Financial Reporting and Analysis

By : Rafiullah
MS Finance
MBA Finance
 Chapter 1

The Economic and institutional setting

for financial Reporting
 Why Financial Statement are Important?

• Investors need adequate information for effective

investment decision.

• Investors analyze the financial reports of a firm to

find the opportunities and risk.
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• Investor need information about
• The economy
• Various industries and
• Company’s financial health
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• Some financial statements include current time data,
while other may include data form the past to find
the changes in different items.
• For example
• The annual rate of sale growth?
• Are accounts Receivable increasing?
• Sales growth compare with the competitors.
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• These trends create opportunities and threats
for an investor.
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• Financial statement uses for different
purposes.
• As analytical tool
• As a management report card
• As a basis for prediction etc.
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• The investor should not rely on the numbers in the
financial statements because the information is of
two types.
• Reliable information
• Judgmental information

Company should follow accounting standards,

additional footnotes etc.
Economic of accounting
information
 Economic transaction
• Involves Raising of funds for company.
• Equity financing or
• Debt financing

• Financial statement facilitate the economic

transaction between business and individuals.
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• Effective financial statements reduce the uncertainty
of the investor and there by lowering cost of capital.

• In economic transaction,
• Demand and supply of financial information come
into existence.
Demand for enterprise financial
statements
 Interested parties
1) Shareholders and investors
2) Manager and employees
3) Lenders and suppliers
4) Customers
5) Government
 Shareholders and investors
• Investors use F/S for investment decision
• Risk
• Return
• Liquidity

• Fundamental and technical analysis are used by firm

to inform investors.
 Manager and employees

• Some firm tie their benefits with the good

performance.

• Bonus, salary increment, pension funds,

employee stock ownership plan etc.
 Lenders and suppliers

• Banks and other creditors uses financial information

for the advancement and extension of credit.

• Uses for amount of loan, interest rate and security

needed.
 Lenders and suppliers
• The loan agreement contain the covenants
provisions.

• Such as,
• To maintain minimum level of working capital,
• Interest coverage ratio etc.
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• In case of violation,
• The lender my ask the firm for additional
security
• Increase the interest rate etc.

• Suppliers analyze F/S for credit extension.

 Customers
• Customers are interested in the financial
health of a company
• Because strong companies offer technical
support,
• warranty and guarantee,
• Quality products
 Government
• For tax purpose
• Changes in the tax policies
• Tax reduction in the period of depression.