Financial statements serve many major purposes. They provide many types of information. The financial statements help one to compute many different ratios as well. In this paper I will analyze show why many analysts prefer ratio analysis to common size statements.
The purpose that financial statements serve is that of providing an overview of long term and short term finances for the business or the organization. There are several types ways that the information in regards to a businesses finances are convey. The information can be conveyed through cash flow statements, balance sheets, income statements and earnings statement. Each financial statement serves a purpose. The balance sheet shows the company’s liabilities, assets and net equity. The cash flow statement shows how the cash is being handled by which the operating expenses, financing activities and investments. Te cash flow statement only shows income as it is received and not as it is an expense therefore there is a major downfall to utilizing the cash flow method (Ashton, R., 2008). Next, there are the income statements that can often also be known as the profit and loss statement because it shows the profits that the company is incurring in addition to the income as well as the expenses that are being generated in the accounting period that is shown. Earnings statements show that of the earnings of an accounting period which in turn a year is usually the accounting period (financial accounting, 2008). Another way a statement is presented is through common sized statements. These statements take items that are on a regular financial statement and document them in percentages. This helps one be able to see the differences in the statements from year to year.
There are limitations to financial statements. The limitations are that financial statements show what is going on with company’s finances in the past and it does not... [continues]
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