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acc_mil_2.pptxGlobal Market- Financial Statement Analysis
Robert Shulzinsky
SNHU
01 Aug 2017
Financial trading in Global market
Trading of financial statement issues takes place into two scenarios;
Financial exchanges
Over the counter markets
Financial exchanges involve following rules governing the conduct of trading (Healy & Palepu, 2012).
It is formal when financial statement analysis is conducted
There are issues concerning financial statement analysis
Trading of financial statement issues takes place into two scenarios; Financial exchanges and Over the counter markets. When considering financial statement analysis then financial exchanges become important since it follows rules governing the conduct of trading. It is formal when financial statement analysis is conducted. As a result, There must be issues concerning financial statement analysis
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Financial Statements in Global Market
Financial statements;
Income statement
Concerns whether the company makes money or not.
Contains revenues and expenses that transform to net income
Balance sheet
Reports financial position at a point in time
Contains assets, liabilities, and owners’ equity
The statement of cash flows
assists in reconciliation of cash inflows and outflows (Healy & Palepu, 2012).
Reveals changes in balance sheet accounts.
Income statement is concerned whether the company made money or not. It contains revenues and expenses that transforms to net income. Balance sheet reports financial position within at a point in time. It contains assets, liabilities, and owners’ equity. The statement of cash flows assists in reconciliation of cash inflows and outflows. Reveals changes in balance sheet accounts.
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Potential issues – problems
Lack of underlying theory
No theory to look at numbers and their interpretation.
Financial statement analysis becomes informal and subjective.
Ratio analysis is affected because of lack of theoretical structure (Higgins, 2012).
Conglomerate Firms
Many firms have operations that consist a wide range of industries.
Due to there sizes, it is difficult to evaluate their financial performance and condition.
Window Dressing
It done to project financial picture which is favorable
A balance sheet can be prepared at a point where level of inventory is low.
A company can appear to have a comfortable position in liquidity and high turnover of inventories (Higgins, 2012).
The major problem in financial statement analysis is that there is no underlying theory that proves to us which numbers to look at and how to interpret them. In the absence of an underlying theory financial statement analysis appears informal and subjective. On the other hand, most striking aspect of ratio analysis is the absence of an explicit theoretical structure.
Most of the firms, especially big ones, operate a wide range of industries. Due to their diversity of their product lines, it is not easy to have suitable benchmarks to evaluate their financial performance and condition. Hence, it appears that meaningful benchmarks may be available only for firms which have a well-defined industry classification.
Companies can decide to do window dressing to project a favorable financial picture. For instance, a company can prepare its balance sheet at a point when its inventory level is very low. As a result, it may appear that the firm has comfortable liquidity position and a high turnover of inventories.
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Problems cont...
Variations in Accounting Policies
Business firms have problems in the treatment of accounting items such as;
depreciation,
Installment sales,
Revaluation of assets, and
Valuation of stocks.
Diversity of these policies create problems in financial statement analysis.
Interpretation of Results
It is difficult to make judgement on whether the financial ratio is good or bad.
For example, a high current ratio can indicate strong liquidity position or excessive inventories (Higgins, 2012).
A firm can have some favorable ratios and unfavorable ratios.
Correlation among ratios
Financial ratios of many firms show high degree of correlation
Because of common elements such as sales
Ratio correlations become redundant and confusing to use a large number of ratios (Higgins, 2012).
Business firms have some problems in treatment of the accounting elements such as depreciation, revaluation of assets, valuation of stocks, and installment sales. Diversity of accounting policies lead to problems in the financial statement analysis.
Financial ratios of many firms show high degree of correlation. Because of common elements such as sales. As a result, ratio correlations become redundant and confusing to use a large number of ratios.
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Potential Issues - Limitations
Ratio analysis is affected by potential limitations with accounting and the data in the statements themselves(Brigham & Ehrhardt, 2013). They include,
Errors and accounting mismanagement
Distortion of raw data
Accounting measures have more external standards than benchmarking companies (Brigham & Ehrhardt, 2013)
Use of performing stock valuation as a tool in the analysis
Omission of important aspects of the success of a firm.
Leads to over simplistic view of a company.
Ratio analysis is affected by potential limitations with accounting and the data in the statements themselves. This can include errors and accounting mismanagement, which involves distorting the raw data used to derive financial ratios.
Proponents of the stronger forms of the efficient-market hypothesis, technical analysts, and behavioral economists argue that fundamental analysis is limited as a stock valuation tool.
Ratio analysis can also omit important aspects of a firm's success, such as key intangibles, like brand, relationships, skills and culture. These are primary drivers of success over the longer term even though they are absent from conventional financial statements.
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Recommendations
Calculate expenses analysis ratios, gross margin ratio and net profit ratio
Firm is able to assess the expenses incurred during comparison of sales (Brigham & Ehrhardt, 2013)
To obtain better control of production cost and expenses
Improving capacity to attract investors.
By calculating return to equity ratio
Increase the equity from external resources
Multiple discriminant analysis computation
To assess historical data
Predict financial failure for the firm.
Verify the financial situation.
Based on the potential financial statement analysis, the skills and constraints accounted, the following recommendations are aimed at avoiding these issues.
The firm should calculate expenses analysis ratio, gross margin ratio and net profit ratio for each period covered. It is through this analysis that a company can be able to assess the expenses incurred comparing to sales realized and gross margin obtained for a better control of production cost and other expenses.
The company should improve its capacity to attract potential investors by calculating its return to equity ratio and compare it to the result of this ratio from the firms in same industry to test their ability to increase the equity even from the external resources that the company can benefit from potential investors.
The computation of multiple discriminant analysis should be made at the end of each accounting period to assess the historical data in order to predict the financial failure of the company.
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Recommendations cont...
Disclosure of financial statement to professional accountants.
To get pieces of advice and recommendations from experts
To assist in decision-making process in the firm
Proper accounting regulations
Training accountants to conform to regulatory body.
Promote the setting of accounting rules and regulations (Brigham & Ehrhardt, 2013)
The management of the company should look for the means of disclosing company's financial statement to the professional accountants in order to get advices and recommendations from these experts to get the fully disclosed financial statement on which financial analysis could be conducted in decision making. There should be accounting regulations to assist in setting and training accountants.
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Benefits of International Financial Statement Analysis
Financial accounting assists investors and lenders to obtain information about businesses.
Important benefit of financial accounting and FASB is the access of information (Vogel, 2014).
They provide accurate and comparable information.
Allows other people to know the profitability and value of a business.
Lenders and investors depend on financial accounting to get detailed information about financial and risks of businesses. In fact, the most important aspect of financial accounting is the access of information. An investor or lender relies on financial accounting to provide accurate and comparable information.
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Benefits cont...
Consistent schedule of final accounts
Three main financial statements include;
Income statement
Balance sheet
Cash flow statement
They are issued on a routine basis.
Investors have access to information on a consistent and dependable basis.
Plurality of uses
Analysis is used in very many ways depending on the actors of market.
Usage is flexible through set of standards such as GAAP and IFRS (Vogel, 2014).
The three-primary external financial statements include the income statement, balance sheet and cash flow statement which are issued on a routine schedule. As a result, investors have access to information on a consistent and dependable basis. Financial statement analysis is used in a variety of ways by different actors of the market. Flexible usage is maintained through a set of standards such as GAAP and IFRS.
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Benefits end…
Financial Accounting vs. Statements vs. Reporting
Financial accounting is done to benefit outside parties
Financial statements is a portion of reporting
Financial reporting include;
Annual report of the company to SEC
Annual report to stockholders.
They should be created in a framework that allows perfect analysis.
Transparency and the FASB
The FASB was developed by the SEC.
The SEC encourages transparency, fairness, and improve contracts among companies (Vogel, 2014).
Financial accounting is done to benefit outside parties. Financial statements is a portion of reporting. Financial reporting includes; Annual report of the company to SEC and Annual report to stockholders. They should be created in a framework that allows perfect analysis. The FASB was developed by the SEC to encourage transparency, fairness, and improve contracts among companies.
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References
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.
Healy, P. M., & Palepu, K. G. (2012). Business analysis valuation: Using financial statements. Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
