It is important to conduct analytical activity on the overall performance of an organization in order to ensure future progressions towards profitability and success. One of such measures is financial statement analysis, which “is the process of analyzing historical financial statement data for the purpose of developing forecasts of future earnings” (Monahan, 2018, p. 107).
In other words, the key emphasis is put on assessing the financial performance of an organization or company with the goal of ensuring a higher degree of profitability and growth. It is a highly important area of study due to its capability to “systematically measure the effect of factors computed using these statements and to determine their ability to predict future returns” (Tulchinsky, 2020, p. 141). It provides valuable information for both the company management as well as investors, and the former is obligated to inform the latter on the overall state of a publicly owned corporate entity.
More specifically, financial statements are critical as measures of accountability, and they allow the interested parties to be able to predict and identify warning signals. The analysis also serves as a management report card and as an analytical tool (Revsine et al., 2021). Therefore, the purpose of financial statement analysis can be considered as a multidimensional one with the goal of comprehensively assessing the overall business’s health. It should be noted that the financial statement analysis allows to spot key weaknesses and vulnerabilities of organizational performance, and it also increases the mandatory level of accountability. For example, financial statements are an invaluable source of data for ensuring that no fraudulent activities are taking place, which ensures a high degree of transparency.
The major takeaway from financial statement analysis is manifested in three essential documents, which are the cash flow statements, profit and loss statements, and the balance sheet. In the case of the latter, shareholders can learn and understand the current state of a company’s assets and liabilities as well as stakeholders’ equity. A cash flow statement enables a more direct look at the cash movements within an organization in three major channels, such as investing activities, financing activities, and operating activities. Lastly, profit and loss statements provide information on the profitability of a business with an emphasis on revenue and expenses, which yield profit.
The Biblical implications of reliable and representationally faithful financial statements are manifested in the fact that it ensures transparency and honesty in business operations. The Holy Bible states: “Do not have two differing weights in your bag—one heavy, one light. Do not have two differing measures in your house—one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the Lord your God is giving you” (The Holy Bible: New International Version. 1973/2011, Deuteronomy 25:13-15).
In other words, the verse emphasizes the importance of honesty and transparency in regard to financial transactions and operations, which means that companies and businesses need to adhere to strict regulatory standards of ethical business conduct. It is of paramount importance to thoroughly and diligently conduct financial statement analyses to ensure that the shareholders and company managers are aware of the major weaknesses and threats since one might not intentionally mean harm or dishonesty, but the implications are still relevant to consider. Thus, financial statements play a vital role in increasing and preserving accountability.
References
Monahan, S. J. (2018). Financial statement analysis and earnings forecasting. Foundations and Trends® in Accounting, 12(2), 105–215. Web.
Revsine, L., Collins, D., Johnson, B., Mittelstaedt, F., & Soffer, L. (2021). Financial Reporting and Analysis (8th ed.). McGraw-Hill Education.
The Holy Bible: New International Version. (2011). Bible Gateway. Web.
Tulchinsky, I. (2020). Finding alphas: A quantitative approach to building trading strategies. John Wiley & Sons.