M7: Introduction to Financial Reports and Analysis (1)

• Financial reporting refers to standard practices to give stakeholders an accurate depiction of a company’s finances, including their revenues, expenses, profits, capital, and cash flow, as formal records that provide in-depth insights into financial information (Calzon, 2021).
• Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity.
• Credit analysis ratios are tools that assist the credit analysis process. These ratios help analysts and investors determine whether individuals or corporations are capable of fulfilling financial obligations. Credit analysis involves both qualitative and quantitative aspects. Ratios cover the quantitative part of the analysis.

  Key ratios can be roughly separated into four groups:

  (1) Profitability; (2) Efficiency; (3) Liquidity; (4) Leverage.
• Basic Parts of Financial Statements That Creditors

  Consider in Extending Business Loans

  ● Statement of Financial Position or Balance Sheet provides information regarding liquidity position and capital structure of a company as of a given date.

  It must be noted that information found in these reports are only true as of the given date. Liquidity refers to the ability of a company to pay maturing obligations. The current assets of a company are compared with its current liabilities to determine its paying capacity.
• Basic Parts of Financial Statements That Creditors

  Consider in Extending Business Loans

  ● Statement of Profit and Loss or Income Statement provides the information regarding the revenues or sales, expenses and net income of a company over a given accounting period (monthly, quarterly, annually).

  In analyzing earnings performance, a comparison with the previous periods and with other companies, especially those coming from the same industry, is a must. It is important to identify how much of the income comes from

  core business and from non-core business.
• Basic Parts of Financial Statements That Creditors

  Consider in Extending Business Loans

  ● Statement of Cash Flows provides an explanation regarding the change in cash balance from one accounting period to another.

  It is classified into three main categories: operating, investing, and financing. It provides information regarding the quality of earnings of the company as shown in the operating activities.
• Basic Parts of Financial Statements That Creditors

  Consider in Extending Business Loans

  ● Statement of Changes in Stockholders/Owner’s Equity. This financial statement provides information that explains the changes in the stockholders or owner’s equity account from one accounting period to another. The changes may be due to the following:

  o Profit or loss for the accounting period

  o Cash dividend declaration

  o Issuance of new shares of stocks

  o Other transactions that affect the equity such as

  comprehensive income, treasury stocks, and

  revaluation of assets.
• Basic Parts of Financial Statements That Creditors

  Consider in Extending Business Loans

  ● Notes to Financial Statements are an integral part of the financial statements. It provides the following information:

  o Brief description of the company

  o Summary of significant accounting policies

  o Breakdown of amounts found in the financial

  statements.
• Review of the Financial Statement Preparation

  1. Analyzing business transactions
  2. Recording in the journals
  3. Posting to ledger accounts
  4. Preparing the unadjusted trial balance
  5. Making the adjusting entries
  6. Preparing the adjusted trial balance
  7. Preparing financial statements
  8. Making the closing entries
  9. Post-closing trial balance
• GENERALIZATION:

   

  Financial statements offer creditors a comprehensive look at the financial health of a business. Details such as income, existing debt obligations, expenses, salaries, profit and cash flow all factor into the overall business financial profile. Creditors use financial statements to determine if the business represents a sound credit risk, as well as its ability to repay debt as agreed.