Organization's financial statements - Essay Example

In this way, the success of financial analysis process is depended on the use of accurate information, as incorporated in financial statements of each organization. Due to its role in the development of effective organizational decisions, the financial analysis has been extensively explored in the literature. Emphasis has been given to the different missions that financial analysis can achieve, as a decision making tool. It seems that the need for eliminating risks in regard to investment decisions has been the key reason for the expansion of financial analysis process (Lee et al. 2009, p.2).

Indeed, it has been proved that financial analysis is an excellent tool for checking whether the existent capital of a firm is adequate for responding to the needs of a particular investment, either in the short or the long term (Lee et al. 2009, p.2). From a similar point of view Norman has argued that financial analysis is quite important for minimizing risks related to the potential participation of a firm in a stock exchange market (Norman 2011). Maitah et al. (2012) refer to the use of financial statement analysis in banks as a tool for identifying effective ‘investment and lending decisions’ (Maitah 2012, p.107). . ? Financial statements most important in financial analysis (Zager & Zager 2006, p.36) Through the financial statement of each organization figures showing the performance of the organization to specific sectors can be retrieved.

For example, reference could be made to Liabilities and Shareholders’ equity, as elements of a firm’s balance sheet, one of the most important financial statements of modern firms (Belkaoui 1998, p.2). The financial analysis process can help managers to check the relationship between their firms’ different financial statements; in this way, the actual financial performance of the firm can be identified. The tool used for achieving this target is the financial ration analysis. The above analysis is developed using financial ratios, i.e. figures showing ‘the expression of the relation between two financial statement accounts’ (Drake & Fabozzi 2012, p.102). The analysis of these ratios helps to understand the performance of a firm in regard to the sectors reflected in these ratios.

The most common financial ratios are presented in Figure 2 below. Figure 2 – Most common financial ratios (Zager & Zager 2006, p.38) At this point, the following fact should be highlighted: Financial ratios reflect different aspects of organizational performance. Other ratios refer to the security of the business, as of its financial strength, while others show the financial efficiency of the organization (Zuger & Zuger 2006). This fact is made clear through the graph in Figure 3. Figure 3 – Financial rations as part of the financial analysis process (Zager & Zager 2006, p.39) According to the issues discussed above, financial analysis is necessary for securing the success of organizational decisions.

The close relationship between financial analysis and