Tuesday, August 23, 2011

Why is important financial analyses?

Financial analysts provide guidance to businesses and individuals making investment decisions. Financial analysts assess the performance of stocks, bonds, commodities, and other types of investments. Also called securities analysts and investment analysts, they work for banks, insurance companies, mutual and pension funds, securities firms, the business media, and other businesses, making investment decisions or recommendations. Financial analysts study company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates to determine a company's value by projecting its future earnings. They often meet with company officials to gain a better insight into the firms' prospects and management.

Meaning and importance of analyses and interpretation of financial statements
Analysis of financial statements is the art of applying various tools to understand the"behavior" of accounting information. It is defined by Metcalf as "the process of assessing the relationships between elements of the financial statements, to provide a better view of financial position and performance of a firm."
According to Kennedy and Muller, "Analysis and interpretation of financial statements is an attempt to determine the significance and meaning of data of financial statements in order to predict the future earnings prospects, the ability to pay interest and maturing obligations, and the dividend policy. "
Interpretation of financial statements refers to the assessment of business performance. According to F. Wood, "to interpret means to simplify the financial statements in favor of the parties concerned." It can be defined as a critical examination of financial statements for a given period.

The difference between “analyses” and “interpretation”
Analysis and interpretation, although used as synonyms of each other, are not the same thing. They differ in the following aspects:
  • The term "analysis" is used in the narrow sense, while the term "interpretation" is used in a broader sense, including analysis.
  • Analysis is the first step, while interpretation is the following step.
  • The analysis implies classification of the facts or data in a logical manner. It means the sharing of complex data into simpler elements. While interpretation means explaining the meaning and importance of facts or data classified.
  However, it must be said that the analysis and interpretation are complementary to each other. The analysis is useless without interpretation and simultaneously, the interpretation becomes difficult without analysis.

The importance of analyses and interpretation
The importance of analysis and interpretation of financial statements is described in the following three points:
  • Any decision taken based on intuition can be wrong. To avoid making wrong decisions, it is always preferable to analyse and interpret the quantitative data. Decisions based on analysis and interpretation carried out in a systematic way are never wrong.
  • Not everyone may have knowledge and experience necessary to understand financial statements. They can be easily understood when analyzed and interpreted.
  • Analysis and interpretation is necessary to verify the accuracy of decisions based on intuition.

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