Demonstrate an understanding of financial statement analysis - Essay Example

Financial ment Analysis Financial ment Analysis Introduction Financial ment Analysis refers to the checks carried out on the financial figures of a company’s financial statements. “This process is important because it provides the interested parties with information concerning the financial condition of an organisation” (Wahlen et al., 2010). Examples of such parties include: Shareholders This is a group of persons owning the firm. Shareholders carry out financial statement analysis with a view of collecting information partaining to profitability of the company.

This is particularly important as it guarantees them investor security of their investment. For instance, if a financial statement analysis is conducted and the results indicate profitability of the company then the shareholders are assured of a company’s prospective growth hence safety of investments. In the contrary, they may decide to sell their shares where financial statement analyses indicate a downfall in profitability.Investors and LendersThis group’s interest concerns the company’s wealth situation.

Their major interest is security of the money they invested in the company and the ability of the company to refund both the accrued interest as well as principle amount within the designated repayment time.Creditors The creditors are interested in financial statement analysis for purposes of establishing the short-term liquidity status of a firm. Their main interest is to ascertain a firm’s capability to repay the amount they owe on time. “They do financial statement analysis from which they are informed on whether there is need to extend the lends and ask for advanced interest charges” (Sinha & Sinha, 2009).

It is for this purpose that the information gathered from the financial statements is important.ManagementThe management is charged with the responsibility of ensuring a smooth running of an organisation. They are responsible in formulation of future policies and plans as well as undertaking immediate decisions. It is for this reason that they should analyse financial statements in order to measure the effectiveness of the policies and the decisions they make in the day-to-day running of a firm.

“In addition, the management’s interest is to ascertain both the short-term and long-tern creditworthiness of the company, productivity, liquidity and return on investment status of the business” (Shim, & Siegel, 2007).Government It is the duty of every government to ensure that firms conform to tax regulations. Therefore, the government examines financial statements with an aim of determining tax submission. In addition, the government uses the collected data to put in place policies aimed at promoting economic growth.

Performing financial statement analysis of a company instead of relying on the ratings and findings of an agency is important. “First, the accuracy of the data and information gathered by a second party may be misleading” (Maguire, 2007). Therefore, decisions made based on such information may prove fatal to the business. Secondly, corporate planning requires the use of up-to date information. Most agencies rely on past fiscal statistics and the information obtained from such data may not be of good use to the company unless the previous condition prevail.

Thirdly, the analysis obtained from the agency offers only numerical information about a firm. “In this regard the qualitative aspects of the firm does not show up yet it is an equally important aspect in decision making” (Fridson & Alvarez, 2011).References:Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioners guide. Hoboken, N.J: Wiley.Maguire, M. (2007). Financial statement analysis. München: GRIN Verlag GmbH.Shim, J. K., & Siegel, J. G. (2007). Schaums outline of financial management.

New York: McGraw-Hill.Sinha, G., & Sinha, G. (2009). Financial statment analysis. New Delhi: PHI Learning Pvt Ltd.Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western.