Essay on Financial Statements and Their Analysis

The life and success of any company or corporation depends on the quality of decisions made by its managers and staff. A high quality of these decisions can only be reached if the company’s managements has the access to reliable data and information and uses precise, fair and independent financial statements which reflect the company’s overall performance, threats and opportunities. That is why the process of analyzing the company’s financial statements is very important.

According to the economic dictionaries a financial statement is a formal record of the financial activities of a business, person or other entity. For a business enterprise, all the relevant financial information is presented in a structured manner in a form easy to understand.

There are four basic financial statements that are used in all companies and industries – the balance sheet (reflects the company’s assets and liabilities), the income statement (gives the information on the company’s income, expenses, profits and losses over a period of time), the statement of retained earnings (shows the changes in the company’s earnings) and the statement of cash flows (reports on the cash flow activities, mostly in operating, investing and financial activities).

The main purpose of all these statements is to provide high quality information about the company’s current financial position and performance and to give further ground for making important managerial decisions. It is quite obvious that to reach these goals, the firm’s financial statements should be easy to understand, precise, reliable, relevant and comparable. The financial statements may be formed both for the internal and the external users. The internal users are, of course, the company’s managers that make their decisions. The banks, financial institutions and prospective investors can be referred to external users that form their relations with the company according to its market and financial position. For example, analyzing the company’s financial statements, a bank would decide whether to grant a company with a loan or not. The investors compare the financial statements of different companies and chose, where to put their money. That is why it is vital for a company to present only reliable and fair statements. There are two main requirements to be met – first, the financial statements should be prepared according to the GAAP; second, these statements have to be checked by an external independent auditor, which will find and correct all possible mistakes and misstatements.

The company’s financial statements provide a basis for a wide range of analysis methods, for example, the analysis of the past, present and future company’s performance and all types of the comparative analysis. The results of such analysis help to discover the main trends in the company’s development avoid crisis situations and take necessary measures depending on the company’s performance and financial possibilities.