Details of the assessment question: Financial statement analysis refers to an ex

Question

Details of the assessment question: Financial statement analysis refers to an examination of the viability, stability and profitability of a business enterprise as a whole or a particular project that it has undertaken. It is performed by expert professionals who prepare reports using the information taken from the company’s financial statements. According to the statement above, the financial statements become the main work for Financial statement analysis Prepare a essay 500 word to cover the following: 1- Who are the main users for Accounting Information-? 2- What are the Components of a financial statement?

Explanation / Answer

1----There are different users of the accounting information that is provided by the different financial statements. The first user is the organization’s management and board of directors that can use the information to assess the financial health of the organization, forecast future sales of the organization and perform budgeting for the different functions and or department. Besides, it helps the management to take proactive action so that organizational performance can be improved.
The second user is the investors who make investments and assess the profitability offered by the organization using the accounting information. These investors calculate ratios such as earning per share and dividend payout ratios, so that they can assess their own capital gain and return while they hold their own share of stocks. It helps them to make a right decision of either buy more stocks, sell the stocks or hold on to what they own as shares. Hence, it is the accounting information that makes them take an informed decision.
The third user is the regulatory agencies that evaluate the accounting information and ensure that the organization is taking all necessary steps, suggested by the guidelines and comply with the accounting norms. Further, the regulatory bodies also assess the necessary disclosures, the best practices and regular audit of the accounts done by the organization. Not doing so, will attract penalty to the organization.
The fourth user is the prospective investors who try to find the organization with potential of growth and make investments. Here, the accounting information helps them to know the hidden facts when they calculate the different ratios such as Price earning ratio, price to sales ratio, and ROI of the organization. Besides, they can also judge the future prospects of the organization using these ratios.
2----Though, there are different users, but there are different components of the financial statement that can be used by different people. The first component is the income statement or profit & loss statement that represents the sales revenue and expense details with net profitability and earning per share for the investors. P&L statement tells the business done by the organization for a period of time that can be for a quarter or for a financial year. Using this component, ratios such as profitability rations can be calculated with some valuation ratios also. The second component is the balance sheet. It is the component that tells about the assets, liabilities and shareholders equity of the organization at one particular time. It includes, fixed assets, current assets, long term loans and current liabilities, other than shareholder’s equity as well as retention & surplus. It helps to know the liquidity ratios and net working capital status as either positive or negative. The third component is cash flow statements or fund flow statements. It tells the net cash or funds created, by using the operating activities, financing activities and investment activities. These three components balance each other. For any error in P&L account and Balance Sheet, cash flow statement can be prepared correctly as it draws values from these two components.

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