The Importance of Quality Financial Statements
The financial accounts of a corporation are a representation of the firm's position, hence quality is critical. Financial statements inform the company about its financial situation, and if they are wrong or of poor quality, the company might be thrown off balance. There are four types of financial statements: cash flow, balance sheet, equity statement, and income statement, all of which are interconnected (Block, 2009). Each statement depicts a different account, and if the statements are of poor quality, the computations will be incorrect.
The Role of Financial Ratios in Evaluating Performance
Financial ratios, according to Block (2009), are used to analyze and weigh the firm's operating performance. For example, the debt-equity ratio is an indicator a company’s financial stability. There are four ratios used in the financial analysis to evaluate the quality of its financial statement. First, profitability ratios illustrate a company’s ability to generate returns on assets, sales and equity. Asset utilization ratio evaluates the efficiency of business in turning over its assets. Third, liquidity ratios indicate a firm’s ability to meet short-term obligations when they occur. Fourth, debt utilization ratios evaluate the overall firm’s position with regards to debt in comparison to its asset base, and it’s earning power. An analysis of these ratios comparatively to the averages in the industry provides significant insights into the weaknesses and strengths of organizations (Block, 2009).
The Significance of Pro Forma Financial Statements
A pro forma income statement is a forecast of future financial statements. The four primary pro forma financial statements would include the income statement, cash flow, profit/loss accounts, and balance sheet. The reason is because pro forma statements summarize projected future company status based on the current financial statements and the financial statements compute the cash flows, balance sheet, and income and profit/loss status of the enterprise.
References
Block, S. B. (2009). Foundations of Financial Management (13th ed.). McGraw-Hill Learning Solutions.
