Financial statements are referred to as the records of the company’s business activities and financial performance. They include the statement of cash flows, balance sheet, income statements, and statements of shareholder’s equity. They are prepared to provide necessary information about the financial status of the firm to investors and creditors. According to(Abdelsalam & Nobanee, 2020), financial statement analysis is the process of examining a company’s financial statements for the aim of making decisions. Financial analysts and accountants use various techniques and tools to evaluate the financial statements of the company. The objective of this research is to evaluate the importance of different financial statements analysis.
Analyzing the balance sheet of a company helps investors make informed business decisions. A company’s financial sheet is the primary focus of fundamental analysts when evaluating an investment opportunity (Chen, 2021). Balance sheets are an essential requirement for business mergers, asset liquidations and potential investment in the company. Investors can make their decision on investing in the company by analyzing the strength of the balance sheet of the company. They evaluate the company’s short-term liquidity, asset performance, and capitalization. The balance sheet provides enough information to the potential investors about the company. After analyzing the balance sheet, they will make their investment decision on the company based on its revenue, debt load and ability to meet its obligation.
Analyzing shareholder’s equity statements provides investors with additional transparency regarding changes in equity accounts (O’Brien, 2012). The statement of shareholders’ equity emphasizes the business actions that contribute to whether the value of shareholders’ equity goes up or reduced. The investors are able to review reports of the business activities that lead to the movement in the value of shareholders’ equity. The statement of shareholders’ equity is useful for disclosing to the public the company’s stock sales and repurchases.
Analyzing the cash flow statement can assist firms in navigating the need for positive cash flow (Halim, 2020). The short-term planning of the business unit, it shows how much money is needed in the future, how much of that money can be raised internally, and how much must be sourced outside. When it comes to internal financial management, such as a plant or fixed asset’s liquidity, or how dividends are distributed, the analysis of cash flow statement will be useful. Last but not least, it provides an explanation for a financial analyst as to why a business unit has run out of money, even though the business is making money, or it has a surplus of cash even though it is losing money.
Analysis of Income statements can assist business owners to determine whether they can make a profit by increasing revenues, reducing expenditures, or both (Huang, 2019). A company’s income statement is a way to see how well the firm’s financial strategy is working at the start of its financial year. This document can be utilized by business management to check on the success of their strategies. The company can then come up with the best ideas to increase profits based on their analysis.
In conclusion, the balance sheet, income statement, or statement of cash flows are all tools used in financial statement analysis to assess a company’s performance or value. The financial analyst techniques such as the vertical, horizontal and ratio analysis enables the investor to understand better the financial profile of the company. Analysis of different financial statements is necessary for the growth of the business. It is important to the management, shareholders, creditors, and the public at large.
Abdelsalam, A., & Nobanee, H. (2020). Financial Statement Analysis of Google. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3647444
Chen, R. (2021). A Balance-Sheet Analysis of the Dutch Economy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4026483
Halim, K. (2020). An Empirical Analysis on the Integrity of Financial Statements. Journal Of Advanced Research In Dynamical And Control Systems, 12(5), 544-549. https://doi.org/10.5373/jardcs/v12i5/20201973
Huang, J. (2019). Data analysis of balance sheet and income statement. Proceedings Of Business And Economic Studies, 2(3). https://doi.org/10.26689/pbes.v2i3.698
O’Brien, C. (2012). Equity between with-Profits Policyholders and Shareholders: Issues and Challenges. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2183879