Accounting is very much connected with our personal lives in so far as it is in respect of every business. The balance sheet is prominently used by the investors and management to gauge the financial status of the business. The inventory being an important principal asset, depicts the financial position of the production and sales process. Despite the benefits associated with financial statement analysis they are also comprised of deficiencies. Financial statements neglect employees since they do not cover their skills and performance within the company which are normally important in the measurement of the company’s performance. This can mainly be attributed to lack of universal guidelines for analyzing financial statements. This enables comparisons of the financial statements of an organization over time.
Financial statements comprise of balance sheets which are not effective in provision of relevant information in time as they entail use of historical data hence not adequate for evaluating the current company’s position. Moreover, there are several accounting measurement techniques which company use in analyzing financial statements which makes it difficult for companies to compare their performance with those of others. At present time, creation and adoption of universal guidelines for financial statements analysis is not possible, especially with the different accounting methods and variation in management strategies among companies.
To managers, financial statement analysis provide assistance in decision making as it enables them measure the companies’ performance at specified time period which in turn provides them with an understanding regarding the profit incurred. The management, which oftentimes does not include the accountants (we’re just the hired help!), and, ultimately, the Board of Directors of the company. It prevents entities from using different methods in order to skew financial information.
Through financial statement analysis managers can easily compare the company’s performance in time periods thereby giving them an understanding of whether the strategies adopted are beneficial to the company thereby helping them in deciding the fate of the strategies. However, comparing the company’s performance with those of rivals using the financial statements can be misleading to the managers in that different companies may utilize different accounting which provide a variation in terms of the results obtained. The process begins with bookkeeping, which is just one step in the accounting process.
So, if you are a member of the management or the Board, take the time to learn the basics of accounting so that next time you see the financial reports, you at least know what it is you are reading. Believe me, I’ve been to meetings discussing financial reports wherein I feel that I’m talking in the local language while the management is talking in a foreign language. Just remember, accounting is an integral part of your business and should not be relegated to the sides.