The major intent of fiscal statement is to supply an overview of the company’s overall public presentation of the company’s operations and besides measure the company’s worth during the twelvemonth. Financial statement non merely assists the fiscal directors but besides the foreigners like creditors. shareholders etc. After reexamining the fiscal statements of the company all the stakeholders assess the company growing. investing chance. dividend profile etc after that note all the stakeholders made appropriate determinations sing the firm’s future’s position. .
Fiscal statements are besides helpful in subjecting the revenue enhancement return of the twelvemonth ( Besley. Brigham. 2001 ) . In basic footings fiscal statement is comprises on Profit & A ; Loss Statement. Balance Sheet. and on Statement of hard currency flows. There could be several grounds which signify the fact that it is soberly indispensable for one to understand the concern or the industry in order to understand the fiscal statements better. Some of them may be: 2. The type of information fiscal statements provides.
There are chiefly three types of information is available in Profit & A ; Loss Statement. Balance Sheet. and Statement of hard currency flows. All the statements have ain importance. Net income & A ; Loss Statement debates over the company’s gross coevals power. cost behaviour and construction and in the terminal on Net Income. The balance sheet provides an overview sing the company’s fiscal place. In the same clip the balance sheet besides discussed about the company’s assets. liabilities and proprietors equity. Cash flow statement discussed over the company’s operating. investment and funding activities during the twelvemonth.
It besides discussed on the in flow and escape of the hard currency and besides on the hard currency equivalents. 3. The restrictions of fiscal statements. The restrictions of fiscal statements are stated below: • Financial statements are debates over the historical facts they can’t address the tendencies like rising prices. growing rates etc ( Erich A. Helfert. 2001 ) . • The qualitative factors are non evaluated in the fiscal statements and frequently neglected because no organisation discussed the qualitative factors in the pecuniary footings.
Like repute of the company. employees public presentation etc ( Erich A. Helfert. 2001 ) . • It is the world that out dated information of the company’s fiscal profile is non worthy particularly when the company’s direction is willing to take more debt from bank ( Garrison. 2004 ) . • Whenever the fiscal statements are presented with out the notes so all the reported figures are image less. 4. The outside factors upon which the decisions drawn from these statements are reliant.
The most relying outside factors that makes an feeling on the fiscal statements are stated below: • Frequently changes in the revenue enhancement per centums make an impact on the firm’s net income. dividend. EPS. owner’s equity. stock monetary value. etc ( Besley. Brigham. 2001 ) . • Government’s ordinance on any appropriate concern slight distorts the fiscal statements of the company ( Besley. Brigham. 2001 ) . • Events go oning after balance sheet day of the months like instance filed in the tribunal of jurisprudence make a negative impact on the reported figures of the company ( Garrison. 2004 ) .
• Fluctuation the involvement rate per centum makes an feeling on the involvement disbursal of the company and besides on the monetary values of the bonds. 5. How points in common-size statements are presented. In order to make common size statements we express it in the signifier of per centums instead than dollar sums. It is easier to understand that we take the differences of sums twelvemonth by twelvemonth and divided that difference sum with the entire sum. Let’s assume: 2008 2007 Difference increase/ ( lessening )
Cash $ 150. 000 $ 100. 000 $ 50. 000 And Total Assets is $ 500. 000. Then Difference Amount/Total Assets x 100 50. 000/500. 000 ten 100 10 % . Means there is an increase of 10 % is reviewed from the twelvemonth 2007 to 2008. 6. How ratios in ratio analysis are computed and used. The expression of some of import ratios is stated below: • Average aggregation period ( in times ) = Net Credit gross revenues / Average debitors • Inventory turnover ( in times ) = Cost of goods Sold / Average Stock • Current Ratio = ( Current Assets / Current Liabilities )
• Total Debt Ratio = ( Entire Liabilities / Total Assets ) • Return on Equity = ( Net Income / Average Equity ) • Return on Assets = ( Net Income / Average Total Assets ) The utilizations of ratios are sated below: • Dividend output which expressed as a rate of return on the market monetary value of the stock. • Interest coverage ratio shows the debt service ability and capableness of a company and besides index of a company’s ability to run into its involvement payment duties ( Myers. Brealey and Marcus. 2001 ) .
• Debt ratio shows the per centum of entire plus financed by debt. from a creditor / bank’s position point. the lower debt ratio gives a positive signal to the creditor. • Current ratio besides suggest the houses liquidity place lower current ratio gives dismaying and negative signal to the creditor that house is fiscal crises and on the border of fiscal crunch ( Myers. Brealey and Marcus. 2001 ) . 7. Why most fiscal analysts prefer ratio analysis to common-size statements. It is rather easy to measure the fiscal public presentation of the company at a glimpse. It is the shortest manner to acquire an appropriate consequence.
Furthermore. common size statement is somewhat retentive and complicated to analyze the different accounting caputs ( Erich A. Helfert. 2001 ) . Reference Besley. Brigham. Scott. Eugene F. ( 2001 ) . Principles of Finance. Florida: Harcourt College Publishers. Brealey. Richard A. . Stewart C. Myers. Alan J. Marcus. ( 2001 ) . Fundamentalss of Corporate Finance. New York. McGraw Hill Helfert. Erich A. ( 2001 ) . Fiscal Analysis Tools and Techniques: A Guide For Managers. McGraw-Hill. Noreen. Eric W. . Peter C. Brewer. Ray H. Garrison. Managerial Accounting. 11. 2004.