Analyzing Financial Statements — What is your perspective?? — Part2Kapil
Analyzing and trying to get insights from Financial Statement is one of the most interesting aspect. A Financial Statement can be dissected in many ways. We had looked at three angles or lenses thru which these statements can be looked at: Here are three more ways to look at these statements :
An auditor’s primary objective is an expression of an opinion on the fairness of financial statements according to generally accepted accounting principles. As auditor, you desire assurance on the absence of errors and irregularities in financial statements. Financial statement analysis can help identify any errors and irregularities affecting the statements. Also, this analysis compels our auditor to understand the company’s operations and its performance in light of prevailing economic and industry conditions. Application of financial statement analysis is especially useful as a preliminary audit tool, directing the auditor to areas of greatest change and unexplained performance.
5 RISK ANALYST
Accounting risk results from the need for judgments, estimates, and impression inherent in the accounting system. Accounting risk increases our uncertainty in decision making. Accounting risk also involves accounting conservatism. Assumptions play an important role in accounting measurements, and these assumptions can be too conservative or optimistic.
6. YOU ARE THE ANALYST/FORECASTER
More persistent earnings reflect recurring, stable, predictable, and operating elements. Your estimate of earnings persistence should consider these elements. More persistent earnings comprise recurring operating elements. Finding 40% of earnings from unusual gains implies less persistence because its source is no operating. You can also question classification of litigation gains as “unusual” – they are sometimes better viewed as extraordinary. The extraordinary loss component also implies less persistent. In this case you need to assess whether environmental costs are truly extraordinary for this company’s business. Together, these components suggest less persistence than suggested by the stable and steady growth trend in aggregate earnings. This lower persistence should be reflected in both the level and uncertainty of your earnings forecast.
Gaining Insights into an organization’s financial statements is also a matter of perspective. Thus analyzing a company from one of the lenses makes a huge difference!!!!!