Understanding and Interpretation of Financial Statements

Financial Statements are a set of reporting templates which provide snapshot financial results of an organization along with the financial performance for a certain period under reference. The financial information is generated using these templates based on accounting principles known as International Financial Reporting Standards. These templates are designed in prescribed format through legislation in each country to generate relevant and fairly representative financial information related to an organization to the users.

The makers of these Financial Statements have an onerous responsibility to ensure that accounting information is fair and represents the firm’s economic performance, financial position, and risk. At the same time, these Financial Statements should provide relevant and credible information to forecast the firm’s expected future earnings and cash flows in order that the users can take informed business decisions based on the reported numbers. Accordingly, the quality of financial reporting needs to articulate fair and accurate economic information contained in the income statement, the balance sheet, the statement of cash flows and notes to the Financial Statements.

However, owing to plethora of numbers, the real substance of the Financial results may sometimes get fuzzy and unclear. Hence all qualified users like bankers, financial institutions and prospective investors use Analytics extensively and apply it to reported financial statements to determine whether they provide useful information that is relevant and reliable for understanding the firm’s financial position, performance, growth, and risk and assists in projection of the firm’s future earnings and cash flows.

To bring about a simplified approach to the above, I have developed this presentation, which is an overview of simplified understanding and interpretation of Financial Statements with the help of Analytics and Accounting ratios.

For detailed body of work on this subject please refer to my book “Guide to understanding of Financial Statements”