Financial statements are the main means of accounting achieving its objective. They communicate the financial results and financial situation of an entity to its owners, stakeholders, management, and other interested parties. If these statements are not understood, accounting will fail to achieve its primary goal. You may visit https://stamosandstamoscpa.com/accounting-and-financial-statements/ to understand business financial statements in detail.
Following are the the role of financial statement evaluation can be seen in relation to the primary objectives of accounting:
(i) To support decision-making by management, investors and other stakeholders.
(ii) To discharge accountability – to senior management and the providers of funds – and to society for the use of public resources.
The financial picture of a company must be understood. It should be compared with the expected results, forecasts, competitor performance, alternative investment options, investor expectations, and other factors. Management, investors, and lenders should also be able to identify the financial strengths or weaknesses of the entity.
It is important to understand these things in addition to accounting techniques.
(i) The potential impact of possible changes in economic indicators such as interest rates and commodity prices, or business confidence surveys.
(ii) Current and anticipated conditions that affect the industry. These include potential competition, product substitution, technological developments, and changing patterns in demand.
(iii). The non-business events that affect the firm. For example, changes to environmental regulations and the impact of government programs on investor or consumer intentions.
This background information is used by the analyst to approach the evaluation of financial statements in an organized manner.