As you begin to assess the financial statements of a corporation, you would use

Question

As you begin to assess the financial statements of a corporation, you would use many different tools. Please discuss the purpose of each tool/process below along with the insight that you would expect to attain from each: Vertical and horizontal analysis of the income statement and balance sheet Cash flow analysis Deep-dive review of account balances Ratio analysis You should also apply additional technical tools including: Structured Query Language (SQL) Open Database Connectivity (ODBC) Digital Analysis Outlier Investigation Stratification Summarization You should consider how each of these financial tools can provide insight into the company and help to develop a list of “red flags.”

Explanation / Answer

Vertical andhorizontal analysis of financial statements:- It helps in the managerial accounting in decision making,forward planning and to analyze the financial position of the firm or entity. Financial statements analyses are useful not only to the company but also to the external users such as shareholders,creditors, governments and financial institutions. If analysis reveals any unexpected differences in income statement accounts, management and accounting staff at the company should isolate the reasons and take action to fix theproblems. Cash flowanalysis:- It helps in determining the closing cashbalance at the end of the every financial year It also helps in identifying cash spent and cash received from various activities such as: operating,financing and investing activities etc., Free cash flow signals that the company is liquid enough inpaying debts, dividends interests etc. RatioAnalysis: The ratio of the current assets to current liabilities is called as current ratio. The ratio of quick assets to the current liabilities is called as quick ratio(quick assets=current assets-stock+expenditures) It gives the picture of the company’s profitability, liquidity,operational efficiency, owner’s equity. Contains various formulae in evaluating the company’sgrowth rate, turnover capabilities in various areas including debtors turnover, creditors turnover ratio and sales turnover etc. Deep-dive review of account balances:- By performing deep dive review of account balances each account gives a clear view of all the transactions made and done in theprejudicial to the interests of the company.    Performing such a review is time taking as it involves analysisof each and every transaction in an account.

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