INTRODUCTION
The interpretation of financial data is extremely important for each of the activities that are carried out within the company, through this the executives use to create different external financing policies, as well as they can focus on the solution of specific problems that afflict the company such as accounts receivable or accounts payable; At the same time, it shapes credit policies towards clients depending on their turnover, it can also be a point of focus when it is used as a tool for the rotation of obsolete inventories. Through the interpretation of the data presented in the financial statements, administrators, clients, employees and financing providers can realize the performance that the company shows in the market;it is taken as one of the main tools of the company.
Due to such importance, the interpretation of financial data requires an investigation that presents each of its components, in this report its conceptualization is detailed, taking up different authors as well as a conclusion about what was collected, followed by the objectives pursued by the interpretation, classifying them in general and specific objective, the importance of interpretation of financial data interesting topic is also presented because in this part the occupation and possible margins of use within a company are revealed, the interpretation and difference methods are presented as part which concludes the topic.However, the example of a company and the application of financial ratios to its financial statements is detailed as the second part that accompanies the issue of Financial Data Interpretation, the retaken company is called Renno, SA DE CV and it has been applied the different types of percentage and measurement analysis.
TOPIC: INTERPRETATION OF FINANCIAL DATA.
CONCEPTS:
By interpretation we must understand the «Relative Appreciation of concepts and figures of the content of the Financial Statements, based on analysis and comparison».
It consists of a series of personal judgments regarding the content of the financial statements, based on analysis and comparison.
It is the issuance of a criterion judgment or opinion of the accounting information of a company, through techniques or methods of analysis that make it easier to understand and present.
It is an administrative and financial function that is responsible for issuing sufficient elements of judgment to support or reject the different opinions that have been formed regarding the financial situation presented by a company.
After the presentation and analysis of the previous concepts related to the term of the Interpretation of Financial Data, it can be concluded that it consists in the determination and issuance of a joint judgment of personal criteria related to the concepts, figures, and other information presented in the financial statements of a specific company, these criteria are formed through the quantitative analysis of different comparison parameters based on techniques or methods already established.
AIMS:
General Objective of Financial Interpretation:
The main objective proposed by the financial interpretation is to help the executives of a company to determine whether the decisions about financing, determining if they were the most appropriate, and in this way to determine the future of the organization's investments; However, there are other intrinsic or extrinsic elements that are equally interested in knowing and interpreting these financial data, in order to determine the situation in which the company is, due to the above, an enunciative summary of the benefit is presented below. or utility obtained by the different people interested in the content of the financial statements.
The specific objectives that include the interpretation of financial data within the administration and management of activities within a company are the following:
• Understand the elements of analysis that provide the comparison of financial ratios and the different analysis techniques that can be applied within a company.
• Describe some of the measures that should be considered for decision-making and alternative solutions for the different problems that affect the company, and help to plan the direction of the investments made by the organization.
• Use the most common reasons to analyze the liquidity and activity of the inventory accounts receivable, Accounts payable, fixed assets and total assets of a company.
• Analyze the relationship between indebtedness and financial leverage presented in the financial statements, as well as the reasons that can be used to evaluate the debtor position of a company and its ability to meet the payments associated with the debt.
• Evaluate the profitability of a company with respect to its sales, investment in assets, capital investment of the owners and the value of the shares.
• Determine the position of the company in the competitive market in which it operates.
• Provide employees with enough information that they need to keep informed about the situation under which the company works.
IMPORTANCE:
The financial statements are a reflection of the movements that the company has incurred during a period of time. 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.
The importance of the analysis goes beyond what is desired by the management since the results provide information for the various users.
The financial executive becomes a decision maker on aspects such as where to obtain the resources, what to invest in, what are the profits or profits of the companies, when and how the financing sources should be paid, the profits should be reinvested.
METHODS OF INTERPRETATION OF FINANCIAL DATA:
Horizontal and vertical and historical method:
The vertical method refers to the use of the financial statements of a period to know its situation or results.
In the horizontal method, the last two periods are compared with each other, since in the period that is happening the accounting is compared against the budget.
In the historical method trends are analyzed, whether of percentages, indices or financial ratios, it can be graphed for better illustration.
The financial reasons:
The financial ratios provide indicators to know if the entity subject to evaluation is solvent, productive, if it has liquidity, etc.
Some of the financial reasons are:
• Working capital.- this ratio is obtained from the difference between current assets and current liabilities. It represents the amount of resources that the company has destined to cover the expenses necessary for its operation.
• Acid test.- It is widely used to evaluate the immediate ability to pay that companies have. It is obtained by dividing the available assets (that is, the cash in hand and banks and easily realized securities) by the current liabilities (short-term).
• Turnover of accounts receivable.- This index is obtained by dividing operating income by the amount of accounts receivable from customers. Reflects the number of times accounts receivable have rotated in the period.
• Ownership ratio.- reflects the proportion in which the owners or shareholders have contributed to the purchase of the total assets.
• Ownership ratio.- reflects the proportion in which the owners or shareholders have contributed to the purchase of the total assets.
• Book value of the shares.- indicates the value of each security and is obtained by dividing the total stockholders' equity by the number of subscribed and paid shares.
• Rate of return: means the return on the total investment of the shareholders. It is calculated by dividing net income, after taxes, by stockholders' equity.
Breakeven:
Background; The equilibrium point system was developed in 1920 by Eng. Walter A. Rautenstrauch, I consider that the financial statements did not present complete information on the following aspects:
1.- Solvency;
2.- Stability and
3.- Productivity.
Trend method:
Like the comparative state method, the trend method is a horizontal interpretation method. A year is selected as the base and 100% is assigned to all items for that year. Then we proceed to determine the trend percentages for the other years and in relation to the base year. Divide the balance of the item in the year in question by the balance of the item in the base year. This quotient is multiplied by 100 to find the trend percentage.
Example:
| (In millions of Dollars) 1982 1983 1984 1985 1986 Accounts Payable $ 200 $ 250 $ 180 $ 420 $ 500
Percentage of Trends Accounts Payable 100% 125% 90% 210% 250% |
A trend percentage greater than 100 means that there has been an increase in the balance of the item compared to the base year. The trend percentage for 1984 is 90, which means that there has been a decrease in the balance of the item with respect to the year considered as the base. An advantage of the trend method, in contrast to the comparative statement method, is that the percentages of increase or decrease in the items can be determined only by subtracting the percentage of trends in question, 100% of the base year, with respect to the 1982 was 25% from the base year and there was a 10% decrease from the base year during 1984.
The trend percentages for a game should be compared to the trend percentages for similar games. In this case, the trend percentages for the accounts payable item (to suppliers) should be compared with the trend percentages for the purchases item that may appear in the income statement of a merchant, if the items that make up the item are detailed. sales cost.
Sometimes it is impossible to calculate trend percentages, one of them is when you want to determine the trend percentage for the profit item for the year when a net loss has been obtained and not a profit in the year considered as the basis. Similarly, a company may have bought, for the first time, a piece of land for future expansion in a fiscal year after the year that has been considered as the base, therefore, a balance of zero will appear in the base year. In this case, like the previous one, the percentage of trend with respect to the base year would be impossible to calculate.
When interpreting trend percentages, particular attention should be paid to the relative importance of the items. A 150% increase in deferred charges may be less significant than a 60% increase in fixed assets (something similar happens when a person with a salary of $ 1 million per month receives a 20% increase and another person with a salary of $ 4 million receives a 10% increase, although the first will receive an increase of $ 400,000.00, while the first will only receive an additional $ 200,000.00 in salary.
DIFFERENCE BETWEEN ANALYSIS AND INTERPRETATION OF FINANCIAL DATA:
Some accountants make no distinction between the analysis and the interpretation of accounting information. Similar to what happens in medicine, where a patient is frequently subjected to a clinical analysis and then, based on this analysis, proceed to conclude the patient's physical condition recommending the treatment to be followed, a counter It must first analyze the accounting information that appears contained in the financial statements and then proceed with its interpretation. The analysis of the financial statements is an arduous job that consists of carrying out a number of mathematical operations to determine their percentages of change; financial ratios will be calculated as well as integral percentages.It should be remembered that the financial statements present condensed items, a greater number of accounts can be summarized. The figures that appear there are like all numbers, cold in nature, without any meaning, unless the human mind tries to interpret them. To facilitate such an interpretation, another process is carried out to determine what is not significant or relevant. When carrying out the interpretation, we will try to find the strengths and weaknesses of the company whose states are being analyzed in interpreting.When carrying out the interpretation, an attempt will be made to find the strengths and weaknesses of the company whose states are being analyzed in interpreting.When carrying out the interpretation, an attempt will be made to find the strengths and weaknesses of the company whose states are being analyzed in interpreting.
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