Among these tools is financial ratio analysis used for comparative purposes. Aside from it, the annual financial statements can be analyzed using horizontal analysis which highlights the trend of various figures from revenue to expenses and cash flow over the reporting periods. Vertical analysis emphasizes the relative size of each item as a composition of a set of numbers such as operating expenses as a proportion of total sales revenue. When dealing with financial forecasts and business plans, historical analysis is irrelevant. Rather a forward outlook would be more appropriate.
The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. The going concern concept is fundamental concept for the preparation of financial statements. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern. For example, International Accounting Standard (IAS) 1, “Presentation of Financial Statements” requires management to make an assessment of an entity’s ability to continue as a going
They also help evaluate financial statement information by showing the relationships between financial and nonfinancial data. Auditors can use these procedures and relationships to obtain evidence about the reasonableness of the amounts provided by the client. Substantial changes from the prior year to the current year give the auditor a questioning mind on certain accounts, and makes the auditing process smoother and more efficient. Auditors could use certain techniques to perform analytical procedures during an audit, such as an analysis of trends and ratios, complex regression modeling of many relationships and data for many years. This could include comparing revenue, expenses, payroll etc.
It consists of all the income which causes changes in the stock holder’s equity e.g.-unrealized gains or losses, retirement investments or pension schemes, foreign currency adjustments etc. This statement helps in the future planning of the organization. Statement of Cash flows is a statement that provides information regarding the cash inflows and outflows of a business. Cash generated is categorized under three headings in the Statement of Cash flows namely Operating Cash Flows, Investing Cash Flows and Financing Cash Flows. It identifies the liquidity position of an entity and helps managers take relevant measures
• Income statement The income statement reports the profit of the company during a given accounting period. Companies can determine both the gross profit and net profit from this information. Gross profit is the amount of money from the sale going to the cost of goods sold. Net income indicates what portion of sales
The assumptions are quantified in order to check their criticality. It is then possible to put the financial results in a spreadsheet and link them together. The financial impacts will change for the various assumptions. CAP measures the criticality of an assumption as a change in the net present value of a venture (NPV). To calculate criticality each assumption is assigned a range of uncertainty: base case, best and worst case.
They came to realise that the usefulness of accounting numbers can be categorized as either timeliness or content. To conduct their research they compared the firm specific changes in stock prices with the unexpected change in the accounting income numbers. The time span for these changes
22nd November, 2015 Laura Schim van der Loeff Academic and Study Skills Pros and cons of “cash-flow accounting” and those of “accrual accounting” Yuting Cui 10888217 In an entity, financial accounting, or bookkeeping is the tool used to keep track on financial activities. Users, for example: managers, stockholders, etc. use the result of financial statements to justify behaviors of the entity and make efficient decisions accounting to the data provided. With different basis, companies have various methods to do bookkeeping. Two methods mentioned in this paper are cash-flow basis and accrual basis accounting.
Under US GAAP, Financial reporting should provide information that is useful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective net cash inﬂows to the related enterprise. (SFAC No. 1, para. 37) It is interesting to note that this is precisely the information that one would need to calculate the value of an enterprise. Thus, in setting accounting principles, the FASB appears to be emphasizing the valuation role of accounting information over other uses.
The culmination of these steps is the preparation of financial statements. Some companies prepare financial statements on a quarterly