Question

Define then discuss why each of this term is important is important to consider when analyzing the financial statements of a company: [6 marks]

3.4.1 Global economy

3.4.2 National economy

3.4.3 The industry

Answer 1

1. Global Economy

In short we can say that Global Economy means the economy of world as a whole. It is the combined measure of the the economy of all the countries in the world. But among our whole world few countries contribute to the largest portion of the world's economy and they will impact the whole world's economy if something happens to their economy.

In the era of globalization and liberalization almost all countries can trade globally. So it is now important to consider the global economic condition while analyzing the financial statements of a company as they are dealing with other countries in the world and have direct impact of global economic output on their statements.

2. National Economy

It means the economy of a nation individually. We can understand it by saying that how a country can generate money and where it utilizing or investing it. It generally defines that how much production and utilization of goods and services in a particular nation by using all its resources available at a given point of time.

There is a direct nexus between the company's growth and the nation's economic growth. If the company generate profits then it will contribute to the nation's growth. Company's financial reports are very important for creation of value for the economy of a nation as a whole that's why while analyzing financial statement it is obvious to consider national economy.

3. The Industry

Industries are the group of enterprises that produces goods or render services for a nation and contributes towards its growth. They may be further divided into three sectors as Primary , Secondary and Tertiary.

While analyzing the financial statement we have require to check the statistics and ratios of the particular industry from which the company belongs to. By analyzing industry's stats we are in a situation to easily compare the growth potential of the company and able to understands whether the company is working according to the other companies in the same industry or is working better than others and it will help investors that whether to invest or not in that particular company.