The core objective of any business or organization is to make a profit from its operations. The best way for a business to determine its profit is from its financial statements. The process of systematically recording financial transactions within a certain period is called accounting. Accounting enables a business to determine its income, assets, equity, and liabilities. Financial statement analysis, then, enables a company to make decisions using the information from these reports.
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In this course, we learned about reporting and analysis of different elements of financial statements – long-lived assets, liabilities, shareholders’ equity, and cash flow. In each chapter, we learned the recognition and measurement of the different elements. We also learned the budget process, types of budgets and their importance, budget control and use in business decision making.
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Reporting and analysis of elements of financial statements is a process important in business decision making. The reporting process begins with the systematic recognition of the elements of financial statements based on the relevant accounting standards. Understanding the application of accounting standards helps in the recognition, measurement, and disclosure of these elements. A business that is able to apply accounting standards in its reporting enhances the reliability of its financial data (Kimmel, Weygandt, & Kieso, 2016). Reliability will enable users of financial statements to analyze and make accurate decisions on investment and planning.
Analysis of financial statements involves the use of different metrics to determine trends in company performance, its effectiveness, liquidity, profitability, solvency, and market performance (Tracy, 2012). The analysis will help investors make investment decisions, creditors to determine whether to float credit to a business, and the business to make operational and strategic decisions.
Budget planning and control are one of the ways that a company is able to effectively use its resources in operations and maximize income. Budget planning ensures that the business operates within its financial means. Budgetary control enables the business to compare the actual and budgeted results to ensure management of these variances. Control will help management determine areas with high variances, monitor them, and make decisions on corrective measures.
References
Kimmel, P., Weygandt, J., & Kieso, D. (2016). Accounting: Tools for Business Decision Making (6th ed.). Hoboken: John Wiley & Sons.
Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
