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Objective Of Financial Statement Analysis

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The bankruptcy of an entity has significant impact on a broad part of society. Investors lose their funds while suppliers and other creditors are subject to losses. In many cases, the bankruptcy of a large corporation may lead other associated entities to bankruptcy due to the interdependencies which will eventually cause a domino of bankruptcy. Banks may suffer losses, especially in the occasion where the entity has extended debt facilities and may cause the entire financial system to falter. In addition to the above, the bankruptcy of an entity entails job losses, increase of unemployment rate, decrease in consumer spending and loss of government revenues from contributions and taxes. The going concern assumption constitutes a fundamental …show more content…

The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. The going concern concept is fundamental concept for the preparation of financial statements. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern. For example, International Accounting Standard (IAS) 1, “Presentation of Financial Statements” requires management to make an assessment of an entity’s ability to continue as a going …show more content…

25, when preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment

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When being placed in the role of a manager, it is important to understand the finances of the organization and how to read and understand the recording of finances. It is also important to understand how all the different parts of the records fit together to give us the knowledge of where the business is financially. Knowing also the different responsibility centers related to financial recording and how they function is important as a manager. Once a manager understands what and where items belong on a balance sheet, they will better understand the state that the business is in. “It provides you with a picture of the financial health of your practice or organization on a certain date.”

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Chapter 12 deals with financial crises, systemic or nonsystemic, refer to the most recent crisis and how it began. Financial crisis is to a phenomenon in which an economy is characterized by a continuous and significant reduction of economic activity. Through years there have been thousands of crises occurred for various reasons, but if we focus to the one that we experience today we can say that is a result of housing asset bubble. Asset bubble occurs when there is a sudden increase in the value of bond, equities, real estate, etc. In combination with the rapid spread of subprime loans and the transfer of risk from banks' balance sheets to the public and investors through securitization, the crisis resulted in an impact in social and economical

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Also many companies reporting related to the state of the value added or environmental information, these are concentrated in industrial sectors. The financial statements reflect the financial position of company, financial performance and cash flows of the company, it is significant to note that the correct depiction of the impacts of transactions and other events and circumstances according to the explanations and criteria identification of assets, liabilities, income and expenses go in the same outline (Brealey,

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