Financial statements are important since they represent a business entity. They comprise “income statement, balance sheet, statement of earnings, statement of changes in financial position, and the cash flow statement” (Siddiqui, 2014, para. 4). Thus, they reflect such aspects as the financial position, business entity’s performance, or alterations in its financial position during the reported period. Financial statements make a useful source of information for the stakeholders interested in a business entity because they need some grounds to make financial decisions. Financial statements’ analysis can be interesting for investors, creditors, company management, and regulatory authorities (“Financial statement analysis,” 2017).
Financial analysis helps to reveal the existing strengths and weaknesses of a company (Siddiqui, 2014). The study of the financial statement allows making conclusions about the efficiency, profitability, and liquidity solvency of a business entity. Moreover, analysis of recent financial statements for a definite period of time can be used to forecast the future performance of a business entity (Brigham & Ehrhardt, 2014). However, it is important to consider macro- and microeconomic factors that would influence the performance of a company. Frequently, ratios are used to present a company’s performance. The major general groups of ratios used in financial statement analysis include liquidity, activity, leverage, and profitability ratios (“Financial statement analysis,” 2017).
Still, some problems can possibly appear during financial statement analysis. First of all, they deal with comparability between financial periods. A problem can appear in case the company changed its accounts, and some information for the previous periods is not available and thus cannot be compared. Secondly, there can be a problem in comparing different companies because they provide different ratios. On the whole, the financial statement is a useful document, but it should be created carefully and consider many significant factors.
References
Brigham, E.F., & Ehrhardt, M.C. (2014). Financial management: Theory & practice (14th ed.). Mason, OH: Cengage Learning.
Financial statement analysis. (2017). Web.
Siddiqui, F. (2014). Financial analysis: A short note on tools and techniques of financial analysis.Web.