Week 9 Discussion 2
Financial statement analysis is known to be a very powerful tool for the particular users who use financial statements, each having various aims concerning the circumstance of entity financially. The people concerned mostly are the investors, creditors, management and the regulatory authorities. In the process of analyzing finance, there is the use of horizontal and vertical analysis. In vertical analysis, each item on a statement is listed as another items percentage, while horizontal analysis compares the information of finance over the periods of reports. This will generally have to mean that in a balance sheet, items are stated as a percentage of all assets while in a financial statement, items are listed as a percentage of the gross sales.
The second method is the use of various types of ratios, which helps to put into calculation the relation that is there between two numbers. Later, both can be compared to the ratios that had been calculated earlier to be able to examine the performance of the organization. This will be depicted when the financial statement is ready and most ratios will be between the expectations while a small number will show the slight problems that are being faced by the organization. Some of the categories of the ratios include activity ratios, liquidity ratios, leverage ratios and profitability ratios (Covin, 2011).
Additionally there are some issues that can be faced in the process of interpreting the results and this are comparison of companies and periods, and also operational information. Therefore, the future performance of the industry such as the changes in claims of warranty cannot be seen because it only presents the total picture. Secondly, another issue can arise from comparison where frequent comparison of company ratios in order to gauge their performances and this may end up giving wrong conclusions because every single company has its own way of aggregating information. On the other hand the issue concerning comparing the periods may not be reliable because a company may not have maintained the accounts in which they store their information so that they differ from time to time.
Zahra, S. A., & Covin, J. G. (2011). Contextual influences on the corporate entrepreneurship-performance relationship: A longitudinal analysis. Journal of business venturing, 10(1), 43-58.
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