What are Corporate Financial Statements good for and what do they not tell you?

Essay on “ What are Corporate Financial Statements good for and

what do they not tell you? “

For each corporation there are 4 main financial statements that should exist and they are: Balance Sheet, Statement of Cashflows, Statement of Income, Statement of Equity and the Notes for the Financial Statements, which have too many information that shouldn’t be missed. For other organizations, like non-profit organizations and governments this list might be different and their statements are much more complicated than for a middle-size company. These statements basically have all the financial information that describes the company, its current financial position, reflects the performance and all the changes in financial position of the company.

There are few types of people that normally use the financial statements to gather the information. First of all, they are the owners and the managers themselves, for them the financial statements are basis for the decision-making that concerns the company’s operations. Financial analysis that they also do on the basis of the information presented in the statements is providing the managers with a more detailed understanding of the figures.

If the company went public this information is also given to the shareholders so that they understand how the situation is going.

For the investors financial statements are vital in terms of deciding whether this company is worth investing in or not, it’s not only showing the past figures but on their basis the projections are made how the company should be doing in foreseeable future.

Not only private investors use them, but also institutions that provide companies with loans and thus they decide if the company deserves to be financed or to have extended debt securities (Wikipedia.org).

Eventually, financial analysis that is performed on the basis of figures presented in the statements, is actually the main tool created that the financial statements are used for. Because this financial analysis adheres to accounting standards by providing accounting regulatory agencies with an understanding regarding whether the company follows Generally Accepted Accounting Principles (“GAAP”) or not. Further, it plays an important role in taxation by assisting government agencies in performing taxation analysis due to the company (Hubpages.com). The good thing is that financial analysis will represent neither the projections nor the assumptions, but pure facts.  Information that has been year on year recorded in the financial statements now can be used to see the trends that help to analyze the company’s performance and in case it has stable rate of growth even to make some predictions for the future. (Redman)

However financial statements have certain limitations that might create some confusion at a certain moment. On of them, is absolutely the vice-versa of the advantage, even-though it is presenting facts, and they are the past. Any past performance cannot guarantee the future performance at the same level. We can only make it more accurate if taking the longer period in consideration and when observing the same trade over the period. (LLC)

Financial statements are not telling us about the qualitative information, as they only include the quantitative numbers. Such factors as reputation and prestige of the business with the public, the efficiency and loyalty of its employees, integrity of management are not reflected in the financial statements. (Corporation) There might also some structural changes in the company that are oriented on the future and again are only presented as qualitative information, however they influence the overall figures. (LLC)

As well as external factors are not reflected in financial statements, there might have been some economic, social, politic events that had a certain affect on the company’s operations, but only financial ones will be shown there.

One of the most important limitations will be the value of money, the change in value for the currency that was in the records 15 years ago and now is significant and nowadays it’s complicated to translate every asset acquired or liability given during these periods into modern values. As well as the exchange rate of foreign currencies that some companies may have operations with, it is floating and can never be defined at stable position, so as value of assets.

Another limitations is that fixed assets are shown at cost less depreciation on the basis of "going concern concept", but the value placed on the fixed assets may not be the same which may be realized on their sale.

As one more and most general limitation will be the fact that these reports are after all interim and some accounts like Profit, Loss Account can’t present the precise data, because they change every small period of time, as the reports with financial statements are more usually done quarterly or monthly. (Corporation)

Financial statements are of vital importance for the companies in order to keep up with the taxation and GAAP regulations to show that it’s fair and transparent in its operations, doesn’t use any creative accounting. The financial analysis, which is a result of processing the information, helps to evaluate the company’s performance, trends, make projections and see if it’s credit-worthy. However there’s a lot of information that might not be precise enough due to the time or human factors (because all financial statements keep the trace of person who was working on them), they do not include the qualitative data and some important managerial decisions that affect the strategies, structures and thus financial figures.

Bibliography

Redman, K Sue. Pros and Cons of a Financial Statement Analysis. 2012. 2013 <http://www.ehow.com/list_5885702_pros-cons-financial-statement-analysis.html>.

Wikipedia.org. Financial Statements. 2013 <http://en.wikipedia.org/wiki/Financial_statements>.

Corporation, Answers. What are the limitations of financial statements? 2013 <http://wiki.answers.com/Q/What_are_the_limitations_of_financial_statements>.

Hubpages.com. Pros and Cons of Financial Statement Analysis. 2013 <http://richet.hubpages.com/hub/Pros-and-Cons-of-Financial-Statement-Analysis>.

LLC, Independent Stock Investing. Understanding the Limitations of Financial Statements. 2013 <http://www.independent-stock-investing.com/Limitations-Of-Financial-Statements.html>.