Financial Statement Analysis is a method of reviewing and analyzing a company.pdf

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Financial Statement Analysis is a method of reviewing and analyzing acompany’s accounting reports (financial statements) in order to gaugeits past, present or projected future performance. This process ofreviewing the financial statements allows for better economic decisionmaking.Globally, publicly listed companies are required by law to file theirfinancial statements with the relevant authorities. For example,publicly listed firms in America are required to submit theirfinancial statements to the Securities and Exchange Commission (SEC).Firms are also obligated to provide their financial statements in theannual report that they share with their stakeholders. As financialstatements are prepared in order to meet requirements, the second stepin the process is to analyze them effectively so that futureprofitability and cash flows can be forecasted.Therefore, the main purpose of financial statement analysis is toutilize information about the past performance of the company in orderto predict how it will fare in the future. Another important purposeof the analysis of financial statements is to identify potentialproblem areas and troubleshoot those.© Shutterstock.com | samui
Here, we will look at 1) theusers of financial statement analysis, 2)themethods of financial statement analysis, 3)key accounting reports(the balance sheet, income statement, and statement of cash flows) andhow they are analyzed, 4)other financial statement information, and5)problems with financial statement analysis.USERS OF FINANCIAL STATEMENT ANALYSISThere are different users of financial statement analysis. These canbe classified into internal and external users. Internal users referto the management of the company who analyzes financial statements inorder to make decisions related to the operations of the company. Onthe other hand, external users do not necessarily belong to thecompany but still hold some sort of financial interest. These includeowners, investors, creditors, government, employees, customers, andthe general public. These users are elaborated on below:1. ManagementThe managers of the company use their financial statement analysis tomake intelligent decisions about their performance. For instance, theymay gauge cost per distribution channel, or how much cash they haveleft, from their accounting reports and make decisions from theseanalysis results.2. OwnersSmall business owners need financial information from their operationsto determine whether the business is profitable. It helps in makingdecisions like whether to continue operating the business, whether toimprove business strategies or whether to give up on the businessaltogether.3. InvestorsPeople who have purchased stock or shares in a company need financialinformation to analyze the way the company is performing. They usefinancial statement analysis to determine what to do with theirinvestments in the company. So depending on how the company is doing,they will either hold onto their stock, sell it or buy more.

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Term
Fall
Professor
NoProfessor
Tags
Balance Sheet, Income Statement, Generally Accepted Accounting Principles

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