Financial Statement: Technique of Evaluating an Organization's Financial Records

Financial statement analysis is referred to as a technique of evaluating an organization's financial records with the intention of making decisions. External interested parties such as investors use the financial records to understand the organization's general health to analyze its value and performance (AH and Mashkour, 2018). Internal stakeholders use financial statements as an instrument for monitoring and supervising the organization's finances. The organization's financial records help keep the inventory of relevant financial information in each aspect of business activities; Thus, they can be analyzed into consideration of the past, current, and anticipated performance. This essay will discuss and elaborate on the different aspects of financial statement analysis and its significance in an organization. Different methods are widely employed as part of evaluating financial records. The company's financial statement evaluation methods should focus on vertical analysis, ratio analysis, and horizontal analysis. Ratios help express the many relationships between financial accounts and between the anticipated relationships from a certain point in time to another, usually quarterly or annually ( Christensen et al ., 2015). Ratios represent one quantity with respect to another. Comprehensive research studies also have considered ratio analysis a significant role in predicting credit failure and stock returns. The horizontal analysis involves the company's financial information comparison over several years, mainly to establish its growth rate. This analysis method will help the company identify the years with a low growth rate and focus on improving the factors attributed to its decreasing growth rate ( Christensen et al ., 2016). On the other hand, vertical analysis is defined as the evaluation of the income statement. Every line item found on the current company's income statement is recorded as the sales percentage within such statements. It thereby assists in evaluating a company's performance by underlining if it is demonstrating an upward or downward trend. (Kraft, 2015). Vertical analysis is crucial as it helps to compare the different companies’ performance across industries. Internal, external, and statutory auditors should be involved in the auditing process of the organization. The fiscal performance and the marketplace position of the company's transparency will improve the degree of confidence in the involved stakeholders. These stakeholders include investors, government agencies, employees, unions, and directors ( Christensen et al ., 2016). These records will equip every stakeholder in making informed economic decisions. The law requires an expert opinion from both internal and external auditors as per the General Accepted Accounting Principles (GAAP). The average company is likely to lose five percent of its yearly income to fraud every year ( Christensen et al ., 2015). The company should predominantly utilize financial statement evaluation to prevent financial fraud; however, other ways to commit fraud should also be identified. Some of the other ways the organization can also include in the prevention of financial fraud include misappropriation of assets and corruption. Corruption comes in different forms, such as conflicts of interest, extortion, and bribes. On the other hand, asset misappropriation involves the direct stealing of money, stealing of non-cash assets, and submitting false repayment claims to demand bogus expenses. Utilization of the discussed measures to prevent financial fraud increases the chances of the company succeeding in the long run. The leading goal of financial statement analysis is to utilize a company’s information regarding its previous and present performance to determine how well it will perform in the years to come.

Reference 

Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit quality: Insights from audit professionals and investors.  Contemporary Accounting Research,  33 (4), 1648-1684.  https://www.thecaq.org/wp-content/uploads/2018/03/Christensen_et_al-2016-Contemporary_Accounting_Research-as-published.pdf

SR, M., AH, J., & Mashkour, S. C. (2018). The role of foreign investment in the development of financial markets: Iraq stock exchange for the period 2010 - 2017.  Journal of Business & Financial Affairs,  07 (04).  https://doi.org/10.4172/2167-0234.1000361 

Kraft, P. (2015). Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads.  The Accounting Review,  90 (2), 641-674. https://www.aaajournals.org/doi/pdf/10.2308/accr-50858