Question

Agree or Disagree and Why?

Managers analyze financial statements to monitor measurements such as debt leverage, cost, sales, assets, and liabilities. Financial statements help managers assess the achievement of financial goals. It was also said that managers analyze their competition’s financial statements and compare them to their internal finances; this is very useful in developing tactical options and strategies. Balance sheets and financial statements present a certain amount of information and date to managers. Horizontal analysis is used in the review of a companies financial statement over multiple periods; it allows financial statements users to quickly spot trends and growth patterns. On the other hand, Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. While horizontal analysis looks changes in the dollar amounts in a company’s financial statements over time, the vertical analysis looks at each line item as a percentage of a base figure within the current period. (Ch 14, Ozzy Tiscareno)

Answer 1

Yes, I agree with the above information. Financial statements are prepared for analysing the profitability and the financial position of the business. Generally

1. Income Statements (Trading and Profit & Loss Account)
2. Statement of Financial Position (Balance Sheet)
3. Cash Flow Statement

are prepared to deteremine the financial soundness of the business entity.

Financial statements are used to determine the financial strenghts of the company for a given period of time. It helps to access the companys profitability, liquidity and operational efficiency and ts survival in the long run.

Balance sheet is one of the essential financial statement needed to take appropriate financial decisions.Balance sheet is used by managers to compare their position with competitors but only balnce sheet is not the single component which shows the overall position of the company and a tool to measure its position with other. Different business have different organization structure , different policies, different human resource , etc. So balance sheet is not the parameter to compare its company's position with the other. Infact the company's should compare their past statements with present statements which will provide them insight into the benefits and problems related with their organisation. They should set a benchmark and work on those areas which require more importance.

The main ways to analyze financial statements are as follows

1. Horizontal analysis
2. Vertical analysis

Horizontal analysis provides a year to year comparison of company's performance in different periods and is generally used for internal purposes amd it is a useful tool to evaluate the trend situations. It is helpful to assess the changes in differen items over a period of time amd the pattern of changes in expenses, sales, profit, etc. whereas Vertical analysis provides a way to compare different companies amd shows the changes in percentage terms.

Financial statements are not noly useful to mangers but for the its various users. By analysing the balance sheet the shareholders and investors analyze which company can increase their wealth and provide them with maximum returns.

Hence, we can say that financial statements are important for analysing the financial worth of the company and it is useful for both the company and users.The market keeps on changing and the its impact on one business is different from the other. It can be favourable for one and unfavaourable for another. Every business prevail in different situations so comparing statements with another is not a better option for developing strategies for our business. One should analyze the statements but should not depend entirely on the financial statements of the company.