Use of Financial Statement in Performance of a Company
Introduction
Financial statement gives a hand in the reviewing not forgetting the analysis of the accounting reports of a company as this helps to gauge the company’s past, its present and also the future performance of the same company. The process of analyzing the financial statement helps in making good economic decisions. Different companies in a global perspective are often required by the law to help in filling their financial statements as this should be done by the relevant authorities. An obligation of firms is also needed to help in provision of financial statements which is shared by their stakeholders. Financial statement needs effective analyzation so as to help in forecasting of the cash flow of the future and also profitability. Therefore, financial statement has a main focus on the analysis and utilization information on how the company has been performing in the past as it helps in prediction of the future of the company (Palea, 2014).
How to use Financial Statement in Explaining Performance of a Company.
Bridging of the gap available in management because basically the financial statements have a reflection of how a company is performing. Profits of the business get to be shown as well as the liabilities of the business, and also how successful the decisions of the company have always been. The company’s performance can be gauged in this case by the shareholders because they do have an access to the financial statements. Performance further gives a hand in bridging the gap that is between expectations that the owners have and the lapses the management has (Engert, 2016).
Availing of credit from the lenders is essential because almost every business at some point needs borrowing of funds to help in proper functioning. Borrowing of funds can be relied on different lenders for instance the bank and other financial institutions. In this case, financial statement plays a very big role because the liabilities of the company have to be shown, profits made, and debts so that investors can use them in making informed decisions (Mwangi and G.N, 2012).
Use of investors where they use the financial statements of the company to asses the company’s finances. Through this, investors are able to figure out how the solvency of the company will get to be in longer term. Through this, the financial position of the company gets better leading to investors starting to invest in the specific company (Johnson, 2017).
Stock exchange has been used to help in performance of a company. Different regulatory bodies for instance Security and Exchange Board of India SEBI can have a hand in accessing the internal matters of the company as it uses them to ensure the investors are protected. Stock advisers in most cases requires SEBI to have a frame on their quotes as they are a great source of information used by the investors (Iswatia and Anshoria, 2007).
Government policies have also been used so as to explain the performance of the company. The policies that are directed to corporates always depend on the financial statements. They depend on the statements simply because there is a depict on how the companies generally function in the statement. In this case, the government can use this information so as to make a decision on taxation policies and also on the regulatory policies (Malik and Kotabe, 2009).
Information on investment plays a great role where the shareholders of a specific company have to rely on the financial statements so as to have an understanding of how the investments they make are paying off. Investors may decide to invest more if the company is earning some good profits. 6n the other side, experience of a lot of loses can make the company start pulling off despite the uses of the financial statement (Bacchetti, 2015)
Methods of Financial Statement Analysis to Ensure Performance.
Horizontal analysis is one of the methods and in this case, there is a comparison of the financial information and historical information of the same company as it is done over a number of reporting periods. Horizontal analysis has a main purpose which the highness and lowness of the numbers gets to be seen as compared to the records of the past. Horizontal analysis plays a role in grouping together all of the information as it starts sorting the information by time, weeks, months or its years. Horizontal analysis has an advantage where it can be used in the misrepresenting of results. In this case, the analysis can be manipulated in order to show different comparisons across time periods as this will help the results appear stellar. When horizontal analysis gets conducted for all financial statements, the impact got on the operational activities gets a use on the financial condition of the company as this happens during the under-review period. In short, the company has the ability to review its performance as compared to the previous periods as it gets to gauge how it is faring on based on the results of the past (Lakada and Lapian, 2017)
Vertical analysis is also conducted on the financial statement as this occurs only for some single period of time. In vertical case, each of the items in financial statement gets shown as base figure for a different item in the financial statement. Basically, vertical analysis has a meaning of where every item found on the income and that of loss financial statement gets shown as the percentage of gross sale. On the other hand, the items got on the balance sheet get expresses using the percentage of all the assets held by the company. Vertical analysis has an advantage in the case where it requires a financial statement only that can be used for a single reported period. The comparison between different firms and departments on performance fits in because one is able to see the relative proportions on the account balance (Lakada and Tumiwa, 2017). Vertical analysis can also be referred to as static analysis and this is due to the act of being carried out for a simple period of time.
Bibliography
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Engert, S. and Baumgartner, R.J., 2016. Corporate sustainability strategy–bridging the gap between formulation and implementation. Journal of cleaner production, 113, pp.822-834.
Mwangi, G.N., 2012. The effect of credit risk management on the financial performance of commercial banks in Kenya (Doctoral dissertation).
Johnson, S. and Tuckett, D., 2017. Narrative decision-making in investment choices: How investors use news about company performance. Available at SSRN 3037463.
Iswatia, S. and Anshoria, M., 2007, November. The influence of intellectual capital to financial performance at insurance companies in Jakarta Stock Exchange (JSE). In Proceedings of the 13th Asia Pacific Management Conference, Melbourne, Australia (pp. 1393-1399).
Malik, O.R. and Kotabe, M., 2009. Dynamic capabilities, government policies, and performance in firms from emerging economies: Evidence from India and Pakistan. Journal of Management Studies, 46(3), pp.421-450.
Becchetti, L., Ciciretti, R., Dalò, A. and Herzel, S., 2015. Socially responsible and conventional investment funds: performance comparison and the global financial crisis. Applied Economics, 47(25), pp.2541-2562.
Lakada, M.N., Lapian, S.J. and Tumiwa, J.R., 2017. ANALYZING THE FINANCIAL STATEMENT USING HORIZONTAL–VERTICAL ANALYSIS TO EVALUATING THE COMPANY FINANCIAL PERFORMANCE PERIOD 2012-2016 (Case Study at PT. Unilever IndonesiaTbk). Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 5(3).