Financial Statement objectives

This`post represent the first in a series of posts that will focus on financial statement analysis. The topics will cover the various areas of financial analysis such as current liquidity, capital structure, funds flow and profit and loss analysis.

Financial statement analysis is the process of applying various analytical tools and techniques to the financial statements of an organization. The purpose of this analysis is to determine significant relationships from business transactions that are not necessarily apparent in the financial statements.

Financial analysis can be used as a preliminary screening tool in the selection of merger candidates. It can be used as a forecasting tool of future results by individual and institutional investors. It can also used as an evaluation tool by corporate management. A key element of financial analysis is to eliminate the reliance on guesswork, hunches or intuition in the decision making process.

In order to understand financial statement analysis, we must first examine the analytical objectives of some of the users of financial statements such as creditors, equity investors, management, auditors and merger analysts.

Creditors are providers of either short term or long term financing to an organization. Trade creditors are providers of very short term credit for the purchase of goods or services and usually expect to be paid within 30 to 90 days. Banks can be thought of the more traditional lenders of short term an long term financing. Another method of credit financing is through the sale of corporate bonds in the securities market. Creditor used financial analysis to asses the existence and reliability of resources to ensure the repayment of principal and interest on loans,

Equity investors are providers of capital to an organization. Since equity investors represent owners in the enterprise equity capital is exposed to all the risks of ownership and provides a cushion to the loan capital that is senior to it. Equity capital or residual interest is what remains after the claims of creditors, bondholders and preferred stockholders have been satisfied during the liquidation process. Therefore, the financial data needs of equity investors are the most comprehensive because their investment is affected by all aspects of the enterprise such as operations, profitability, financial condition, and capital structure.

The objectives of management in financial statement analysis is to asses the organization's financial condition, profitability, and cash flow. management has a number of methods, tools and techniques available to it in monitoring and keeping up with the ever changing business environment.

The objectives of acquisition and merger analysts are in many ways similar to those of the equity investor except that the analysis of the enterprise focuses primarily on the acquisition of an enterprise. Acquisition analysis will stress the valuation of assets including intangible assets such as goodwill, and the liabilities included in the acquisition or merger plan.