Resources:pp. 192 and 193 (Ch. 6) of Understanding Financial Statements
Read the scenario in Problem 6.9 on p.
234 (Ch. 6).
Compose a 350- to 500-word response
that includes a paragraph about the main ideas of the annual report and an
explanation of how you might present these ideas to stakeholders.
Refer to the questions in the
Objectives of Analysis section on pp. 192 and 193 (Ch. 6) for guidance on
tailoring ideas to present to stakeholders.
Format your paper consistent with APA
Post your paper as a MicrosoftÂ®
6.9. Writing Skills Problem
R.E.C. Inc.âs staff of accountants finished preparing the financial
statements for 2007 and
will meet next week with the companyâs CEO as well as the Director
of Investor Relations
and representatives from the marketing and art departments to
design the current yearâs
Write a paragraph in which you present the main idea(s) you think
the company should
shareholders in the annual report.
Objectives of Analysis
Before beginning the analysis of any firmâs financial statements,
it is necessary to specify
the objectives of the analysis.The objectives will vary depending
on the perspective
of the financial statement user and the specific questions that
are addressed by the
analysis of the financial statement data.
A creditoris ultimately concerned with the ability of an
existing or prospective
borrower to make interest and principal payments on borrowed
funds. The questions
raised in a credit analysis should include:
â¢ What is the borrowing cause? What do the financial
statements reveal about the
reason a firm has requested a loan or the purchase of goods on
â¢ What is the firmâs capital structure? How much debt is
How well has debt been serviced in the past?
â¢ What will be the source of debt repayment? How well does
the company manage
working capital? Is the firm generating cash from operations?
The credit analyst will use the historical record of the company,
as presented in the
financial statements, to answer such questions and to predict the
potential of the firm
to satisfy future demands for cash, including debt service.
The investorattempts to arrive at an estimation of a
companyâs future earnings
stream in order to attach a value to the securities being
considered for purchase or
liquidation.The investment analyst poses such questions as:
â¢ What is the companyâs performance record, and what are
the future expectations?
What is its record with regard to growth and stability of
earnings? Of cash flow
â¢ How much riskis inherent in the firmâs existing capital
structure? What are the
expected returns, given the
firmâs current condition and future outlook?
â¢ How successfully does the firm compete in its industry, and how
well positioned is
the company to hold or improve its competitive position?
The investment analyst also uses historical financial statement
data to forecast the
future. In the case of the investor, the ultimate objective is to
determine whether the
investment is sound.
Financial statement analysis from the standpoint of management
relates to all of
the questions raised by creditors and investors because these user
groups must be satisfied
in order for the firm to obtain capital as needed. Management must
its employees, the general public, regulators, and the financial
looks to financial statement data to determine:
â¢ How wellhas the firm performed and why? What operating
contributed to success and which have not?
â¢ What are the strengths and weaknessesof the companyâs
â¢ What changesshould be implemented in order to improve
Financial statements provide insight into the companyâs current
status and lead
to the development of policies and strategies for the future. It
should be pointed
out, however, that management also has responsibility for
preparing the financial
statements.The analyst should be alert to the potential for
management to influence
the outcome of financial statement reporting in order to appeal to
investors, and other users. It is important that any analysis of
include a careful reading of the notes to the financial
statements, and it may be helpful
to supplement the analysis with other material in the annual
report and with
other sources of information apart from the annual report.