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Pros and Cons of Financial Statement Analysis
Financial statements analysis is an essential tool to the company since it ensures that it adheres to accounting standards by providing accounting regulatory agencies with an understanding regarding whether the company follows accounting standards or not. Further, it plays an important role in taxation by assisting government agencies in performing taxation analysis due to the company. In addition to that, the company can easily analyze its own performance over a specified time period and plan in advance measures to be taken to ensure the company rips many benefits in future.
Despite the benefits associated with financial statement analysis they are also comprised of deficiencies. Financial statements neglect employees since they do not cover their skills and performance within the company which are normally important in the measurement of the company’s performance. Financial statements comprise of balance sheets which are not effective in provision of relevant information in time as they entail use of historical data hence not adequate for evaluating the current company’s position. Moreover, there are several accounting measurement techniques which company use in analyzing financial statements which makes it difficult for companies to compare their performance with those of others.
To managers, financial statement analysis provide assistance in decision making as it enables them measure the companies’ performance at specified time period which in turn provides them with an understanding regarding the profit incurred. In a company, there are strategies formulated and implemented whose objective is to ensure improvement in the performance of the organization. Through financial statement analysis managers can easily compare the company’s performance in time periods thereby giving them an understanding of whether the strategies adopted are beneficial to the company thereby helping them in deciding the fate of the strategies.
However, comparing the company’s performance with those of rivals using the financial statements can be misleading to the managers in that different companies may utilize different accounting which provide a variation in terms of the results obtained. This can mainly be attributed to lack of universal guidelines for analyzing financial statements. At present time, creation and adoption of universal guidelines for financial statements analysis is not possible, especially with the different accounting methods and variation in management strategies among companies.