.
If historical financial statements are not taken into consideration, it may not be possible to determine the future prospects of the company. Also, future projections based on the most recent financial statements may not provide accurate results. The comparision of performance of one company with another company on the basis of current financial statements may not provide relevant information for decision making purposes. It is practically impossible for a company to obtain loan without an assessement of previous year's financial statements by the bank.
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