Financial statements play an essential role in modern economies, partly because of a series of regulatory pronouncements and investor demands for greater accountability and data transparency. Businesses rely on a network of operating resources and technological equipment to identify what's important when analyzing accounting reports and recommending steps for compliance.
Company principals understand that producing accurate performance data generally hinges on steadily training bookkeeping and hiring top accounting talent. Having competent personnel spearhead financial analysis is a money saver, as it provides the firm with timely, useful insight about its operating activities. This occupational excellence also helps investors avoid casino-finance scenarios, make proper bets and adequately review the four primary financial statements. These include a statement of financial statement, a statement of profit and loss, a statement of cash flows and a statement of shareholders' equity. "Casino finance" is an investment strategy classified as extremely high risk.
Security-exchange participants often express anger and disappointment when they realize that a company's leadership doesn't deliver positive operating results. Investors may flock to more profitable businesses if they sense that company principals show no real effort to produce healthy performance despite the rhetoric. Corporate financiers use three methodologies to analyze financial statements: horizontal analysis, vertical analysis and ratio analysis. Horizontal analysis focuses on chronological fluctuations, paying attention to how performance data move year after year. Vertical analysis sets one financial item as the benchmark and compares all other data sets with that numerical standard. Ratio analysis makes extensive use of such operating metrics as net profit margin and working capital. This technique focuses on corporate efficiency, solvency, safety and liquidity. Working capital equals short-term assets minus short-term liabilities.
The most important recommendation for financial-statement preparation is to conform to key accounting norms and industry standards. These include generally accepted accounting principals (GAAP) and international financial reporting standards (IFRS). Besides GAAP and IFRS, other edicts include U.S. Securities and Exchange Commission guidelines. By law, accountants must display financial items in a specific way when presenting accounting data. For example, they must show assets distinctly from liabilities in a balance sheet. Similarly, they must separate revenues from expenses in an income statement.
Many specialists help businesses make sense of the tools involved in financial-statement preparation and presentation, as well as the types of expertise necessary to use them effectively. These experts include certified public accountants, financial consultants and investment bankers. External advisers enable a company to decide which strategy might be most helpful in its bookkeeping and reporting processes.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.