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3 LITERATURE REVIEW3.1 REVIEW OF LITERATURE
Literature Review was done by referring previous studies, articles and books to knowthe areas of study and analyze the gap or study not done so far. There are various studies wereconducted relating to operational performance of the company from which most relevantliteratures were reviewed.
Kennedy and Muller (1999), has explained that “The analysis and interpretation of financial statements are an attempt to determine the significance and meaning of financial statements dataso that the forecast may be made of the prospects for future earnings, ability to pay interest and debt maturines (both current and long term) and profitability and sound dividend policy.”
T.S.Reddy and Y. Hari Prasad Reddy
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Without subjecting these to data analysis, many fallaciousconclusions might be drawn concerning the financial condition of the enterprise. Financialstatement analysis is undertaken by creditors, investors and other financial statement users inorder to determine the credit worthiness and earning potential of an entity.
Susan Ward (2008), emphasis that financial analysis using ratios between key values helpinvestors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds ithas deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option.
M Y Khan & P K Jain (2011), have explained that the Financial statements provide asummarized view of the financial position and operations of a firm. Therefore, much can belearnt about a firm from a careful examination of its financial statements as invaluabledocuments / performance reports. The analysis of financial statements is, thus, an important aidto financial analysis.
Elizabeth Duncan and Elliott
In accounting there is much to be learned, about the financial aspects of a business. In the past five weeks I have learned the importance of financial reports and how they relate to the success of an establishment. These reports may include balance sheets and income statements, which help accountants and the public grasp the overall financial condition of a company. The information in these reports is really significant to, managers, owners, employees, and investors. Managers of a business can take and deduce financial
Abstract : Analysis of financial statement of a company is an important because it is useful to obtain Information
Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.
These statements can also be used to make a company look stronger, than they appear. Therefore, it is important for investors to do extra research on companies. As an investor, the information will be used to decide the true financial position of a company. If one is, a government official this information can be used to find out if a company is out of compliance. This is an important
Financial accounting statements can help a user to make future decisions by showing the concerned business’s health. It shows where money is being generated, spent and lost, depicting the financial performance and financial position. The statements can also help in situations such as raising fresh capital in the form of a loan, e.g. a bank will most likely require these statements to show the business’s credibility or worthiness. The statements help influence managerial decisions on which direction the business needs to head, and how to best maximize profit.
Analysis of financial statements is necessary to understanding performance. According to Investopedia (2015), there are two methods of analysis, trend or horizontal analysis and vertical analysis. As horizontal analysis is a comparison over a period of time, vertical analysis compares items within a specific financial statement based on a total amount, such as assets or liabilities. Common size financial statements are utilized to conduct vertical analysis (Vitez, 2015). With the amount of comprehensive information available, business managers are better equipped to make
Financial statements provide documentation of a company’s financial history for a set timeframe. One of the financial statement used by investors, creditors, and mangers is the balance sheet. The second statement used by accountant’s income statement, which is also important to shareholders. The third statement is the retained earnings statement, and the fourth financial statement is the statement of cash flows. Each financial statement has a different purpose and shows different aspects of the company’s finances. However, these financial statements are integrated and work together to
Financial statements of the company are significant for the investors who would like to venture into the business operation. It gives them the insight whether the business is making profits or it is doomed to fail;
1. the income statement, 2. the balance sheet and 3. the statement of cash flows). Financial statement analysis is applied both to historical data, which reflect the results of the past managerial decisions, and to forecasted data, which comprise the roadmap for the business’s future.
The equity investors are interested in knowing about the profitability, solvency and market ratios of the company. Higher profitability ratio will increase the market value of the company. The market ratios like price earnings ratio, earnings per share, dividend yield, etc. tells the exact position of the company’s share in the market. Favorable market ratio indicates the increase in market capitalization for investors. The equity investors are also interested in knowing the solvency ratio as high debt will pose danger to the ownership of the company. Higher debt is harmful for the liquidity position of the company and in some worst cases; the company even faces the risk of liquidation.
A financial statement is a document in which the current situation of the user at the end of the fiscal year is known. The financial statements are important because they are serious and official recognition that allow a much organised idea finance documents. They help not only to see the past, but to learn from it to improve the following year. They also allow study of clear and effective way he was saved was spent and more. The financial statements reflect the financial position of the company, financial performance and cash flows of the company, it is significant to note that the correct depiction of the impacts of transactions and other events and circumstances according to the explanations and a criteria identification of assets, liabilities, income and expenses goes in the same outline (Schroeder et al., 2011).
Financial statements are a very useful tool for individuals interested in the organization. Investors use the information to determine if it a wise decision to put their money into the organization. Investors need to determine if the organization has been successful and profitable and will continue to be successful and profitable. Creditors use the financial statements to determine the amount of credit that should be advanced to the organization. Employees generally do not look at the financial statements, but if a new executive was thinking of joining the organization, he or she may want to see the potential of the organization to make sure the investors are becoming a part of a successful organization. Management uses the financial statements on a monthly basis to determine which areas of the organization are profitable and which areas of the organization that needs to be discontinued or restructure to become more profitable.
Financial accounting reports, to include balance sheets and income statements provide accountants and the general public a snap shot of a company’s overall financial condition and possibly their future financial position. This financial information is very important to business owners, executive managers, private investors and employees. The information contained in a company’s financial report has several important uses. Managers and senior leaders of a business can take extrapolated financial data from the income statement which details monthly earnings as well as the company’s liabilities and equity position. This information can then be used to analyze and forecast future annual budgets. Additionally information obtained in these multiple types of reports can also be used to proactively predict trends that may have a negative financial impact on company’s future operations. On another note a company’s financial reports are used by lending institutions to determine their ability to receive and repay loans used to finance business operations.
Financial statements are used to track performance and explain differences in multiple companies (Melicher & Norton, 2013). The information available on these reports is important to have if you run a company, or are researching it for investment purposes. These statements can show where money could have been saved, or used in a different way. They are a useful tool for management to adjust their approach as needed. There are different industries, which results in a variety of assets, liabilities, products, services, and approaches to producing profit (Melicher & Norton). There are large and small companies and financial statements provide a way to research and, or compare them. The following will discuss financial statements, including income statements, balance sheets, and statement of cash flows.
This essay will begin to look at the main financial statements used by decision makers in businesses today. This essay will go into detail about the income statement and statement of financial position and whether these two statements provide decision makers with their financial information adequately. This essay will also include the various advantages and disadvantages of each financial statement as well as describing whom the decision makers are and why financial statements are important to them. A conclusion will be present at the end of this essay to demonstrate an overall view of whether financial statements are beneficial to decision makers.