For Flores (2016), financial accounting culminates with the formulation of companies' financial statements; for which the International Accounting Standards must be taken into account.
In this regard, the International Accounting Standard 1- Presentation of Financial Statements; establishes the bases for the presentation of the general purpose financial statements, to ensure that they are comparable, both with the financial statements of the same entity corresponding to previous periods, and with those of other entities.
This Standard establishes general requirements for the presentation of the financial statements, guides to determine its structure and minimum requirements on its content. This standard also establishes that the International Financial Reporting Standards (IFRS) are the Standards and Interpretations issued by the International Accounting Standards Board (IASB). Those Standards include: (a) International Financial Reporting Standards; (b) International Accounting Standards; (c) IFRIC Interpretations; and, (d) Interpretations of the SIC.
IAS-1 establishes that the financial statements constitute a structured representation of the financial situation and financial performance of an entity. The purpose of financial statements is to provide information about an entity's financial position, financial performance, and cash flows that is useful to a wide variety of users in making their economic decisions. The financial statements also show the results of the management carried out by the administrators with the resources entrusted to them. To meet this objective, the financial statements will provide information about the following elements of an entity: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, which include gains and losses;(e) contributions from the owners and distributions to them in their capacity as such; and, (f) cash flows. This information, together with that contained in the notes, helps users to predict the entity's future cash flows and, in particular, their timing and degree of certainty.
IAS-1 establishes that a complete set of financial statements comprises: (a) a statement of financial position at the end of the period; (b) a statement of income and other comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, which include a summary of significant accounting policies and other explanatory information; e) comparative information with respect to the immediately preceding period.
Based on the aforementioned, two financial statements have been prepared that will serve as the basis for the purposes of this research work. (See PDF)
STRUCTURAL ANALYSIS OF FINANCIAL STATEMENTS AND DECISION MAKING:
Financial analysis methods are considered as the procedures used to simplify, separate or reduce the descriptive and numerical data that make up the financial statements, in order to measure the relationships in a single period and the changes presented in various accounting years. According to the way of analyzing the content of the financial statements, there are the following evaluation methods:
- Vertical analysis method. It is used to analyze the Statement of Financial Position and the Income Statement, comparing the figures vertically; horizontal analysis method. It is a procedure that consists of comparing homogeneous financial statements in two or more consecutive periods, to determine the increases and decreases or variations of the accounts, from one period to another. This analysis is of great importance for the company, because it informs if the changes in activities and if the results have been positive or negative; It also allows defining which ones deserve more attention because they are significant changes in gait. Unlike vertical analysis which is static because it analyzes and compares data from a single period,This procedure is dynamic because it relates the financial changes presented in increases or decreases from one period to another. It also shows the variations in absolute figures, in percentages or in ratios, which allows a broad observation of the changes presented for study, interpretation and decision-making.
There are two procedures for vertical analysis:
- Comprehensive percentages procedure: It consists of determining the percentage composition of each account of the Assets, Liabilities and Equity, taking as a base the value of the total Assets and the percentage that each element of the Statement of Results represents from the Net Sales: Integral Percentage = Partial value / base value X 100. Example The value of the total assets of the company is 122,042 and the value of the Stocks is 38,768. Calculate the integral percentage. Integral percentage = 38,768 / 122,042 X 100. Integral percentage = 31.77%. The financial analysis allows determining the convenience of investing or granting credits to the business; likewise, determine the efficiency of the administration of a company. Simple ratio procedure: The simple ratios procedure has great practical value, since it allows you to obtain an unlimited number of ratios and indices that serve to determine liquidity, solvency, stability, solidity and profitability in addition to the permanence of your inventories in storage, the collection periods of clients and payment to suppliers and other factors that serve to widely analyze the economic and financial situation of a company.
Analysis procedure:
- Two Financial Statements (Statement of Financial Position; or, Statement of Comprehensive Income) are taken from two consecutive periods, prepared on the same valuation basis. The corresponding accounts of the analyzed States are presented. The values of each account are recorded in two columns, on the two dates to be compared, recording in the first column the figures for the most recent period and in the second column, the previous period. Another column is created indicating the increases or decreases, indicating the difference between the figures recorded in the two periods, subtracting the values of the previous year from the values of the most recent year. (Increases are positive values and decreases are negative values.) Increases and decreases and percentage are recorded in an additional column.(This is obtained by dividing the value of the increase or decrease by the value of the base period multiplied by 100.) In another column, the variations in terms of ratios are recorded. (It is obtained when the absolute data is taken from the comparative Financial Statements and the values of the most recent year are divided by the values of the previous year). When observing the data obtained, it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.it follows that when the ratio is less than 1, there was a decrease and when it is higher, there was an increase.
The structural analysis allows to quickly see the composition of the company's investments, in order to make the decisions to increase, maintain or decrease the corresponding concepts.
Keep going. (See PDF)
Flores Soria Jaime. (2016). Financial Accounting. Lima: Center of Specialization in Accounting and Finance-CECOF Asesores.
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