Question

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Overview of Financial Reporting, Financial Statement Analysis and Valuation What does financial statement analysis mean to you? Share your thoughts. Then search the Internet for an article on financial statement analysis that you find interesting. Provide a brief summary of the article, along with the article link.

Answer 1

The term financial statements consists of three different statements, namely Balance sheet, Income statement and Cash flow statement. The application of each is different from one to another.

If we look into balance sheet of any firm, we can know the financial strength of the firm on a given date. What is the amount of assets its holding, which kind of assets there are, how the funds were utilized, the composition of total assets and total liabilities can be described.

If we look into the income statement of a firm, we can come to know the volume of sales revenue, direct and indirect expenses, interest paid on debts, all kinds of taxes etc. The purpose to prepare this sheet is to identify and calculate the level of profit of the firm for a given year.

Cash flow statement shows the sources and application of cash to the firm for a given period of time. In general the sources of cash and its application are divided as:

cash from Operating activities, cash from financing activities and cash from investing activities.

For this discussion, I have referred an article, and it explains the relationship between stock returns by using its financial statements. It explains various components need to be considered for evaluation of firm and how it resulted to the firm and so on. And also explains the different shades of financial inclusion of firm, how it helps the firm to estimate the flow of funds in future etc.

Reference:

1. RW Holthausen and DF Larcker - Journal of Accounting and Economics, 1992 - Elsevier