Commonwealth Bank of Australia and Satyam - Strengths and Weaknesses of Financial Statements Analysis - Case Study Example

Financial Statements By Student’s Name Code+ Course name Professor’s Name University Name City, State Date Executive Summary As a matter of fact, financial statements analysis means evaluating the fiscal weaknesses and strengths of an organisation on the grounds of financial statements and accounting data. In this scenario, it is possible for the analysis to be computed by instituting the associations between the balance sheet and profit and loss account items. Initially, the data pertinent to the verdict under consideration turns to be selected from the entire information that is available within the financial statement. Afterwards, they are suitably arranged to highlight appropriate relationships. The last step turns to be evaluation and interpretation. As a consequence, financial analysis has a meaning of selecting, instituting relationship and assessing data accounting. As final accounts never reveal all the material together with pertinent information for evaluating the financial weaknesses and strengths of an organisation, it becomes essential to evaluate the information offered within the financial statement. In point of fact, the creditor or financial manager can assess how the firm uses its funds together with that firm’s financing of those uses, through employing analytical tools for instance, statement of funds flow. Apart from the financial manager’s studying the past flow, he also assesses the prospect flows from the fiscal statement grounded on prediction. Introduction Financial statement analysis turns to be organised types of techniques that analyses the fiscal performance of firms, to evaluate their weaknesses and strengths, and makes comparisons with other organizations within similar industries (Financial Statement Analysis 2015). Financial statements offer information regarding the present and past performance of an organisation. They are also used in projecting the organisations’ future performance. Moreover, financial statements are utilised by managers of organisations in improving their performances, by the analysts who offer company’s stock recommendations, by the creditors of the companies who make decisions of either lending money to the company or not, and by the company’s shareholders who are concerned with the contemporary company’s performance as well as whether the organisation would continue making profit or not. An essential condition for an efficient financial statement analysis by any financial analyst is first understanding the business. In point of fact, financial statement analysis makes use of the financial reports of companies as their major input. Ethics forms a substantial element in the profession of Accountancy. It ensures party overrides the other during business transactions. Thus the staff, company owners and customers feel catered for during making decisions on investments. Balance Sheet, Cash Flow Statement and Income Statement Actually, a balance sheet turns to be an image of the financial health of business at a particular moment, normally at the accounting period closure (Debarshi 2011). A balance sheet constitutes stockholders’ capital/equity, liabilities and assets. In this scenario, liabilities and assets get dividend into long-term and short-term obligations. Actually, the balance sheet’s assets ought to equal liabilities in addition to owners’ equity (Albrecht 2008). The formula for comprehending a balance sheet is ALOE; Assets = Liabilities + Owners Equity. All balance sheets follow similar format; on the left are assets while on the right are liabilities and beneath liabilities turns out to be the net worth. Given that it is prepared in single column, the first to be listed are assets, then liabilities and the net worth (Debarshi 2011). Current assets turn out to be assets that can be changed to cash within twelve months or less. The common examples of current assets comprise of prepaid expenses, cash, and investment securities among others. On the other hand, long-term assets comprise of assets that are retained by companies for a long period, like, machinery, plant and land. Long-term assets bring in revenue or/and get held to make it possible for the management of the enterprises within which the investments are made (Albrecht 2011). Additionally, intangible assets are considered to be in the long-term assets’ category. The intangible assets possess no tangible or physical characteristics for instance, goodwill, trademarks, patents and copyrights. On the other side, current liabilities turns to be debts owed to the outsiders that ought to be paid in twelve months time. Examples of current liabilities include incurred wages and salaries and have not yet cleared (Debarshi 2011). On the other hand, long-term liabilities turn out to be obligations which require more than a year to be met. They include for instance, mortgages. Shareholder’s equity on the other hand, turns out to be the disparity between assets and liabilities (Greene & South-Western Cengage Learning 2012). Equity turns out to be total capital which would remain the moment the liabilities would be satisfied. The first strength of balance sheet is that it assists accountants/managers to make decisions of whether the business falls within the position of expansion, if it is capable of handling the ordinary fiscal flows and ebbs of expenses and revenues, or if the business should take fast steps of boosting the cash reserves (Greene & South-Western Cengage Learning 2012). The other strength is that balance sheets are capable of recognising and analysing trends, specifically in the payables and receivables areas. On the other hand, the first weakness of balance sheet is that it only displays an image of the firm’s stockholder’s equity, liabilities and assets at the reporting period’s end (Greene & South-Western Cengage Learning 2012). In this scenario, it does not display the out and into flows of the accounts during that moment. The other weakness is that a few numbers are dependent on interpretation, estimates and judgements (Debarshi 2011). Intangible assets turn out to be factors which might be very pertinent, but cannot be dependably quantified. The other weakness is that application of financial standards is not all the time done to the letter, thus balance sheets might not be true reflections of the companies’ financial positions. On the other hand, the cash flow statement turns out to be the summarized statement that is generally prepared the accounting year’s end screening therein the outflows and inflows of the enterprises’ cash during that year of accounting (Greene & South-Western Cengage Learning 2012). In other words, cash flow shows different sources of cash equivalents and cash as well as their uses made by the concern during that year of accounting. Cash flow statement makes a summary of the entire cash flows between the dual years of accounting. The first strength of cash flow statement is that it offers information of the manner in which cash accounts altered on a certain period (Albrecht, et al 2008). In this case, it reports the period’s events and transactions in regards to their cash’s consequences. Additionally, cash flow statements offer substantial information from the perspective of cash-basis which complements the balance sheet and income statement, therefore offering a more inclusive image of a firm’s financial position and operations (Albrecht 2008). Furthermore, cash flow statements offer early caution of waiting financial difficulties. On the other hand, income statement also referred as the Profit and Loss A/c turns to be the statement that is prepared at every accounting period’s end for ascertaining the earned revenue profit or incurred revenue loss from the business at a particular given accounting period (Debarshi 2011). The revenue proceeds gained get ascertained by subtracting different incurred costs during the period of accounting to generate income in the business from the income realised for the business at the moment of accounting period through way of selling goods together with other activities. As such, three parts ascertain such profits. First, extra earnings made from the enterprise’s operating activities like, selling goods, during the period of accounting over the expenses of direct revenue incurred to continue with operating activities like, wages, of the venture for that period of accounting embodies Gross Profit for that year of accounting (Debarshi 2011). Second, Operating Profit get established by subtracting incurred indirect operating expenses like, selling expenses, for that period of accounting from the Gross Profit. Lastly, Net Profit for the period of accounting get ascertained by regulating non-operating revenues like, interest for that period of accounting with the Operating Profit. Therefore, gained profit or incurred loss during the period of accounting get ascertained via the income statement through matching total incurred expenses at that particular accounting moment with the revenue earnings gained at that particular period of accounting (Albrecht, et al 2008). Hence, income statement portrays the enterprise’s profit earning capacity for a given accounting period (Debarshi 2011). It is generally prepared at every accounting period’s end mostly to assess usual operating performance of an alarm for that period of accounting. Ethics in Financial Accounting The first ethics in financial accounting is accountability. As a matter of fact, businesses tend to be accountable to various customers, shareholders, investors and partners (Duska, Duska & Ragatz 2011). Investors, shareholders and partners ought to know the truth regarding the companies’ finances as such information is essential in making critical venture decisions. On the other hand, customers have a right of being offered financial healthy information of a company by the accountants the moment they become partners of the company’s longevity transactions. The other ethics is honesty. Accountants are entitled to offer the owners of companies’ correct and honest information which lubricates good planning (Duska, Duska & Ragatz 2011). This duty entails offering precise information and offering it in the suitable time frame which is sufficiently punctual to be pertinent. The other ethics is reporting taxes accurately (Duska, Duska & Ragatz 2011). Offering incorrect information to the tax agencies would lower tax burden, but would attract perjury charges and fines if the company is caught. The other ethical issue is disclosure. Actually, the lack of disclosing information to the investors which might have changed their decisions on making investment to the company is regarded as fraudulent fiscal reporting (Duska, Duska & Ragatz 2011). Accountants ought to take a good position of informing investors the precise fiscal position of the company to enable them make informed decisions and choices. Critical Evaluation of the Strengths and Weaknesses of Financial Statements Analysis in Judgement As a matter of fact, financial statements turn to be documents of financial data that a firm publishes on monthly, quarterly, biannual or on annual basis (Khan & Jain 2004). Those documents comprise of the net worth of the company based on liabilities and assets together with the company’s operational budget, earnings and expenses. However, there are a number of strengths and weaknesses regarding the financial statement analysis judgement. This paper begins with the weaknesses of financial statement analysis in decision making. First and foremost weakness is market patterns. In this scenario, the figures and data used are normally based on the prevailing market at that particular given moment (Khan & Jain 2004). Thus, data might alter quickly on dependence of the market, so accountants should not presume that the figures in the last financial statement would increase or be status quo. The second weakness is continuous analysis versus at-one-time (Khan & Jain 2004). In this scenario, one financial statement only displays the way a firm is performing at only one single moment. The other weakness of financial statements is that; they sometimes never meet the objective of offering information regarding the performance, financial position together with alterations in fiscal position of an organization which is purposeful to several users in economic decisions making (Siegel & Shim 2000). As such, it becomes hard to arrive at the expected concrete economic decision. The other weakness of financial statements is that they are at times not comparable, reliable, relevant and understandable (Siegel & Shim 2000). Additionally, reported equity, liabilities and assets are at times never related directly to the financial position of an organization. In this case, it becomes hard to come up with a final report that is factual and to be relied upon. The other weakness of financial information is that financial accounting information gets affected by assumptions and estimates (Siegel & Shim 2000). In this case, accounting standards permit dissimilar accounting policies that damage comparability and therefore ratio analysis becomes less important in such circumstances. The other weakness of financial statement analysis is that a firm might window-dress making its fiscal picture appear better than it actually is (Khan & Jain 2004). On the other side, the first strength of financial statements in making decisions is in budget outline (Siegel & Shim 2000). In this case, using financial statements for future decision making and planning have a tendency of showing the budgets of a company. The second strength of financial statement analysis is sales pattern. Financial statements disclose the amount of money from sales in a year. Actually, the sales might vary, but an accountant ought to be capable of recognising the pattern over sales figures’ years. The other strength of financial statement is that managers and owners of companies demand financial statements in making purposeful decisions which have effects on their ongoing operations (Khan & Jain 2004). As such, financial statement analyses get executed on those statements to offer management with a comprehension of the numbers that are more detailed. Additionally, those statements also get utilised as a portion of the management’s yearly report to their stockholders. Thus, the stockholders get an opportunity of deciding whether or not to continue investing in the company or not. The other strength of financial statement analysis is that employees make use of those reports in making collective haggling agreements with their management, within the labour unions’ case or for persons in deliberating their rankings, promotion and compensation (Khan & Jain 2004). The other strength of financial statement analysis is that potential investors use financial statements in assessing the feasibility of venturing in an enterprise. More often than not, financial analyses are utilised by investors and get engineered by financial analysts, therefore offering them with the foundation for arriving at the final investment decisions (Siegel & Shim 2000). In this scenario, some investors inject more money in the enterprise when they realise that there is an expected growth of the firm and increase in returns. The other strength of financial statement analysis is that they bring to light functional information in easy form faster (Siegel & Shim 2000). In this scenario, a user might make judgement of a company through just having a glance at few numbers rather than reading the entire financial statements. The other strength of financial statement analysis is that; it assists in trend evaluation that entails making comparison of one company for a certain period. In this scenario, it becomes possible for the user to know when the company made losses or profits more easily and quickly. The other strength of financial statement analysis is that it is possible to draw conclusions concerning a firm’s liquidity position. The firm’s liquidity position becomes suitable the moment it is capable of meeting its contemporary requirements the time that it is required. A firm is said to possess the capability of meeting its short-term liabilities when it possesses enough money for paying interest on its short-maturing liability normally in a year together with repaying the principal. Financial statement analysis is also faced with a number of issues. As financial statement analysis turns to be a brilliant tool, multiple issues exist which can obstruct with analysis results interpretation. The other issue with financial statement analysis is operational information (Siegel & Shim 2000). In point of fact, financial analysis does not review a firm’s operational information, but only reviews financial information, therefore making it impossible to see various key future performance key indicators, like, the order backlog size, or warranty claims changes. Therefore, financial analysis only embodies a fraction of the whole picture. The other issue of financial statement analysis is conceptual diversity (Khan & Jain 2004). Yet another element that has an influence on the purposefulness of ratios turns out to be that; there exists a dissimilarity of opinion concerning the different concepts utilised to calculate the ratios. As a matter of fact, an opinion diversity room always prevails as to what make up profit, assets, debt, and equity among others. Unlike firms might make use of those terms in unlike senses or a particular firm might utilise them to denote dissimilar things at dissimilar moments (Khan & Jain 2004). Dependence on one ratio for a specific purpose might not be the final indicator. Case Studies The first case study in this paper is derived from the CBA. The Commonwealth Bank of Australia was accused of intentionally holding-up a compensation plan for several potent victims of its scandal-ridden fiscal planning arm in order to shun hefty payouts (Finacial Review 2014). In this case, the financial statements revealed that CBA was to pay huge sums of money to all the victims who were involved in the loss of their money in the bank’s financial planning scandal. CBA would have in this case had a huge liability that would affect its operations for a few years before resuming its normal profits. This proved to be unethical to the victims as the bank did not prove to be honest and accountable to its customers. As the bank was expected to be accountable to all its operations, it was also expected to compensate fully without delay the financial planning scandal victims. The other case study is from SATYAM. Satyam’s chairman on 7th January 2009 made a few exceptional revelations. He pointed out that there was overstatement of the company’s accounts mounting to about US$1 billion which was connected to bank and cash balances (HSK 2014). Fiscal statement fraud turns out to be the intentional falsification of fiscal state of a company by deliberately omitting or misstating disclosures or amounts within the financial statement for the purposes of cheating the users of the fiscal statements. Satyam’s fraud is known as ‘cooking the books’ as its financial statements revealed the fiscal image which the company wanted users to see, but not its real financial state (HSK 2014). In this case, the company lost its reputation to the users. Conclusion Financial statement analysis assesses the businesses’ financial strengths and weaknesses. In this scenario, it becomes possible for the analysis to be computed by instituting the associations between the balance sheet and profit and loss account items. This makes it critically important to ensure that financial statements are made as accurate as possible. It is through financial statement which are of integrity and show the true picture that the organization may be made more efficient in its financial and daily operations. Ethics in the Accounting profession is of utmost important. In this case, it creates a common relating and working ground for the company owners, customers and staff. Staff in accounting must make sure that the records are a true reflection of the context and circumstances of the organization. They must therefore keep up with current standards of financial reporting and also prepare statements according to industry standards. Bibliography 2015, Financial Statement Analysis, Retrieved 3rd March, 2015 from http://www.accountingtools.com/financial-statement-analysis Albrecht, et al, 2008, Accounting, Concepts & Applications. Mason, Ohio: Thompson/South-Western. Debarshi, B, 2011, Financial Statement Analysis: For University of Calcutta. New Delhi: Dorling Kindersley. Debarshi, B, 2011, Management Accounting. Delhi: Pearson. Duska, R, F., Duska, B, S, & Ragatz, J, 2011, Accounting Ethics. Chichester, West Sussex, U.K: Malden, MA: Wiley-Blackwell. Financial Review, 2014, CBA accused of Stalling Compensation for Financial Planning Victims. Retrieved 3rd March, 2015 from http://www.afr.com/p/business/financial_services/cba_accused_of_stalling_compensation_qgESo08nI16pgC3QYEzrbL Greene, C, L & South-Western Cengage Learning, 2012, Entrepreneurship: Ideas in Action. Mason, OH: South-Western Cengage Learning. HSK, 2014, Kinds of Fraud in Financial Statement. Retrieved 3rd March, 2014 from http://globalfinancialtrend.com/kinds-of-fraud-in-financial-statement/ Khan, M, Y and Jain, P, K, 2004, Financial Management; Text, Problems, and Cases. New Delhi: Tata McRaw-Hill. Siegel, J, G and Shim, J, K, 2000, Accounting Handbook. Hauppauge, N.Y.: Barrons. Read More