Financial Statement Analysis and Financial Forecasting

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Financial Statement Analysis and Financial Forecasting

4.1 Introduction. The lesson will consist of basic financial statements, its relevancy, reliability and quality as a basis for making decisions. Focus on the decision-making role of accounting system has to be elaborated. Also ratio analysis as decision tool with forecasting models is discussed. The basis concept of preparation of financial statement and its usefulness is included with ratio analysis. Cash flow analysis and financial planning with forecasted financial statement are covered.

4.2 Source of Financial Information. Accounting is the guide-post for management. A firm should know the financial implications of its operations. The financial score of the firm is kept by
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Measures assets and liabilities in monetary units and in accordance with cost principles. Communicates information about assets (resources), liabilities (out side claims), and owners’ equity.

4.3.4 Profit and Loss Account (Income Statement). Income statement is considered as a very significant statement, with more attention to the firm’s earning capacity as a measure of its financial strength. The earning capacity and potential of a firm is reflected by its income statement. The generally accepted convention is to show one year’s events in income statement. Since the income statement reflects the results of operations for a period of time, it is a flow statement. The income statement presents the summery of revenues, expenses and net income of a firm. It serves as a measure of the firm’s profitability. Revenues are amounts which the customers pay to the firm for providing them goods and services. The firm uses economic resources in providing goods CDCE Page 2

and services to customers. The cost of the economic resources used to earn revenues during a period of time called expenses. Thus, to determine net income, the accounting system matches expenses incurred during the accounting period against revenues earned during that period. The matching of expenses with revenue is called matching
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