Financial Statement

Do you believe that financial statement analysis is an exact science? Explain.

If accurately reported financial statements can provide the bottom line of business’ success. Financial Statements should be analyzed in total, so that an investor can view the big picture. Also, previous financial statements should be reviewed so investors can see the company’s pattern of successes and failures. When and where did they miss the mark on their predictions and what were the stimulating factors.

Please note the businesses report their activity in the most positive light. In areas of grey, the company can adjust figures and promote themselves with altered information. Financial statements, if honestly reported, can provide an accurate presentation of firm’s profitability.

- How are the income statement and statement of cash flows used to make business decisions? What are the advantages and limitations of using them to make decisions affecting the future of a business?

The Income Statement provides a simplistic conclusion, profit or loss during a specific period. This statement reports the overall revenues and costs and provides investors with the company’s profitability. One limitation is that the statement is limited to a specific period of time. The company could overachieve in the next period, if the profits fluctuate, the statement may not provide a broad picture of profitability.

The Statement of Cash Flows reflects only the debits and credits to cash during a specific period. A limitation is that the company may hold assets that are not cash. If the Statement of Cash Flows reflects low cash, it does not mean the business is not profitable.