Financial Statements An Entity
An Analysis Of Financial Position

Financial statements are useful for analyzing an entity's financial position and performance by the users such as the owners and investors, management, suppliers, lenders, employees, customers, the government, and the general public. In accounting perspective, the term "Financial Statement" fundamentally refers to four core statements -

1. The Balance Sheet:

It primarily reflects the assets and liabilities of an entity on a given date.

a. Current Ratio:

It basically reflects the liquidity perspective of the balance sheet if the company can meet its obligations in the next financial period? This is done by figuring out the current ratio by comparing the current assets of the entity, assets that can be turned into cash in the next year, with current liabilities, which are obligations that have to be met in the next accounting year.

b. Owners Equity:

It basically reflects changes in the owners' equity in the given period of time. It shows the opening balance of owner's equity, plus contributions made (if any) plus the amount of profit reinvested (if any) or minus owner's withdrawal (if any).

2. Income Statement:

Although it reflects the profit or loss of an entity by segregating the direct and indirect incomes and expenses on a given date, but here for the purpose of assessment, the primary question is the earnings growth and growth of net income on the income statement.

Here, the question is, Is it earning? - If yes, what is its earnings growth compared to sales growth? The income statement will reflect if the sales growth rate is going up and so is the net earnings growth rate. If they are not, then the company might have earnings going up and the revenue is coming down.

3. Profitability (The Return On Assets):

Return on assets is an indicator of how profitable a company is relative to its total assets. Return on assets gives an idea of how efficient management is at using its assets to generate earnings.

The best measure of a entity is its profitability, without it, an entity cannot grow, and if it doesn't have the required growth, then its stock will reflect a downward trend which will not be a healthy sign. Increase in profits indicates that a company can pay dividends and that the share price will trend upward. Creditors will extend loan at a cheaper rate, compared to unprofitable entity; and eventually, the stockholders' equity of profitable entity will rise even more.

The common profitability measures compare profits with sales, assets, or equity: net profit margin, return on assets, and return on equity.

4. Cash Flow Statement:

It is something that all wise interested parties (internal or external) look for all of the time. It caters to questions like - Is this company bringing in real cash? Is the company generating cash by selling off stock, or borrowing money, or selling part of business? How is it getting the money?

The cash flow statement reflects the categorized inflow and outflow of cash. Inflows like sales, interest income and loan proceeds and outflows like staff salaries, loan payments, taxes and fixed assets and current purchased during the period.

Putting it all together, we get the financial statements which are a quantitative way for assessment of an entity's performance based on the following metrics:

Reports On Financial Statements:

These key financial metrics reflects in the financial statements of a concern how good a company really is safe for future investment.

The primary area of focus is to properly analyse Gross Profit (Cost of goods sold) against the operating expenses and the Gross Margin that amplifies the entity.

Bankers View Point:

Form the point of view of the bankers; banks are mostly focused on the liquidity of the entity. They prefer higher the amount of Current (liquid) Assets as recovery of their funds becomes easier if the loan goes sour. For Fixed Assets definitely serve as Collateral Security, where a particular equipment or property backs some loans.