The Analysis of Financial Statements

Date: 2015-10-07; view: 467.

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The objective of public accounting reports is to reveal or describe the economic activities of a company. In this sense, accounting reports represent raw material to be used in developing an understanding of a company and its operations The statements provide much useful information, but by analysis and study of them additional relationships and activities may be revealed The underlying principles of accounting analysis are to be found in infor­mation theory and communication theory. But the practice is best re­vealed by a study of what analysts do, and in practice ratio analysis and trend studies are widely used analytical techniques. While analysis of all types of accounting reports is desirable for disclosure of information on a company's activities, the process can best be ex­plained by emphasizing methods of analyzing the public accounting

The purposes for which information is needed will indicate the types of analyses to be made. In broad terms, there are three types of analyses:

1. General-purpose analysis, which aims merely to reveal more com­pletely the information in accounting statements, and to relate it to other factors in the company and the economy.

2. Analysis for credit or investment purposes, which aims to disclose relationships which bear upon the financial effectiveness of the company.

3. Analysis for management purposes, which aims to disclose success­ful and unsuccessful plans and operations.