Financial statements Financial statements means the statements showing the financial affairs of a person, an enterprise or an accounting unit.

They are the means for decision making. These statements are drawn primarily in terms of monetary terms. Nature of financial statements 1. They are means for decision making on specific issues, but they themselves are not ends. 2. These statements are drawn primarily in terms of monetary figures. 3. These statements are historical in nature. 4. Quantitative rather than qualitative information predominates here. 5. These statements concern primarily with the information internal to the enterprise, only in rare cases information external to the enterprise. 6. These statements helps in decision making but are not decisions by themselves. 7. These statements are not user specific, they are meant for specific groups. 8. These statements are drawn usually as per GAAP of the land. 9. These statements are not drawn adhering to the principles of economics, management, or finance. 10. The scope of manipulating these statements by personal judgement is very high.

Objectives of financial statements 1. Provide information needs of various present and prospective stakeholders about the net results of the business activities at regular intervals. 2. Make the affairs of the company transparent to the parties external to the day to day activities of the enterprise. 3. Safeguard the interest of the stakeholders who do not have access to the day to day affairs of the company 4. Keep the management under pressure so that the scope of manipulation can be minimized as they are to measure and report the financial results of the business adhering to certain rules and regulations 5. Observe legal formalities 6. Enhance credibility of the enterprise and increase its market acceptability 7. Help outsiders in understanding the affairs of the enterprise 8. Build up better image in the market about business performance of the enterprise 9. Present performances of the past, prospects in the future and plan for future course of action in order to reap emerging opportunities of the market

Financial statement analysis

FSA is largely a study of relationship among the various financial factors in a business as discussed by a single set of statement. Advantages of FSA 1. Through analysing these statements, an idea about the existing economic position of the enterprise can be derived 2. These statements presents facts in numbers 3. It is difficult for individual households to examine the financial statements of individual enterprises. Expert analyst give their opinions after considering various facts and statements 4. The meaning underlying the figures can be derived through analysis by which it can be established that numbers in the statements are not mere figures, they strongly establish the picture of specific situations. 5. Analysis is made with the aim to find the future on the basis of past. 6. Financial statements relate to individual enterprises.

Disadvantages of FSA 1. Financial statements are not free from the influence of personal judgements of the reporters. As they are guided by self interest, it may not be possible for them to report neutrally. 2. Figures develop out of accounting numbers. Such data are usually based on historical costs. Again in accounting the historical costs are matched with current revenues. That is why it is very difficult to establish a direct relation between short term cash flow and accounting profit. 3. Financial statements may be window dressed. 4. Enterprises with various segments may provide data jointly. In such cases the idea about the performances of individual segments will not be available. 5. Financial statements are stated in terms of money. But the purchasing power of the money changes. In such cases, meaningful comparison among performances of different years become difficult. 6. In support of financial statement analysis, it is often suggested that one compares the firm performance with industry averages. But information on industry average is not available. Hence it is very difficult to derive an ideal standard in industry with which performances of an individual firm can be compared.

Sources of information for financial statement analysis Internal sources External sources

Internal sources of information It can be divided into two broad categories: General purpose financial reports published according to legal requirement Voluntary reports

General purpose financial reports General purpose reports are published according to legal requirements. As per the provisions of law, companies are under legal compulsion to publish some statements. Hence these statements are divided into two groups: Statutory reports Supplementary reports

Statutory reports: can be divided into two parts: 1. Principal statements 2. Footnotes Principal statements: I. II. III. IV. Income statements Balance sheet Cash flow statements Management discussions and analysis

Footnotes: The text of the statement alone may not be considered sufficient to clarify the whole picture. In such cases, explanations may be given by way of footnotes. Usually footnotes are given on the following issues: I. II. III. IV. V. Accounting policies Purchase commitments Contingencies Inventory valuation method Revenue recognition principle

Supplementary reports: According to the provisions of law or GAAP, publication of some statements depends on the discretion of the management. It may not publish such documents. But these statements help in understanding the statements published under mandatory requirements. These are supplementary statements. Companies are not punished if such documents are not published. Voluntary reports: In this age of severe competition, the management of a company is eager to draw interests of consumers and investors. Through various statements it tries hard to draw

the attention of different parties to brighten the companys brand image. A few of such statements are: Letters to shareholders Management forecast Managements report

External sources of information Outside decision makers do not confine themselves only to the financial statements published by the companies while deciding about their dealings with enterprise. They collect information from external sources also. Firms function as a part of the overall socio economic system of a country. Researchers also analyse financial statements of the firms and publish their findings in journals. A few external sources of financial statements are stated as follows: Analysts report Economy industry statistics News articles about company Standard and poors analysts handbook Standard and poors corporation records Moodys investors services The wall street journal index