ACCT 370 DB Importance of Financial Statement Analysis

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Liberty University *

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370

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Finance

Date

Feb 20, 2024

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What is financial statement analysis? Financial statement analysis is the process of evaluating a company's financial statements to understand its financial health and performance. “The literature on financial statement analysis attempts to improve fundamental analysis and identify market inefficiencies with respect to financial statement information” (Jackson, 2022). When comparing a company's financial performance to its competitors and the industry average, this might entail looking at financial ratios including the current ratio, debt-to-equity ratio, and return on equity. Financial statement analysis seeks to identify trends and potential complications so that investors may decide whether to purchase, hold, or sell a company's stock with knowledge. Why is financial statement analysis an important area of study? “Financial statement analysis is crucial for complying with business laws and regulations, while also meeting the needs of stakeholders and various other parties” ( How financial statement analysis, 2020). Analyzing a company's financial statements may give investors information about its financial performance and health, which can aid them in making better-educated decisions about whether to purchase, hold, or sell its stock. Financial statement analysis may also assist managers in identifying areas where the firm needs to improve, such as in reducing costs or revenue-generating initiatives. It is significant for lenders since it enables them to evaluate a company's creditworthiness and decide whether or not to issue loans. Financial statement analysis is another tool regulators use to make sure businesses are adhering to laws and regulations governing financial reporting. It also aids in projecting future performance. By studying historical performance and finding trends and patterns, financial statement analysis aids in forecasting the future success of the organization. Overall, financial statement analysis is a useful tool that a number of stakeholders may utilize to acquire a better understanding of a company's financial status and performance. What is learned from the process of financial statement analysis? The process of financial statement analysis can provide a variety of insights about a company. It can reveal a company's overall financial health by identifying trends in its revenues, profits, and cash flow. It can also indicate whether a company is generating enough cash to pay its bills and whether it is carrying too much debt. By examining variables such as gross margin, operating margin, and net income, financial statement analysis can disclose a company's profitability. It can also demonstrate how a company's profitability compares to that of its competitors and industry averages. Financial statement analysis may also aid in determining a company's liquidity, or its capacity to pay its payments when they become due. It is possible to do so by examining measurements such as the current ratio and quick ratio. Financial statement analysis also aids in determining a company's solvency, or its capacity to satisfy long-term financial obligations. This may be accomplished by examining metrics such as the debt-to-equity ratio and the interest coverage ratio. When examining metrics such as inventory turnover, days sales outstanding, and days payments outstanding, financial statement analysis can disclose a company's efficiency. It can also provide insight into a company's market position by comparing

its financial performance to that of its peers and industry averages. However, financial statements do not always provide a complete and faithful picture of a company’s activities and condition” (Resvine et al., 2020). Discuss the Biblical implications of reliable and representationally faithful financial statements. The need for reliable and representationally faithful financial statements is founded in biblical values of honesty and integrity. The Bible emphasizes the need of being genuine and trustworthy in one's business dealings. “The LORD detests dishonest scales, but accurate weights find favor with him” (Proverbs 11:1, NIV, 2020). This verse implies that God despises dishonest or incorrect financial activities and places a premium on fairness and precision in financial dealings. Furthermore, the Bible emphasizes the significance of accountability for one's actions. “For God shall bring every work into judgment, with every secret thing, whether it be good, or whether it be evil” (Ecclesiastes 12:14, KJV, 2023). This implies that individuals will be held accountable for their activities, including their financial dealings, and that financial accounts must be transparent and truthful. In that regard, trustworthy and accurate financial records may be viewed as a reflection of one's integrity and honesty, as well as a crucial component of being accountable to God and others. It's also worth noting that financial statements are vital not just for the company, but also for its stakeholders, who include investors, workers, customers, and suppliers. Reliable and representationally true financial statements offer stakeholders accurate and fair information on which to base key choices. References Ecclesiastes 12:14 . Bible Hub. (2023). Retrieved January 23, 2023, from https://biblehub.com/ecclesiastes/12-14.htm How financial statement analysis helps business grow . Ohio University. (2020, January 22). Retrieved January 23, 2023, from https://onlinemasters.ohio.edu/blog/financial-statement-analysis-helps-business-grow/#:~:text=It %20provides%20internal%20and%20external,helpful%20for%20making%20lending%20decisio ns. Jackson, A. B. (2022). Financial statement analysis: A review and current issues. China Finance Review International, 12 (1), 1-19. https://doi.org/10.1108/CFRI-10-2021-0208 Proverbs 11:1 . BibleRef.com. (2020). Retrieved January 23, 2023, from https://www.bibleref.com/Proverbs/11/Proverbs-11-1.html#:~:text=Proverbs%2011%3A1%2C%2 0ESV%3A,just%20weight%20is%20his%20delight. Resvine, L., Collins, D. W., Johnson, W. B., Mittelstaedt, H. F., & Soffer, L. C. (2020). Financial reporting and analysis (8th ed.). New York, NY: McGraw-Hill.

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