Analysis and Interpretation of Financial Statements.doc -...

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UNIVERSITY OF NAIROBI SCHOOL OF BUSINESS DEPARTMENT OF FINANCE AND ACCOUNTING MASTER OF BUSINESS ADMINSTRATION DEGREE PROGRAMME DAC 501: FINANCIAL ACCOUNTING © Abdullatif Essajee and Herick Ondigo ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT Introduction: Financial statements are essentially historical and static documents. They tell us what has happened during a particular period or series of periods of time. The most valuable information to most users of financial statements or reports, however, concerns what probably will happen in the future. The purpose of financial statement analysis is to assist statement users in predicting the future by means of comparison, evaluation and trend analysis. The first procedure in financial statement analysis is to obtain useful information. The main sources of financial information include, but are not limited to, the following: (i) Published Reports Quoted companies normally issue both interim and annual reports, which contain comparative financial statements and notes thereto. Supplementary financial information and management discussion as well as analysis of the comparative years’ operations and prospects for the future will also be available. These reports are normally made available to the public as well as to the shareholders of the company. (ii) Registrar of Companies Public companies are required by law to file annual reports with the registrar of companies. These reports are available for perusal at the registry upon payment of a minimum fee. (iii) Credit and Investment Advisory Agencies Some firms specialize in compiling financial information for investors in annual supplements. Many trade associations also collect and publish financial information for enterprises in various industries. Major stock brokerage firms and investment advisory services compile financial information about public enterprises and make it available to their customers. Some brokerage firms maintain a staff or research analysis department that study business conditions, review published financial statements, meet with chief executives of enterprises to obtain information on new products, industry trends, negative changes and interpret the information for their clients. (iv) Audit Reports When an independent auditor performs an audit, the audit report is usually addressed to the shareholders of the audited enterprise. The audit firms frequently also prepare a management report, which deals with a wide variety of issues encountered in the course of the audit. Such a 1
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management report is not a public document, however, it is a useful source of financial information. (v) Government Statistics and Market Research Organizations Objectives of Financial Statement Analysis Financial analysis is the process of critically examining in detail, accounting information given in financial statements and reports. It is a process of evaluating relationships between component parts of financial statements to obtain a better understanding of a firm's performance and financial position. Financial statement analysis involves three basic procedures:
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  • Fall '17
  • mwangi

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