Question

Dear Uncle Carlos l feel so appreciate that you suggest Nevile Corp.to me. I received the information of this company and spent long time to read it. However, I think that basing an investment decision on information of financial statements would be unwise because they are neither relevant nor faithful representation. Firstly, according to the financial statements provided by Nevile Corp, they are a year old and so they have lost their ability to make a difference in my decision making. Because maybe lots of things have changed in that one year. Information with no bearing on a decision is irrelevant. Relevance is one of the two fundamental qualities. Therefore, to be relevant, information provided must be timely Secondly, financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. However, I could not analyze Nevile Corp.'s current resources because the financial statements shown without reference to other years profitability and it also cannot provide its dividend payments. Therefore, it cannot help me predict the amount, timing, and uncertainty of Nevile Corp's future profit-ability. Furthermore, the confirmatory value is closely related to predictive value. These financial statements do not provide feedback (previous evaluations) on any strategies which the company may have apply to increase profits. Besides that, the financial information provided indicates a lack of materiality. It may does not evaluate both the relative size and importance of an item. So the

Answer 1

Financial statements are one of the important tool that the investor has to make the decision of whether making investment in the company or not.

The investors are the third party and they are unaware about the facts that are behind the corporate veil and the financial statements are the only way they can actually go behind the veil and get to know what is happening in the company. Is there profits or company is making losses this can be judged by actually checking the financial statements only.

The financial statements that are one year old cannot be judged for the today’s condition of the company as this is correct that in one year something must have been changed and thus it is important that the financial statements belongs to the current year in which the decision has to be taken.

Since the financial statements are only for one year and hence this is not possible to compare the numbers with another years.

The financials statement is also not being audited by the third party so there might be the case where the numbers are cooked instead of being booked. If the statements are audited by the third party then this will increase the reliability of the statements.

The statements also does not disclose the method of depreciation that has been used. The method of depreciation is important to know because it has effect on the profitably and increase the loss of the corporations.

Hence these statements should not been relied for making investment.