Financial statements can be understood as those documents that show the economic situation of a company, its ability to pay, at a specific date, past, present or future; or, the result of operations obtained in a past or present period or exercise, in normal or special situations. The Financial Statements are a reflection of the movements that the company has incurred over a period of time. The Financial Analysis serves as an objective examination that is used as a starting point to provide reference about the facts concerning a company.
Frequently, investors and creditors compare the financial statements of many different companies to decide where to invest their resources. For such comparisons to be valid, the Financial Statements of these companies must be reasonably comparable, this means that they must show similar information.
financial statementsCLASSIFICATION
The Financial Statements can be classified according to their importance and these are divided into:
- Basic or Main Secondary
BASIC OR MAIN
- Balance Sheet Profit and Loss Statement or Income Statement Statement of Origin and Application of Resources Statement of Changes in Financial Position
SECONDARY
Secondary Financial Statements, also known as annexes, are those that analyze a specific line of a Basic Financial Statement, for example:
balance sheet will be secondary
- Statement of Movement of Surplus Accounts Statement of Deficit Movements Status of Movement of Capital Accounts Detailed Statement of Accounts Receivable
The following will be secondary to the Profit and Loss Statement or Income Statement:
- State of Cost of Sales
State of Cost of Production
Analytical State of Indirect Manufacturing Charges
State Analytical of Cost of Sales
Analytical State of Administration Costs
The State of Origin and Application of Resources will be secondary:
- Analytical State of the Origin of Resources
Analytical State of Application of Resources
State of Variations of Working Capital
Analytical State of other Variations
The State of Changes in the Financial Situation will be secondary:
- Resources Generated by Operating Activity
Resources Generated by Financing
Resources Used by Investment
Increase or Decrease in Cash and Temporary Investments
ANALYSIS OF FINANCIAL STATEMENTS
It is the disintegration or separation of values that appear in these statements, in order to know their origins, the changes suffered and their causes, in order to have a more accurate and truthful idea about the financial situation of a company
When carrying out the analysis of the Financial Statements, sufficient criteria and bases will have been obtained to make the decisions that best suit the company, those that help maintain the resources previously obtained and acquire new ones that guarantee future economic benefits, also verify and comply with third-party obligations in order to achieve the primary objective of administrative management, to position itself in the market obtaining wide profit margins with a permanent and solid validity vis-à-vis competitors, granting a degree of satisfaction for all the managing bodies of this collectivity.
ANALYSIS METHODS
If the accounting has been a methodical and systematic record of the operations carried out by a company, and the Financial Statements are the summary or summary of those activities; In order to judge on the financial position of a company, we have to resort to the analysis of these statements, and then interpret the results of that analysis.
The 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 Horizontal Analysis
Method Ratio
Method Integral Percents
Method Graphic Method
Importance and Need for Analysis
The mere reading of the Financial Statements, although they constitute the most complete Financial Information available to the company, is not sufficient for their entire understanding, nor to fully understand the business situation.
Values are poured into the company's accounting, in accordance with certain accepted criteria or conventions, which deserve clarification. Different Financial Statements could be obtained in the same company, due to the divergence of application criteria of generally accepted accounting principles.
Without resorting to the analysis, the owners, administrators or third parties interested in the business, even being versed in accounting, upon receiving the financial statements would hardly find an answer to the following questions:
How important are they, and what meaning do the figures have? What action must be taken under them? Are the realizable resources available to the business sufficient to pay the due debts? What working capital does it have, and how is it invested? Are machinery and equipment necessary, or are resources being wasted? Is the return obtained balanced with the investment made? Are Utilities Properly Invested?
For the reasons mentioned, and of course, they do not try to be all those that are usually observed about the Financial Statements, it is acceptable to affirm that it is necessary to subject them to a series of tests or investigations, that is, analysis, in order to Obtain sufficient evidence, to serve as a basis, to express your opinion on the different economic and financial phases of a company.
IMPORTANCE
The Financial Statements are a reflection of the movements that the company has incurred over a period of time. The Financial Analysis serves as an objective examination that is used as a starting point to provide reference about the facts concerning a company. In order to get to a later study, it should be given importance in numbers by simplifying their relationships.
Economic Phases of the Company
The company as an entity that carries out an activity aimed at a social and economic purpose; by natural reason those who achieve a better harmony and coordination of the factors and productive resources, will enjoy a better economic - financial position regarding those that this economic activity has not yet achieved.
It has been established that a judgment on the financial and economic position of a business may be issued after certain studies or analyzes. These studies can be carried out from different points of view, and focus on various aspects of the company, such as: Liquidity, credit, activity, efficiency, development and projection, factor convertibility, performance, etc. Notwithstanding the existence of various aspects, situations or economic positions, also called phases that the entire company presents.
To judge this situation, the analysis has generally been referred to; to the degree of Solvency, to the Stability phase, and to Profitability.
It means having the necessary or sufficient resources to cover debts. The study of solvency measures the payment capacity of the business to meet its short-term obligations, therefore solvency is considered as a present credit situation. The analysis of the solvency of a company, allows knowing:
Solvency
1.- If the resources available are sufficient to cover the debts at any given time. 2.- What working capital do you have, and if it is adequate? 3. - If the terms you grant for your sales are related to those you get for purchases. 4.- If the immediately realizable values are enough to cover enforceable obligations, or what proportion they keep among themselves. 5.- Are resources being wasted, instead of channeling them for productive purposes? An excessively high solvency index, although it increases its liquidity, reduces its means of productivity. 6.- Can the business be considered as a credit subject?
It is such a situation that guarantees the normal and continuous development of the activity. For the analysis of the same, it is determined if the company is in a position to meet its future obligations. For this reason it is said that it is a future credit situation. Analyzing Stability it is possible to determine:
Stability
1.- The proportion in which the capital is invested, between the owners and creditors. When the amount of the debts is greater than the funds that come from the owners, the business is subject to external pressures, being affected at a given moment by its normal development.
2.- If the creditors' investment is mostly in the short or long term.
3.- It influences the judgment on the credit capacity.
4.- The profits generated, in what proportion have they been by own or other people's investment?
5.- Is the capital investment, the retained earnings, represented by realizable or fixed assets? Is the investment appropriate?
6.- In what proportion of own or foreign capital, has the company's assets been acquired?
7.- Is there investment in some securities, or is their activity so slow that it can affect the stability of the business?
8.- Is it judged that you can fulfill your future obligations?
Profitability
It is the ability of the business to generate profits; it is reflected in the returns achieved. With the study of the same, the efficiency of the directors and administrators of the company is mainly measured, since in them the management of the company rests. Their analysis provides the following information:
1.- Know the proportion in which the stockholders' equity has been achieved. 2.- Determine if the fixed asset is producing enough goods or services to support the investment made. 3.- Are the profits obtained adequate to the capital of the business? 4.- Are the results obtained in relation to sales convenient? 5.- The returns corresponding to the available resources, whether their own or those of others. 6.- It allows the measurement of the general efficiency of the company's management.
CONCLUSION
Financial statements are very necessary for decision-making by organizations outside the company and for management itself, since without these the financial position of the company would not be known, which allows new investors to come to the company to invest..
It is also necessary to emphasize that the analysis of the financial statements is nothing more than an aid in decision-making since they are only the most faithful reflection of the economic situation of the business, but it does not show the global situation of our company, so you have to be cautious in using this technique.
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