Profit and loss account plays a vital role in providing information about the enterprise’s income but fails to give information about decision-making. Analysis of financial statements is the process of reviewing the financial statements of the company to make a wise decision of earning income in the future. The financial analysis and reporting help various investors, top management, lenders, government agencies in assessing the company’s sound financial condition, profits of the company, predicting bankruptcy, etc. There are many companies offer financial reporting services to various clients to know the transparency of their business.
The various objectives are-
- Analyzing the future prediction-To analyze the future, the past performances of the company are reviewed to check whether the company is financially sound or not. Also, various parameters are taken into consideration when analyzing past performances like past sales, profits, cash flow, debt ratio, etc.
After analyzing the past performances, it gives a clear idea to the investors that the company is financially sound, and they are good to invest in the company.
- Eliminating unintentional mistakes- The accounting mistakes may occur in the company’s financial statement that could tarnish the image of the company. Thus, the company needs to maintain the day-to-day transactions of sale and purchase, expenses, etc. to make a better decision.
- Makes future decision-making easier-Analyzing financial statements helps the users and other stakeholders to know the company’s strengths and weaknesses that would help them in making better decisions with the right information. Thus, future decision-making becomes easier for stakeholders.
- Reduce the chances of fraud by employees in the organization- This objective also plays a vital role and should be given due importance. There are times when we see that the employee cheated his\her boss and due to which heavy losses may incur in the organization. Thus, the financial statement analysis helps to suspect every possible financial entry to put a stop on losses. It further helps the company in protecting its assets from being getting damaged.
- Operational efficiency of management- The control process is applied where the actual performance of the company is compared with the set standard and if any deviation is found then it will be used as the efficiency of management. Therefore, the analysis of financial management helps in assessing the efficiency of management
- Approval of loan by financial institutions- Financial institutions, loan agencies have the power to decide on sanctioning loan to the company. With the help of financial statement analysis, the companies credit score, interest rate, maturity date, etc. is taken into consideration that decides whether the loan should be given to them or not. If the company has a good credit score, then the loan can be sanction there and then or else they would not be regarded as financially sound.
Financial statements are important for every stakeholder. The investor needs to analyze the financial statement before investing in the company. The government agencies help review the taxation. Top management helps determine whether the resources are used inefficient manner or not. The financial reporting helps the company in knowing their strengths and weaknesses and can analyze its performance from past over periods.