Tag: Statement

  • Meaning, Process, Definition, Concept of Financial Statement Analysis

    Meaning, Process, Definition, Concept of Financial Statement Analysis

    What is Financial Statement Analysis? Financial statement analysis is the use of analytical or financial tools to examine and compare financial statements to make business decisions. Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account. So, what we discussing is – Meaning, Process, Definition, Concept of Financial Statement Analysis.

    Cost Accounting is explains Meaning, Process, Definition, Concept of Financial Statement Analysis.

    In this article, we will discuss the Meaning and Process of Financial Statement Analysis, Definition of Financial Statement Analysis, and Concept of Financial Statement Analysis.

    So be it discuss:

    It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures.

    The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns. It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company.

    Meaning and Process of Financial Statement Analysis and their Interpretation:

    The nature and importance of financial statements are explained in the preceding pages. It has been explaining that facts disclosed by financial statements are of outstanding significance to the various parties interested in the financial position of a business concern. The financial statements are helpful to the executives to assess the implications of their decisions, evaluate and review their performance and implement corrective action.

    Financial statements render invaluable service to owners, employees, customers, suppliers and the government in their respective fields of interest. The financial statements are useful and meaningful only when they are analyzed and interpreted.

    The scientific method has to adapt to analyze and interpret these statements as done in the case of preparation of these statements. The effort is taken to understand the implications of the statements is called interpretation. Some people call it ‘examination’, ‘criticism’ or ‘analysis’. Therefore, it is meaningful to call it ‘analysis and interpretation’.

    Purpose:

    The purpose of the financial analysis is to diagnose the information contained in financial statements to judge the profitability and financial soundness of the firm. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc. before making his conclusion regarding the illness and before giving his treatment, a financial analyst analysis the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise.

    Definition of Financial Statement Analysis:

    Wood in his work “Business Accounting” has defined the term interpretation as follows:

    “To interpret means to put the meaning of a statement in simple terms for the benefit of a person”.

    In the words of Myers,

    “Financial statement analysis is largely a study of the relationship among the various financial factors in a business as disclosed by a single set of the statement and a study of the trend of these factors as shown in a series of statements.”

    Kennedy and Muller said,

    “Analysis and interpretation of financial statements are an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities (both current and long-term) and the probability of a sound dividend policy.”

    The balance sheet and profit and loss account are to interpret to convey a meaningful message to the layman who is still the typical shareholder in our country.

    Interpretation considers being the most important function of a management accountant because the management of today needs relevant data and information to conduct its function efficiently. The information is more valuable if it is presenting in an analytical form than in absolute form.

    Management Accountant is expecting to analyze and interpret the financial statements to perform his basic duty of “Communication to the management”. Interpretation in its widest sense includes many processes like the arrangement, analysis, establishing a relationship between available facts and finally making conclusions.

    The Concept of Financial Statement Analysis:

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can consider as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are like in EPS, dividend, net worth and market value per share.

    Management interests in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government interests from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company.

    Therefore, all the stakeholders are like in the performance of the companies but their perspective may be different. The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position.

    Process:

    Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statements. The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports.

    Financial statements are such records and reports, which contain the data required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    The financial statements of a business enterprise are intending to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instances, competitors.

    Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of an account of the company- the Balance Sheet reflecting the assets, liabilities, and capital as of a certain date. And, the Profit and Loss Account showing the results of operation during a period.

    The financial statements are a collection of data organized according to logical and consistent accounting procedures. The function of the financial statement is to convey an understanding of some financial aspects of the company.

    Financial statement analysis:

    Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may finish by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a company’s previous financial performance and its future potential. The analysis of a financial statement finishes obtaining better insight into a firm’s position and performance.

    Analyzing a financial statement is a process of evaluating the relationship between parts of the financial statement to obtain. A better understanding of the firm’s position and performance. The financial analysis is thus the analysis of the financial statements. Which is finish to evaluate the performance of the company?

    Types of analysis:

    Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis, and Common Size Statement Analysis are the major tools of the financial analysis. Financial statement analysis involves the computation of ratios to evaluate a company’s financial position and results of operation. A ratio is an important tool for financial statement analysis.

    The relationship between two accounting figures expressed mathematically knows as the financial ratio. The ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgment about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship to appraise financial performance.

    Ratio analysis:

    Ratio analysis is such a powerful tool for financial analysis. That through it, the economic and financial position of a business unit can be fully x-ray. Ratios are just a convenient way to summarize largely. Quantities of financial data and to compare the performance of the firms. Ratios are exceptionally useful tools with which one can judge. The financial performance of the firm over some time. Performance ratio can provide insight into a bank’s profitability, return on investment, capital adequacy and liquidity.

    The above theories suggest that financial analysis helps to measure the performance of the companies. Different analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is evaluating. Short-term creditors are concerning with the firm’s ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to pay off current liabilities.

    They are like liquidity. Long-term creditors hold bonds or debentures; mortgages against the firm are like in the current payment of interest and the eventual repayment of the principal. The company must be sufficiently liquid in the short-term and have adequate profits for the long-term. They examine liquidity and profitability.

    Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firm’s stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the common stock would trade at a lower price in the market. Analysis of the financial statement of a company for one year or a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a longer period.

    Trend Analysis:

    The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change. This method involves the calculation of the percentage relationship that each item bears to the same item in the base year. The trend percentage discloses the changes in the financial and operating data between specific periods and makes. It is possible to form an opinion as to whether favorable and unfavorable tendencies are reflecting by the data.

    Comparative Statement Analysis is another method of measuring the performance of the company. It uses to compare the performance and position of the firm with the average performance of the industry or with other firms. Such a comparison will identify areas of weakness that can then address to rectify the situation.

    Meaning Process Definition Concept of Financial Statement Analysis
    Meaning, Process, Definition, Concept of Financial Statement Analysis. Image credit from #Pixabay.
  • Explanation of Financial Statements: Objectives, Importance, and Limitations

    Explanation of Financial Statements: Objectives, Importance, and Limitations

    Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analyzed and reported. Explanation of Financial Statements: Objectives, Importance, and Limitations – Keep study and learn. This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should be disclosed, how it should be disclosed, and which financial statement should prepare.

    Financial Statements explanation of each, Meaning of Financial Statements, Objectives of Financial Statements, Importance, and Limitations of Financial Statements.

    Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can draw from these statements alone.

    However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, common-size statements, trend analysis, schedule of changes in working capital, funds flow, cash flow analysis, and ratio analysis. Related learn Financial Accounting: Meaning, Nature, and Scope!

    Meaning of Financial Statements: 

    Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which shows the financial position of a business concern in an organized manner. We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts. For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared.

    The trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in the credit column. To find out the profit earned or loss sustained by the firm during a given period and its financial position at a given point in time is one of the purposes of accounting. For achieving this objective, financial statements are prepared by the business enterprise, which includes the income statement and positional statement.

    A firm communicates to the users through financial statements and reports.  The financial statements contain summarized information on the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management.  They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
    1. Statement of financial position (or Balance sheet): Balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date.  It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
    2. Income statement (or Profit and loss account): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management.  Financial statements are prepared from the accounting records maintained by the firm.

    These two basic financial statements viz:

    (i) Income Statement,  or Trading, and Profit & Loss Account and (ii) Positional Statement, or Balance Sheet portrays the operational efficiency and solvency of any business enterprise.

    The following formula summarizes what a balance sheet shows:

    ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

    A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholder’s equity.

    The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time. So, we can also say that the last step of the accounting cycle is the preparation of financial statements.

    The income statement is another term used for Trading and Profit & Loss Account. It determines the profit earned or loss sustained by the business enterprise during a period. In the large business organization, usually one account i.e., Trading and Profit & Loss Account is prepared for knowing gross profit, operating profit, and net profit.

    On the other hand, in small size organizations, this account is divided into two parts i.e. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared. The positional statement is another term used for the Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by the Balance Sheet.

    Objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • Reliable information about changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
    • Financial information that assists in estimating the earning potential of the enterprise.
    • Other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users

    Objective and Importance:

    The profitability of Business:

    Financial statements are required to ascertain whether the enterprise is earning the adequate profit and to know whether the profits have increased or decreased as compared to the previous years so that corrective steps can be taken well in advance.

    The Solvency of the Business:

    Financial statements help to analyze the position of the business as regards to the capacity of the entity to repay its short as well as long-term liabilities.

    The Growth of the Business:

    Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion about the growth of the business. For example, an increase in sales with a simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.

    Financial Strength of Business:

    Financial statements help the entity in determining the solvency of the business and help to answer various aspects viz., whether it is capable to purchase assets from its resources and/or whether the entity can repay its outside liabilities as and when they become due.

    Making Comparison and Selection of Appropriate Policy:

    To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt the sound business policy by making Intra firm comparison.

    Forecasting and Preparing Budgets:

    The financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these shortcomings. Financial statements help the management to make the forecast and prepare budgets.

    Communicating with Different Parties:

    Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.

    Limitations of Financial Statements:

    Manipulation or Window Dressing:

    Some business enterprises resort to manipulating the information contained in the financial statements to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing.

    Use of Diverse Procedures:

    There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under the straight-line method or written down value method. However, the results provided by comparing the financial statements of such business enterprises would be misleading.

    Qualitative Aspect Ignored:

    The financial statements incorporate the information which can be expressed in monetary terms. Thus, they fail to assimilate the transactions which cannot be converted into monetary terms. For example, a conflict between the marketing manager and sales manager cannot be recorded in the books of accounts due to its non-monetary nature, but it will certainly affect the functioning of the activities adversely and consequently, the profits may suffer.

    Historical:

    Financial statements are historical as they record past events and facts. Due to continuous changes in the demand of the product, policies of the firm or government, etc, analysis based on past information does not serve any useful purpose and gives the only post­mortem report.

    Price Level Changes:

    Figures contained in financial statements do not show the effects of changes in the price level, i.e. price index in one year may differ from the price index in other years. As a result, the misleading picture may be obtained by making a comparison of figures of the past year with current year figures.

    Subjectivity & Personal Bias:

    Conclusions drawn from the analysis of figures given in financial statements depend upon the personal ability and knowledge of an analyst. For example, the term ‘Net profit’ may be interpreted by an analyst as net profit before tax, while another analyst may take it as net profit after tax.

    Lack of Regular Data/Information:

    Analysis of financial statements of a single year has limited uses. The analysis assumes importance only when compared with financial statements, relating to different years or different firm.

    Financial statements are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first step in the accounting process but they are the end products of the accounting process which give concise accounting information of the accounting period after the accounting period is over. To know the profit or loss earned by a firm, Trading, and Profit and Loss Account is prepared. Balance Sheet will portray the financial condition of the firm on a particular date.

    Explanation of Financial Statements Objectives Importance and Limitations ilearnlot
    Explanation of Financial Statements: Objectives, Importance, and Limitations, Image Credit from ilearnlot.com.
  • Value Added Statements: Definition, Advantages, and Disadvantages!

    Value Added Statements: Definition, Advantages, and Disadvantages!

    Learn, Explain Value Added Statements: Definition, Advantages, and Disadvantages! 

    The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The Concept of Value Added Statements: Meaning of Value Added Statements, Definition of Value Added Statements, Advantages of Value Added Statements, and Limitations or Disadvantages of Value Added Statements! The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. Also learned, Guide to Theories in Human Resource Management! Value Added Statements: Definition, Advantages, and Disadvantages!

    This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of the proprietary theory.

    Definition: The financial statement which shows how much value (wealth) has been created by an enterprise through utilization of its capacity, capital, manpower, and other resources, and how it is allocated among different stakeholders (employees, lenders, shareholders, government, etc.) in an accounting period.

    Value added is now reported in the financial statements of companies in the form of a statement. Value Added Statement (VAS) is aimed at supplementing a new dimension to the existing system of corporate financial accounting and reporting. This is called value-added statement. This statement shows the value created; value added (value generated) and the distribution of it to interest groups viz. Employees, shareholders, promoters of capital and government. 

    Since VAS represents how the value or wealth created or generated by an entity is shared among different stakeholders, it is significant from the national point of view. ICAI, 1985 has defined Value Added Statement as a statement that reveals the value added by an enterprise which it has been able to generate, and its distribution among those contributing to its generation known as stakeholders.

    For the purpose of calculating the amount of value added and its distribution, the value added statement is prepared. The main concern of this statement lies in deriving a measure of wealth (i.e. value), the entity has contributed to the society through the collective efforts of the various stakeholders. This statement is prepared and published voluntarily with the annual financial reports. Thus the presentation of a statement of value-added aids in the disclosure of VA by an enterprise.

    The value-added statement may be defined as a statement, which shows the income of the company as an entity and how that is divided between the people who have contributed to its creation.

    Assumptions in Value Added Statements:

    Following are the basic assumptions which are used for computation of value-added income through the preparation of value-added statements.

    • VAS is a supplement, not a substitute to P&L account.
    • The same data which is recorded and processed by the conventional accounting system is used in the preparation of VAS.
    • The basic accounting concepts and principals of accounting remain the same in preparation of VAS.

    It is convenient to prepare Value Added statements from conventional Profit & Loss account. However, there is a lot of difference between these two statements since the income statements contain certain nonvalue-added items e.g. provisions, interests, non-trading profit, and losses, etc.

    Objectives of Value Added Statements:

    The main objectives of preparing Value Added Statements are:

    • To indicate the value or wealth created by an enterprise. In a way, it shows the wealth-creating ability of the organization.
    • To show the manner in which the wealth created is distributed amongst the employees, shareholders and the government. The pattern of distribution of value added can be clearly understood.
    • To indicate the organization’s contribution to national income.
    • To use it as a basis for making inter-firm and intra-firm analysis, for preparation of financial plans and targets, for developing productivity linked incentive schemes.

    Value Added Statements v/s Profit & Loss Account:

    The traditional Profit & Loss Account is prepared on the theory that the company was created by its shareholders and exists for their benefit. However, the traditional accounting system shows only the profits or losses made by a business enterprise and do not provide any information showing the extent to which the wealth is created by a business unit in a given period. 

    The newly developed accounting method of value added is aiming to add a new dimension to the existing system of corporate financial accounting and reporting through the disclosure of additional information regarding the amount of wealth an entity has created in an accounting period and how it has been divided up by the entity amongst those who have contributed to its creation.

    The statement of value-added conceives the company as the corporate entity in which those who provide capital and those who provide labor cooperate to create wealth which they share amongst themselves and with the government. When the value added statement is prepared, then the company is viewed as a `wealth’ producing entity of a number of groups which are known as stockholders. 

    The value-added statement shows the wealth obtained by its employees, government, providers of capital or business itself during a period of time and the manner in which the generated value is distributed among the employees, government and the providers of capital. It shows the companies contributing to the national income.

    The value-added statement is not a substitute, but a supplement to the Profit & Loss Account although it is based on the figures from the latter. The value-added statement is essentially a much simpler statement than the profit statement. The Profit & Loss Account is prepared on the basis of double entry system and its preparation is statutorily compulsory, but the value added statement is not prepared in the statutory account.

    Advantages of Value Added Statements:

    The following are some of the advantages of Value Added Statements:

    • Reporting on VA improves the attitude of employees towards their employing companies. This is because the VA statement reflects a broader view of the companies objectives and responsibilities
    • VA statement makes it easier for the company to introduce a productivity linked bonus scheme for employees based in VA. The employees may be given productivity bonus on the basis of VA/payroll ratio
    • VA based (e.g. VA/Payroll, taxation/VA, VA/sales, etc.) are useful diagnostic and predictive tools. Trends in VA ratios comparisons with other companies and international comparisons may be useful.
    • VA provides a very good measure of the size and importance of a company. To use sales figures or capital employed figures as a basis for company ranking can cause distortion. This is because sales may be inflated by large bought-in expenses or a capital-intensive company with a few employees may appear to be more important than a highly skilled labor intensive company
    • VA statement links a company’s financial accounts to national income. A company’s VA indicates the company’s contribution to national income.
    • Finally, VA statement is built on the basic conceptual foundation which is currently accepted on the balance sheet and income statements. Concepts such as going concern, matching, consistency, and substance over form are equally applicable to the VA statement.

    Criticisms and Limitations or disadvantages of Value Added Statements:

    It is argued that although the Value Added statements shows the application of VA to several interest groups (like employees, government, shareholders, etc.), the risk associated with the company is only borne by the shareholders. In other words, employees, government, and outside financers are only interested in getting their share in VA, but, when the company is in trouble the entire risk associated therein is borne only by shareholders. Therefore, the concept of showing value added as applied to several interested groups is being questioned by many academics. 

    They advocated that since the shareholders are ultimate risk-takers, the residual profit remaining after meeting the obligation of outside interest group should only be shown as value added accruing to the shareholders. However, academics have also admitted that from the overall point of view value-added statement may be shown as the supplementary statement of financial information. But in no case can the VA statement substitute the traditional income statement (i.e. Profit and loss account).

    Another contemporary criticism of VA statement is that such statements are non-standardized. However, this practice of non-standardization can be effectively eliminated by bringing out an accounting standard on value added. Therefore, this criticism is a temporary phenomenon.

    Thus, along with the advantages, the value added statements embody certain limitations also. These limitations are as follows:

    • Preparation and presentation of the value-added statement may lead to information overload and confusion, as an ordinary employee reading his company’s corporate annual report may not be able to reconcile the value added statement with the earnings statement.
    • Another limitation of Value-added statement is that it raises a danger that management may take the maximization of value added as their goal i.e. the inclusion of the value added may wrongly lead management to pursue maximization of firms value.
    • Another argument against a value-added statement is that its inclusion in the corporate annual report would involve extra work, therefore, extra costs and delay and also a slight loss of confidentiality in view of the additional disclosure involved.
    • The most severe limitation of value-added data emerges from lack of any uniformity and consistency amongst different companies in the preparation and presentation of Value Added statements. VAS is flagrantly standardized.
    • Since there are various methods of calculating VA, it is difficult to make inter-firm comparisons. An even intra-firm comparison is not possible if the treatment of these items is changed in the subsequent years.
    • Value Added statements may lead to confusion especially in the cases where wealth or value added is increasing while earnings are decreasing.

    In spite of these limitations, it may be said that the value-added statement brings about certain changes in emphasis rather than the change in the content in the traditional financial statement. Thus it is considered as a valuable means of social disclosure.

    Value Added Statements Definition Advantages and Disadvantages - ilearnlot

  • What is the Financial Statement Analysis?

    Learn, Explain What is the Financial Statement Analysis?

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can be considered as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Also learned, Concept of Accountability in Financial Management, What is the Financial Statement Analysis?

    Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different.

    Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account. It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns. It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company.

    The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position. Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statement. The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports. Financial statements are such records and reports, which contain the data required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    The financial statements of a business enterprise are intended to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instance, competitors. Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of accounts of the company the Balance Sheet reflecting the assets, liabilities, and capital as of a certain date and the Profit and Loss Account showing the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures. The function of financial statement is to convey an understanding of some financial aspects of the company.

    Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be done by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a company’s previous financial performance and its future potential. The analysis of a financial statement is done to obtain a better insight into a firm’s position and performance. Analyzing a financial statement is a process of evaluating the relationship between component parts of the financial statement to obtain a better understanding of the firm’s position and performance. The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.

    Financial statement analysis involves the computation of ratios to evaluate a company’s financial position and results of operation. A ratio is an important tool for financial statement analysis. The relationship between two accounting figures expressed mathematically is known as the financial ratio. The ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgment about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in order to appraise financial performance.

    Ratio analysis is such a powerful tool of financial analysis that through it, the economic and financial position of a business unit can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms. Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time. Performance ratio can provide an insight into a bank’s profitability, return on investment, capital adequacy and liquidity.

    The above theories suggest that financial analysis helps to measure the performance of the companies. Different analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is being evaluated. Short-term creditors are concerned with the firm’s ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-term creditors hold bonds or debentures; mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal.

    The company must be sufficiently liquid in the short-term and have adequate profits for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firm’s stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the common stock would trade at a lower price in the market.

    Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a longer period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change. This method involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favorable and unfavorable tendencies are reflected by the data.

    Comparative Statement Analysis is another method of measuring the performance of the company. It is used to compare the performance and position of the firm with the average performance of the industry or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.

  • Components of a Strategy Statement

    Components of a Strategy Statement

    What are Components of a Strategy Statement?

    The strategy statement of a firm sets the firm’s long-term strategic direction and broad policy directions. It gives the firm a clear sense of direction and a blueprint for the firm’s activities for the upcoming years. The main constituents of a strategic statement are as follows:

    Strategic Intent

    An organization’s strategic intent is the purpose that it exists and why it will continue to exist, providing it maintains a competitive advantage. Strategic intent gives a picture of what an organization must get into immediately in order to achieve the company’s vision. It motivates the people. It clarifies the vision of the vision of the company.

    Strategic intent helps management to emphasize and concentrate on the priorities. Strategic intent is, nothing but, the influencing of an organization’s resource potential and core competencies to achieve what at first may seem to be unachievable goals in the competitive environment. A well expressed strategic intent should guide/steer the development of strategic intent or the setting of goals and objectives that require that all of the organization’s competencies be controlled to a maximum value.

    Strategic intent includes directing organization’s attention on the need of winning; inspiring people by telling them that the targets are valuable; encouraging individual and team participation as well as the contribution, and utilizing intent to direct allocation of resources.

    Strategic intent differs from strategic fit in a way that while strategic fit deals with harmonizing available resources and potentials to the external environment, strategic intent emphasizes on building new resources and potentials so as to create and exploit future opportunities.

    Vision Statement

    A vision statement identifies where the organization wants or intends to be in future or where it should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future. For instance, Microsoft’s vision is “to empower people through great software, any time, any place, or any device.” Wal-Mart’s vision is to become the worldwide leader in retailing.

    A vision is the potential to view things ahead of themselves. It answers the question “where we want to be”. It gives us a reminder about what we attempt to develop. A vision statement is for the organization and its members, unlike the mission statement which is for the customers/clients. It contributes to effective decision-making as well as effective business planning. It incorporates a shared understanding about the nature and aim of the organization and utilizes this understanding to direct and guide the organization towards a better purpose. It describes that on achieving the mission, how the organizational future would appear to be.

    Mission Statement

    The mission statement is the statement of the role by which an organization intends to serve its stakeholders. It describes why an organization is operating and thus provides a framework within which strategies are formulated. It describes what the organization does (i.e., present capabilities), who all it serves (i.e., stakeholders) and what makes an organization unique (i.e., the reason for existence).

    A mission statement differentiates an organization from others by explaining its broad scope of activities, its products, and technologies it uses to achieve its goals and objectives. It talks about an organization’s present (i.e., “about where we are”). For instance, Microsoft’s mission is to help people and businesses throughout the world to realize their full potential. Wal-Mart’s mission is “To give ordinary folk the chance to buy the same thing as rich people.” Mission statements always exist at the top level of an organization, but may also be made at various organizational levels. Chief executive plays a significant role in the formulation of a mission statement. Once the mission statement is formulated, it serves the organization in long run, but it may become ambiguous with organizational growth and innovations.

    In today’s dynamic and competitive environment, the mission may need to be redefined. However, care must be taken that the redefined mission statement should have original fundamentals/components. The mission statement has three main components a statement of mission or vision of the company, a statement of the core values that shape the acts and behavior of the employees, and a statement of the goals and objectives.

    Goals and Objectives

    A goal is a desired future state or objective that an organization tries to achieve. Goals specify in particular what must be done if an organization is to attain mission or vision. Goals make the mission more prominent and concrete. They coordinate and integrate various functional and departmental areas in an organization.

    Objectives: Objective, in general, indicates a place where you want to reach. In organizational literature, it means the aim which an organization tries to achieve. Objectives are generally in plural form. Objectives are predetermined; they provide clear direction to the activities and results to be obtained from the planning process. Objectives must be SMART (Specific, measurable, achievable, realistic and timely). Objectives must be clearly defined so that the works become goal-oriented and the unproductive and unsystematic tasks can be avoided.

    Goals: A Goal is simply something that somebody wants to achieve. The synonyms of goal are aim, ambition, purpose, target and objective. Simply speaking, goal refers to the purpose towards which the efforts are made or endeavors are directed. A goal has a time-frame which is generally long term. So, it’s a long term plan.

    At this stage, it is important to differentiate between the terms objective and goal, because the words, objective and goals seem to be synonymous, but, in fact, they are not. It does not matter much which word you call goal and which word you call objective if you are consistent in your own use and understand its relevance or applicability. However, if there are words in English that are confusing, especially to the students, objective and goal are the ones among them. It’s, therefore, important to understand them so as to avoid the confusion.

    When you have something you want to accomplish, it is important to set both goals and objectives. Once you learn the difference between goals and objectives, you will realize that how important it is that you have both of them. Goals without objectives can never be accomplished while objectives without goals will never get you to where you want to be. The two concepts are separate but related and will help you to be who you want to be.

  • Advantage and Disadvantages of Mission Statement

    Advantage and Disadvantages of Mission Statement

    Difference of Advantage and Disadvantages of Mission Statement

    What is Definition of Mission Statement? A sentence describing a company’s function, markets and competitive advantages; a short written statement of your business goals and philosophies. Difference of Advantages and Disadvantages of Diversity Management.

    A mission-statement defines what an organization is, why it exists, its reason for being. At a minimum, your mission-statement should define who your primary customers are, identify the products and services you produce, and describe the geographical location in which you operate.

    If you don’t have a mission-statement, create one by writing down in one sentence what the purpose of your business is. Ask two or three of the key people in your company to do the same thing. Then discuss the statements and come up with one sentence everyone agrees with. Once you have finalized your mission-statement, communicate it to everyone in the company.

    It’s more important to communicate the mission-statement to employees than to customers. Your mission-statement doesn’t have to be clever or catchy just accurate.

    If you already have a mission-statement, you will need to periodically review and possibly revise it to make sure it accurately reflects your goals as your company and the business and economic climates evolve. To do this, simply ask yourself if the statement still correctly describes what you’re doing.

    If your review results in a revision of the statement, be sure everyone in the company is aware of the change. Make a big deal out of it. After all, a change in your mission probably means your company is growing-and that’s a big deal.

    Once you have designed a niche for your business, you’re ready to create a mission-statement. A key tool that can be as important as your business plan, a mission-statement captures, in a few succinct sentences, the essence of your business’s goals and the philosophies underlying them. Equally important, the mission-statement signals what your business is all about to your customers, employees, suppliers and the community.

    The mission-statement reflects every facet of your business: the range and nature of the products you offer, pricing, quality, service, marketplace position, growth potential, use of technology, and your relationships with your customers, employees, suppliers, competitors and the community. Components of a Strategy Statement.

    Advantages of Mission-Statement

    Provides direction: Mission-statements are a way to direct a business into the right path, it plays a part in helping the business make better decisions which can be beneficial to them. Without the mission-statement providing direction, businesses may struggle when it comes to making decisions and planning for the future, this is why providing direction could be considered one of the most advantageous points of a mission-statement.

    Clear purpose: Having a clear purpose can remove any potential ambiguities that can surround the existence of a business. People who are interested in the progression of the business, such as stakeholders, will want to know that the business is making the right choices and progressing more towards achieving their goals, which will help to remove any doubt the stakeholders may have in the business.

    The benefit of having a simple and clear mission-statement is that it can be beneficial in many different ways. A mission-statement can help to play as a motivational tool within an organization. It can allow employees to all work towards one common goal that benefits both the organization and themselves. This can help with factors such as employee satisfaction and productivity. It is important that employees feel a sense of purpose. By giving them this sense of purpose it will allow them to focus more on their daily tasks. Help them to realize the goals of the organization and their role.

    Disadvantages of Mission-Statement

    Although it is mostly beneficial for a business to craft a good mission-statement. There are some situations where a mission-statement can be considered pointless or not useful to a business.

    Unrealistic: In most cases, mission statements turn out to be unrealistic and far too optimistic. An unrealistic mission statement can also affect the performance and morale of the employees within the workplace. This is because an unrealistic mission statement would reduce the likelihood of employees being able to meet this standard which could demotivate employees in the long term. Unrealistic mission statements also serve no purpose and can consider a waste of management’s time. Another issue which could arise from an unrealistic mission statement is that poor decisions could made in an attempt to achieve this goal. Which has the potential to harm the business and seen as a waste of both time and resources.

    Waste of time and resources: Mission-statements require planning, this takes time. Effort for those who are responsible for creating the mission statement. If the mission-statement is not achieve, then the process of creating. The mission-statement could seen as a waste of time for all of the people involve. A lot of thought and time is spent in designing a good mission-statement. And to have all of that time wasted is not what businesses can afford to doing. The wasted time could have spent on much more important tasks within the organization such as decision-making for the business.

    Advantage and Disadvantages of Mission Statement

  • Mission Statement

    Mission Statement

    What is Mission Statement?

    A mission statement is a short statement of an organization’s purpose, identifying the scope of its operations: what kind of product or service it provides, its primary customers or market, and its geographical region of operation. It may include a short statement of such fundamental matters as the organization’s values or philosophies, a business’s main competitive advantages, or a desired future state the “vision”.

    A mission statement is not simply a description of an organization by an external party, but an expression, made by its leaders, of their desires and intent for the organization. The purpose of a mission statement is to focus and direct the organization itself. It communicates primarily to the people who make up the organization its members or employees giving them a shared understanding of the organization’s intended direction. Organizations normally do not change their mission statements over time, since they define their continuous, ongoing purpose and focus.

    According to Chris Bart, professor of strategy and governance at McMaster University, a commercial mission statement consists of three essential components:

    Key Market: Who is your target client or customer (generalize if needed)?

    Contribution: What product or service do you provide to that client?

    Distinction: What makes your product or service unique, so that the client would choose you?

    Bart estimates that in practice, only about ten percent of mission statements say something meaningful. For this reason, they are widely regarded with contempt.

    The next step is to prepare mission statements. If the vision is “WHAT” of life, then the mission is “WHY” and “HOW”. It identifies the roles and activities to which an individual is committed and provides the overall direction for achieving the vision. Mission focuses on what you want to be and what you want to do- contributions and achievements. Mission focuses on the values and principles upon which being and doing are based. A personal vision needs to be clearly developed so that the mission statement can be based on it.

    I. These statements should clearly indicate the important roles and methodologies followed for fulfilling the vision.

    II. Techniques and tools such as affinity diagram, brainstorming, fish-bone diagram, and surveys should be used.

    III. Mission statements should realize the vision in action. Conduct a mind map to check whether it is really fulfilled.

    IV. These statements will carry the information which needs to be fulfilled in the near future.

    V. Time factor may be brought in to make it more systematic.

    Mission statements are prepared to make the employees understand in clear terms “HOW” to achieve the vision and “WHY” all this has to be done. It is a ROAD MAP for achieving the vision. The mission statements act as a guiding force encouraging the individuals to work towards reaching the vision.

    What is Purpose of Mission statement?

    The sole purpose of a mission statement is to serve as your company’s goal/agenda, it outlines clearly what the goal of the company is. Some generic examples of mission statements would be, “To provide the best service possible within the banking sector for our customers.” or “To provide the best experience for all of our customers.” The reason why businesses make use of mission statements is to make it clear what they look to achieve as an organization, not only for themselves and their employees but to the customers and other people who are a part of the business, such as shareholders. As a company evolves, so will their mission statement, this is to make sure that the company remains on track and to ensure that the mission statement does not lose its touch and become boring or stale.

    North American magazine and website that carries news stories about entrepreneurship, small business management, and business, Entrepreneur explains the purpose of a mission statement as the following:

    “The mission statement reflects every facet of your business: the range and nature of the products you offer, pricing, quality, service, marketplace position, growth potential, use of technology, and your relationships with your customers, employees, suppliers, competitors and the community.”

    It is important that a mission statement is not confused with a vision statement. As discussed earlier, the main purpose of a mission statement is to get across the ambitions of an organization in a short and simple fashion, it is not necessary to go into detail for the mission statement which is evident in examples given. The reason why it is important that a mission statement and vision statement are not confused is because they both serve different purposes. Vision statements tend to be more related to strategic planning and lean more towards discussing where a company aims to be in the future.

    Here are what business leaders say a mission statement should do for a company:

    “A good vision or mission statement will fill a few roles: It will be toothy enough to engage the media, analysts and other industry watchers. It will be aspirational enough to give employees something to reach for and bind them together in their day-to-day work. And it will be clear and specific enough to build the brand and affect public perception of the company. In an ideal world, it will even give your customers a sense that they’re buying into your vision when they purchase one of your products.” by Kyle Monson, a partner at Knock Twice hybrid creative agency.

    “A company’s mission statement is the cornerstone on which it is built. Its strategic plan and its culture are directly tied to the vision the mission statement puts forth. It is important that a mission statement supports the overarching goals and purpose of the company and explain why you exist as a business in a way that can be understood internally within the company and externally to consumers.” by Gerry David, president, and CEO of healthy lifestyle company Celsius Holdings.

    “Creating a mission statement takes time and a lot of decision making. It lays down expectations for how your customers and employees will interact with one another, so take your time with it. Clearly, write down your vision of the company and ask yourself, ‘What am I trying to accomplish?’ Think about how you want others to perceive your company, what’s important to you and your organization, and then prioritize it. Most importantly, make sure it’s clear, concise and easy for anyone to understand.” by Bobby Harris, president, and CEO of Blue Grace Logistics.

  • What is Vision Statement?

    What is Vision Statement?

    Learn, What is Vision Statement? Meaning and Definition!

    A vision statement is a declaration of an organization’s objectives, ideally based on economic foresight, intended to guide its internal decision-making. A vision statement is not limited to business organizations and may also be used by non-profit or governmental entities. Also learn, “The Language of Business” also called Accounting, but Why? Vision Statement! 

    The vision statement is written by looking ahead into the future. It aims at higher achievable things. It is based on what the organization should strive for and achieve in another five to ten years. Through various activities, the faculty is guided to attain the vision. This acts as a powerful tool, a guiding star. When personalized and truly owned, vision provides the incentive the drive towards fulfillment. It creates commitment, motivation and the drive for initiating the mission, objectives, projects, and tasks necessary to realize the vision. Developing a vision may take a few weeks. Though this looks to be a long time, it should be understood that it is a portrayal of what life could be five to ten years from now. Time is allowed for dreaming and brainstorming along with categorizing random thoughts to ensure a comprehensive and realistic vision.

    In today’s competitive environment, it is just not sufficient if we are a step ahead of other institutes. It should be by leaps and bounds. To achieve this, every institute needs to have a vision. They should start looking into the future, predicting it, planning for it, and making it happen. Only this will make the difference between dreaming things and making things happen. Thus, vision is the result of dreams in action.

    The gap between dream and action is filled with the plan. How well we succeed will depend upon depends on how well we plan. Planning sets the direction and speed of the progress. Effective utilization of time and resources is a needed prerequisite. To survive in this global village, productivity is more important than production. Effectiveness is more important than efficiency. It is more important how effectively I utilize the fewer opportunities put forth before me.

    Vision is not the state of being but the process of becoming. Vision should be something which is far fetching and not that which calls for a change every day. It should be borne in mind that the vision statement is organization specific.

    #Definition and Structure of Vision Statement!

    A vision statement is a company’s roadmap, indicating both what the company wants to become and guiding transformational initiatives by setting a defined direction for the company’s growth. Vision statements undergo minimal revisions during the life of a business, unlike operational goals which may be updated from year-to-year. Vision statements can range in length from short sentences to multiple pages. Vision statements are also formally written and referenced in company documents rather than, for example, general principles informally articulated by senior management.

    The definition of a vision statement according to Business Dictionary is “An aspirational description of what an organization would like to achieve or accomplish in the mid-term or long-term future. It is intended to serve as a clear guide for choosing current and future courses of action.”

    A consensus does not exist on the characteristics of a “good” or “bad” vision statement. Commonly cited traits include:

    Concise: Able to be easily remembered and repeated.

    Clear: Defines a prime goal.

    Future-oriented: Describes where the company is going rather than the current state.

    Stable: Offers a long-term perspective and is unlikely to be impacted by market or technology changes.

    Challenging: Not something that can be easily met and discarded.

    Abstract: General enough to encompass all of the organization’s interests and strategic direction.

    Inspiring: Motivates employees and is something that employees view as desirable.

    Management vision can lead the organization towards success and it can also demoralize the organization. There are cases where improper vision statements have ruined the organization. Hence, it is necessary that utmost importance is given and care is taken while formulating the vision statement. To formulate a vision statement, one has to study the core values and purpose of the organization. Only such a vision statement will do the motivating role.

    For the human being, there are many core values. Some people have money as the core value. Some have ethics and some have power, status as core values. Whatever people do are the reflections of their core value. Similarly, the activities of an organization should reflect its core value. Some of the core values are:

    I. Service to people.

    II. Innovative technology.

    III. High ethical standards.

    IV. Always on time, and.

    V. Maximum Profit.

    The purpose means to answer the question: “what for does the organization run?” This purpose also should reflect in the vision statement.

    The vision statement gives direction to the organization. Having a vision paves way for the success of the organization. Between the dream and the vision, the organization has to climb a ladder of action plans such as expertise, creativity, empowerment, involvement, and values. A vision in each of these sub-levels will help the organization to reach the goal faster.

    What should be Vision statement?

    As Future-oriented.

    As Creative.

    As Setting high standards of excellence.

    As Inspiring enthusiasm and encouraging commitment.

    As Reflecting uniqueness, and.

    As Very clear and challenging.

    It is found that when a vision is clearly stated, the focus is there. People, who look ten years ahead, succeed more rather than those who leave things to fate.

    Continuous monitoring and feedback are necessary to find where the organization is positioned with regard to its vision. It gives an indication of the progress of the organization.

    The vision should be popularized among the employees by having it displayed in all prominent places in the organization; having it printed on personal items such as ID cards, pay slips etc. Top officials should promote the vision statement frequently in personal and public talks. They must also own it and live it.

    What is Vision Statement - ilearnlot