Role of Financial Statements in Decision Making

Credit risk consists of three parts: the size of the exposure at the time of default, the probability of default occurring, and the loss if the credit event occurs (Fraser & Simkins, 2010). Undoubtedly, a combination of a clear strategy, a knowledge of analytical tools, an understanding of the risk management instruments, responsible oversight, and the ability to be intuitive is crucial to risk management (Bethel, 2016). Wells Fargo is one of the most successful banks in the United States in managing risk. Successfully, they have navigated through risk by choosing a course of action determined by their risk management process (Perez, 2014).

The Board of Directors declared a quarterly cash dividend of $0.20 per share on the company’s common stock. This increase in dividend was payable to shareholders of record on closed of business on May 11, 2016. In the first quarter of this year, the company brought back 1.0 million shares of its common stock at a cost of $50.0 million, with the expectation that it will return its free cash flow to shareholders in this year in the form of dividends and share of repurchases. The Cheesecake Factory knows the importance of success, therefore they schedule conference calls and webcast live on the company’s website throughout May 26, 2016. This ensure stakeholders that the company was not in the red, and continue to profit.

Financial statements are often referred to as “reports”. As you scan the pages, you will find neat columns of precise numbers. Financial statements look objective. Looks can be deceiving. The questions that financial statements are intended to address do not have objectively true answers. Suppose a firm builds a factory, with custom-built machinery designed to specifically to produce the firm’s product. That factory would become an asset on the left-hand side of the balance sheet. How much is that asset worth?

unused portion of the money received from policy holders in the way of premiums is what the insurance companies use to mitigate their risk and invest their money. The profit could be described as the earned premium plus the investment income less incurred losses and less underwriting expenses. In conclusion the goal of the insurance company is to collect more premium and investment income than is paid out to policy holders.

Eagerness to learn more and the ability to grasp concepts quickly earned me a position in Risk Analytics team with a premier UK- based multinational bank. With an objective to address Economic Capital Charge as per IAS39 accounting standards, I designed a loss forecasting model based on historical recovery trend. To incorporate bulk recoveries from debt sale, I evolved an overlay methodology addressing multiple types of debt sale strategies. Having generated a favourable financial impact , I received Mastermind award as a part of Rewards and Recognitions at EXL. In addition, I worked on model monitoring projects focused on improving the accuracy and robustness of the risk models.

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.

During the interviews, it was understood that Portfolio Theory is difficult to apply to loaning administration. A bank is required to have a flexible credit evaluating process to capture the individuality of each loan. These differences depend on the size of the loan and the different clients’ risks. This makes it difficult to apply loan portfolio diversification compared to a portfolio of bonds or stocks. Nevertheless, more than the fixed principles banks seem to follow the intuition behind it not to expose themselves more than a limit.

According to FASB webpage, revenue is a crucial number to users of financial statements in assessing a company’s performance and prospects. However, revenue recognition requirements in U.S. GAAP differ from those in IFRS, and both sets of requirements are considered to be in need of improvements. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would 1) remove inconsistencies and weaknesses in existing revenue recognition standards and practices; 2) provide a more robust framework for addressing revenue recognition issues; 3) improve comparability of revenue recognition practices across

Most principal aspects of counter-party credit risk such as risk classifications, risk measurements will be discussed in the following chapters. Since financial risk management is playing an indispensable role in recent years, how to balance between the expected loss and potential return is a commonly concerned topic in financial institutions. Meanwhile, some portfolio models, related simulation methods as well as the methodology of coding EE, PFE, CVA and RC will be introduced later.

The purpose of financial statement is to provide entities form employee’s to government organizations to include all stakeholders viable and reliable information that effects strategic decisions. With the differences between the U.S. GAAP and IFRS pose problems over the an acceptable accounting flaws that exist with in standards of accounting practice relevant to manipulate the system that has been adopted. Via Turner Investments (2016) a CPA blogger says "Anyone who believes all countries can embrace international accounting standards and use those standards in the same way is dumber than a sack of rocks, The New York Times Web site.” Additionally, as cited by Hassan (2015) of Zhou and Chen that “the reason why banks manipulate earnings is supported by three arguments: signaling argument, income smoothing or earnings management argument and capital management argument” (p. 93). Further in concern, is a statement by American Institute of Certified Public Accountants (AICPA) that the “U.S. GAAP must go” declared in Forbes.com that the system can “collapse under its own weight” due to playing and construing financial records (Turner Investments, 2016). The regulation heavy U.S GAAP bares constraints and needs to be more user-friendly as with the IFRS standards given way to a universal international accounting system reflective of the times we live in.

Financial Statements basically show the historical performance or record of the company at some previous point of time. By the time when financial statements are made public, changes are many economical areas such as market conditions, currency exchange rate and inflations can change the values of assets and liabilities. In this case there often exist discrepancies between book value of assets and their market values.

In preparation of financial statements, it is important that an appropriate method is adopted for asset measurement within the financial reporting framework. Asset measurement has been in existence and practiced for years immemorial, for Vehmanen(2013, p.132) measurements involve assigning numeral to objects or events in accordance to a set of rules or standards. The gradual sophistication in financial reporting and evolution of global investment markets together with the increasing knowledgeable investors and financial reporting users have gingered interest in asset measurement methods.

Economic and financial decisions are made based on Financial Statements. Financial statement is a statement where it records all the financial activities and position status of a company, person or an entity. In order to ensure that statements are useful, it follows certain framework which are based on accounting principles. Accrual accounting and Going Concern Concept accounting are the two accounting principles amongst various concepts. There are other various accounting concepts such as Consistency Concept, Realisation Concept, Prudence Concept, Business Entity Concept, Materiality Concept, Periodicity Assumption, Historical Cost Principle, Revenue Recognition Principle, Objectivity Concept, Conservatism Concept, Full Disclosure Concept, Cost Benefit Concept. Without these concepts, the rule of accounting will not be visible in making financial statements. It is necessary to have these sorts of concepts so that there can be a proper function in the financial department of any Business. But this document will attempt to explain it’s importance and the pros and cons of only Going Concern and Accrual Basis concepts.

The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ

Credit risk is the possibility that the actual return on an investment or loan extended will deviate from that, which was expected (Conford, 2000). Coyle (2000) defines credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time. The main sources of credit risk include, limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor credit assessment., no non-executive directors, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank. To minimize these risks, it is necessary for the